Hello everyone. There seems to be quite a bit of confusion around loss assessment coverage within an H.O.-6 policy (unit owner’s policy), so let’s dig in and see how this coverage reads and works.
A quick note, when a condominium unit owner purchases an H.O.-6 policy, they are getting property and liability coverage. So there are at least two sections of coverage in the unit owner’s policy. Thus, there are two types of loss assessment coverage: one that applies to property coverage and one that applies to the liability coverage in a unit owners policy.
For some continuity, let’s review the loss assessment definition within ISO’s homeowners 2022 forms. This is a standardized form used in the insurance industry so it will give us a baseline of what most carriers use as their definition. Keep in mind that your policy’s wording may vary from the below, so it’s important to review your specific policy.
Property Coverage – Loss Assessment:
6. Loss Assessment
We will pay up to $2,000 for your share of loss assessment charged during the policy period against you, as owner or tenant of the "residence premises", by a corporation or association of property owners. The assessment must be made as a result of direct loss to property, owned by all members collectively, of the type that would be covered by this Policy if owned by you, caused by a Peril Insured Against under Coverage A, other than:
§ (1) Earthquake; or
(2) Land shock waves or tremors before, during or after a volcanic eruption. The limit of $2,000 is the most we will pay with respect to any one loss, regardless of the number of assessments. We will only apply one deductible, per unit, to the total amount of any one loss to the property described above, regardless of the number of assessments.
We do not cover assessments charged against you or a corporation or association of property owners by any governmental body.
Paragraph Q. Policy Period under Section I – Conditions does not apply to this coverage. This coverage is additional insurance.
One sentence in particular stands out: “The assessment must be made as a result of direct loss to property, owned by all members collectively, of the type that would be covered by this Policy if owned by you, caused by a Peril Insured Against under Coverage A”. There’s quite a bit to unpack here, so let’s break this down:
1. “…as a result of a direct loss to property…”
a. For example, common element sink in the association’s lounge clogs, backs up and damages the lounge area.
2. “…property damaged is owned by all members collectively…”
a. Property owned by all members collectively is typically the common elements. Your unit is not collectively owned by all the members.
3. “…of the type that would be covered by this Policy if owned by you…”
a. I.E. sheetrock, flooring, cabinetry, etc.
i. Not fire pumps in the sprinkler control room
4. “…caused by a Peril Insured Against under Coverage A…”
a. This one is really important because this means your unit owner’s policy must insure against the peril that caused the damage to the commonly owned property.
i. Some unit owner’s policies don’t automatically cover drain line backup and this needs to be added back by endorsement. So your loss assessment coverage may not kick in if the sink in the lounge area backs up and damages the common elements.
ii. Many unit owners on upper floors don’t consider purchasing flood coverage either. So, if a storm drain or landscaping drain clogs, it may overflow into the common elements on the first floor.
1. Many associations have flood coverage, but the deductibles are pretty high ($25k-$100k are common) and the association may assess this back to the unit owners.
2. If you haven’t purchased any flood coverage, loss assessment coverage under the unit owner’s policy will probably be denied.
a. Just buy a small amount of flood coverage so if you are assessed for an instance like the above, the money isn’t coming from your pocket.
Phew… that was a lot and hopefully it wasn’t too confusing.
Stay tuned for our 2nd part where we will break down the loss assessment coverage provided in the liability section of the unit owner’s policy (H.O.-6).
Make a great day.
Buddy Whitaker