If you live in a home that is part of a homeowners association (HOA), it’s possible that some of your property is insured by the association and not on your personal home insurance policy. However, each association is unique so it’s important to understand both the parts of the property required to be insured by the association as well as the limits actually purchased. Many homeowners leave these responsibilities to the board of directors and do not independently verify the amount of coverage. Unfortunately, if the property is underinsured in the event of a loss, it will still come back to you to fund out of pocket as a member of the association.
The first thing you should do is review the by-laws and covenants, conditions and restrictions (CC&Rs) of the association. These documents will clearly define what property is the responsibility of the association and what property is your individual responsibility. Commonly, in condominium buildings, the structure is insured by the association while individual unit owners are responsible for the interior of units. There is a bit of variation from association to association so it’s necessary to do a document review instead of relying on assumptions or past experience with other associations.
One of the issues addressed in the HOA documents should be the obligation of the association to provide a certain level of insurance for the property, both for damage to the property and liability of the association. Armed with that information, you should then ask to review the association’s insurance policies to see if they meet the requirements. One important thing to consider is how the replacement cost of the building is being evaluated. If the insurance policy has not been updated in many years, it’s possible that it does not have an adequate limit to repair or replace the condominium building in the event of a loss.
The evaluations are the responsibility of the board of directors with assistance from the management company. However, these individuals are not infallible and they can make mistakes. A good association team should welcome your inquiries and input if they are confident in the work they have performed on behalf of all homeowners. If you do not believe the limits of coverage are sufficient to meet the obligations detailed in the association documents, you need to raise the issue with the board. As a homeowner member, you have a right and a duty to point out any problems.
If the insurance is inadequate to pay a claim, the association will likely call for a special assessment to make up the shortfall. The assessment is then the obligation of all the homeowners. When this happens, it often creates a great hardship for individuals and can lead to an association becoming insolvent. To protect yourself in the event of such assessments, you should make sure to have adequate coverage on your home insurance policy. Loss assessment coverage is a coverage that can be easily built into condo unit owners’ home insurance policies.
However, even with loss assessment coverage, the better solution is always for the association to have adequate coverage in the first place. You should do your part as an involved member of the association and complete your own due diligence of the association’s insurance regardless of where you live – Colorado Springs, Albuquerque, Arlington, Denver, Fort Worth, etc.