HOAs and Homeowners Insurance

shutterstock_143170456Homeowners can encounter homeowners associations (HOAs) in many ways, not always when they reside in multi-family buildings. For example, even if you own a single-family home, it’s still possible to be a member of an association that controls the community property such as parks, pools, and even the front yard of your home. Because not everyone is well versed on the various rules and responsibilities associated with being part of an association, it can sometimes lead to confusion with home insurance. Many homeowners are confused by the HOA’s responsibility to insure certain property versus the individual’s homeowner’s obligation.

What types of homeowners associations exist?

Homeowners associations come in many forms and sometimes individual homeowners may find themselves as members of more than one association by virtue of their homeownership. The most commonly found HOAs are those that govern multi-family housing units such as condominiums and townhouses. Because these types of dwellings involve commonly owned property, a formal process is created through the HOA to manage the interests of all homeowners. In these types of HOAs, the common ownership is usually vested in the HOA itself, with individual unit owners generally being referred to as owning the “air space” in their respective units. While that phrase is common usage, it’s a bit misleading as owners also have a proportionate ownership interest in the HOA itself. For example, if a condo building has ten units of the exact same size, each unit owner would also own 10% of the total building. Therefore, unit owners certainly own more than just “air.”

What are the common rules I have to follow?

Most HOAs have an elected governing board comprised of individual members. The board is charged with making certain decisions on behalf of the HOA and in the best interest of the owners. HOAs are usually created by the property builder/developer at the outset of constructing the building or community. Along with creating the HOA and its bylaws, a set of rules and regulations known as the Covenants, Conditions and Restrictions (CC&Rs) are often generated at the same time. These form the basic operating terms for the HOA and homeowners. Everyone living in the community is expected to follow the rules and the HOA is tasked with enforcing those rules. HOAs themselves are generally regulated by state law that can vary greatly from state to state. Certain states that have more HOAs may have better-defined laws whereas the practice may be less regulated in states with very few HOAs. The Community Associations Institute is an organization that supports associations nationwide and provides good information on its website.

While some people might find HOA rules to be overbearing and difficult to comply with, others appreciate living in communities with strong HOA oversight. The latter group believes that HOAs can help people live in greater harmony within a community with defined rules and such rules also enhance the long-term property value of the community. Detractors may chafe under rules that limit expressing individuality through one’s home. For example, most HOAs do not allow individuals to randomly paint their house in any color they desire. Instead, paint color appropriateness is determined by the HOA or limited to a pre-determined palette of color selections. Some other common rules you may encounter in an HOA are:

  • Pets – while HOAs generally allow pets, they may have restrictions on the number of pets and size/type allowed.
  • Building Materials – most multi-family building HOAs have strict rules on what type of flooring and other materials may be used when remodeling. These are designed to minimize impact on your neighbors.
  • Noise – since this is probably the most common complaint between neighbors, it’s not unusual to find restrictions on certain activities during “quiet hours.” This can include a ban on taking out the trash after 10:00pm.

Does it cost anything to be part of an association?

Another area of friction with HOAs are the monthly dues assessed by the association. HOA dues are necessary to pay for maintenance of the common property and other expenses. In many situations, the HOA will pay for some or most utilities, depending on how the association was created. The HOA is also responsible for insuring all association-owned property against loss or damage and for maintaining liability insurance for injury in common areas. Unfortunately, it’s often difficult for everyone within the association to agree with the exact level of spending, leading to some disagreements between homeowners.

What type of insurance does the association maintain?

If you reside in a community that’s part of an HOA, you need to understand exactly what the association’s insurance obligations are relative to your own. Without knowing this, you may potentially end up with a gap in insurance having assumed the association insured something when it did not. Your first step is to understand what type of association you belong to. If you have a single-family, detached home, your homeowners association most likely only owns community amenities, such as recreational facilities, gates, and perhaps streets, if they are private. On the other hand, if you live in a condominium building, it’s most likely that the HOA owns your building and you own the property inside of your unit.

Understanding the HOA’s insurance and ownership obligations is important as they inform your own decisions. Your first step is to review the HOA documents (either the by-laws or CC&RS, or both), which will address the HOA’s ownership rights. In condos, a common area of confusion is where the association’s obligations end and where yours begin. A common delineation is known as “studs in,” which means that you own everything in your unit, including the drywall. Other associations may be defined as “walls in,” which place a little more ownership responsibility on the HOA.

However, simply understanding the HOA’s insurance obligation is only one part of your due diligence process. Now that you know what to insure for yourself, you still need to review the association’s insurance. Most HOA bylaws should incorporate the obligation to maintain proper insurance for the building and the association. Because values constantly change, the actual amount of insurance is a regular evaluation that must be undertaken by the board members. If the building is underinsured, you may end up having to contribute out-of-pocket to fund the uninsured portion of a claim. Therefore, it pays to be an informed homeowner and ask the right questions. Just because there is a board running the HOA does not mean that you should not be reviewing their decisions and contributing to the process.

What type of insurance do I need to maintain when part of an association?

Once you are satisfied with the HOA’s insurance, it’s time to make sure that you have sufficient insurance in place for your own interests. If you own a single-family, detached home, you will need to have traditional home insurance, as the HOA does not insure your dwelling. However, if you live in any type of multi-family building, you will need to purchase condo owner’s insurance. This is similar to regular home insurance except that it presumes most of your dwelling is being insured by the HOA. What you are left to insure is the interior part of your unit (such as flooring, cabinets, and appliances) and your personal property, also known as “contents.”

You’ll need to evaluate the cost to replace all of these items and specify the value to your insurance company. Make sure that you elect to have “replacement cost” coverage for the maximum insurance benefit. Otherwise, your insurance company will only pay you actual cash value, which is the replacement cost less depreciation. The latter will leave you with very little coverage benefit and does not warrant the usually small amount of premium savings.

In condo policies, there is an option to purchase “loss assessment” coverage, which addresses the situation previously described, wherein an HOA might not have sufficient insurance to cover a loss. When HOAs assess their members to pay claims, it can sometimes represent a significant, unexpected out-of-pocket expense. Loss Assessment coverage will protect you from such events and is usually quite inexpensive.

While personal liability insurance is part of all home insurance policies, the importance of it cannot be overstated when it comes to condo owners. Standard home insurance woes such as a water leak or house fire can become much bigger losses when in a multi-family dwelling. Instead of the water leak being isolated to one home, it can spread to other units. In these circumstances, it’s not longer a simple home insurance claim, but a potentially costly liability claim. It’s not uncommon for HOAs to require homeowners maintain a certain minimum level of personal liability just for these situations.

Like it or not, HOAs are a reality of modern homeownership. An informed consumer will need to understand the benefits and potential pitfalls of belonging to an association. Along with that comes the need to be properly insured, both as an individual and as a member of an HOA.

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