Loss assessment coverage

Homeowners associations (HOAs) are common among residents of condominiums, townhomes, and single-family homes. The association is in charge of the upkeep of the community's common areas, services, and amenities. Fees are paid by each homeowner or condo owner to cover the use and maintenance of common areas. When damage occurs or someone is injured in the common areas, the cost of repairs and medical expenses is typically passed on to the association members. In this case, having loss assessment coverage on your individual home or condo insurance policy would cover the damages, leaving you with no direct financial responsibility.

What is loss assessment coverage?

Most homeowners and condo owners can add loss assessment coverage to their home insurance policy as an optional benefit. Although loss assessment is frequently associated with condo associations, any home or townhome located within a homeowners association may qualify for loss assessment coverage.

When you live in a condo or homeowners association neighborhood, the HOA obtains a HOA insurance policy, also known as a master policy, to cover losses to the common areas and building. A master policy for a single-family home development will typically insure common areas such as the swimming pool, tennis courts, playground, and amenity center, whereas a master policy for condos and some townhomes will also cover the residential structure but not individual units.

Despite the fact that HOAs have their own insurance policy, members may be required to pay some of the expenses that are not covered by the HOA's master policy in the form of a special assessment. Loss assessment coverage protects members from having to pay these additional costs themselves.

What is covered under loss assessment coverage?

Although the specifics of loss assessment coverage vary by provider, most include protection against three types of losses.

Damage assessments

When a covered peril damages a common area in a HOA, the master policy typically covers the damages. If the cost of repair exceeds the master policy's coverage limit, the HOA may assess members and require them to pay the difference. If the damages exceed the amount covered by the master policy, loss assessment coverage in an individual condo or homeowners insurance policy may cover the cost assessed to members.

HOAs will usually divide the remaining cost evenly among HOA members, but not all HOA bylaws or master policies are the same. When you join the association, read the details carefully so you know what to expect if this situation ever occurs to you. If the master HOA policy is unclear, request clarification from your association. Before determining what individual coverage you need to purchase, you should request a copy of the master policy to review with your insurance agent.

Liability assessments

When a resident is hurt in a common area of a residential development, such as the amenity center, parking garage, playground, swimming pool, or tennis court, they may choose to sue the HOA for compensation. These situations are typically covered by the HOA master policy. However, the cost of the settlement may be greater than the liability limit in the master policy.

If the HOA is legally held liable for liability damages that exceed the policy limits, members may be assessed for the remaining cost. Your homeowners or condo owners insurance policy's loss assessment coverage may protect you from having to pay these costs out of pocket.

Deductible assessments

When a HOA buys a master policy, it must also select a deductible amount for each coverage. A deductible is the amount of money that the policyholder, in this case the HOA, must pay out of pocket when a claim is filed.

If the HOA's common areas are damaged and the deductible is high, the cost of repair may be less than the deductible. In this case, the master policy will not cover the damages, and the HOA may assess members to cover the repair costs. Even if the claim is fully covered by the master policy limits, the HOA may levy a special assessment on owners for having to pay the deductible. Loss assessment coverage can help members avoid deductible assessments by paying the member's share of the cost up to the coverage limit.

Do I need loss assessment coverage?

If you own a condo or plan to buy a home or townhome in a HOA community, you should strongly consider loss assessment coverage. People who join HOAs may be held liable for damages that occur through no fault of their own, and purchasing loss assessment coverage can protect HOA members from financial hardship when an assessment occurs. Home insurance companies typically provide different loss assessment coverage limits ranging from $1,000 to $100,000 or more. Purchasing a $100,000 limit on loss assessment coverage typically costs less than $75 in additional premium per year, according to the Insurance Information Institute.

When deciding how much loss assessment coverage to purchase, review the HOA's master policy to see how assessments are handled and how those assessments will affect members.

If a HOA needs to assess members for an uncovered loss, the cost is usually divided equally among members. If the HOA has a large number of members, the loss assessment per owner will be lower than if the HOA has fewer members.

Consider this scenario when deciding whether or not loss assessment coverage is right for you and how much to buy. If a storm damages the amenities in a shared area for $500,000 and the HOA master policy only covers $400,000, the homeowners will most likely be assessed an excess of $100,000. If the policy has a $25,000 deductible, the association may also assess the cost of the deductible among the community's owners. Loss assessment coverage may assist you in covering the cost of your portion of the assessment.

How to buy loss assessment coverage

Most home insurance companies provide loss assessment coverage. When purchasing a condo, townhome, or homeowners insurance policy, the provider will typically offer loss assessment as an optional coverage that can be added to your policy as an endorsement.

Consider the number of people living in the HOA as well as the type of common areas provided by the HOA, such as swimming pools, playgrounds, and other areas where people may be injured or where repairs may be costly. These factors may increase the likelihood of an assessment as well as the amount of that assessment.