Coverage Concerns

From house to condo

Moving to a condominium warrants
professional insurance guidance

by Roy C. McCormick

People who move from single-family dwellings and apartments to condominium units—usually retirees who may have lived in the same house for many years—face new and unique property and liability exposures. It is important that they be informed about both the risks and the available insurance coverages.

A condominium unit owners form, identified as HO-6 in most homeowners programs, contains provisions of HO-4 (renters form) modified for condominium unit ownership. Basic property coverage is provided under Section I; personal liability coverage under Section II. Important endorsements are available to expand the scope of coverage.

SECTION I

A significant coverage feature in Section I, peculiar to a unit owners form and brought about by the special nature of condominium ownership, is the inclusion of dwelling coverage (A) for specific and limited kinds of property. Made effective for a selected limit, the coverage applies to alterations, appliances, fixtures and improvements—building property that is the insurance responsibility of the unit owner. Attention to limits for personal property coverage (C) under Section I is of primary importance. Fixing a sound amount of insurance at the beginning will assure proper coverage when limits are adjusted in the future.

Basic coverage is on an actual cash value basis. A major consideration for new or well preserved furnishings is conversion of the ACV coverage, by endorsement, to a replacement cost basis. Bills of sale or appraisals and room photographs should be kept to support future claims. Because the owner probably will purchase additional items after moving in, there should be a periodic review of limits and coverage.

When relocating to a condominium, retirees generally downsize their personal property but keep prized possessions that are small yet exceptionally valuable. Scheduling such items is a key subject for discussion with the insured; overlooking it can contribute to dissatisfaction in the event of a loss.

Insurance limits are minimal for “special limits” categories under unscheduled personal property coverage (C) of homeowners policies, including the condominium unit owners form, and coverage is confined to named perils. After a check of the classes of property to which “special limits” apply in a particular policy, an inquiry as to whether an insured possesses such items sets the stage for appropriate scheduling recommendations. Jewelry, stamp and coin collections, silver objects and manuscripts are categories deserving of coverage for all causes of loss except as specifically excluded and for their full value, established by bills of sale or appraisals.

Loss assessment coverage is especially important for condominium living, and this point should be made clear to a unit owner. It applies to the insured’s share of loss assessment arising from perils or claims within the scope of the policy.

Insufficient limits of fire insurance carried by the condominium association on the building(s) is an example of a situation that would give rise to an assessment. Policies issued by most insurers contain a built-in limit of loss assessment coverage, generally $1,000, under Section I and, notably, under personal liability coverage of Section II.

When arranging insurance coverage for condominium unit owners, it is important to discuss the option of increasing the basic limit of loss assessment coverage and, in many instances, to recommend higher limits. This is done by endorsement for a reasonable additional premium.

Personal property coverage is restricted when the premises is rented. A theft is excluded if it takes place in a part of the premises rented by the insured to others. However, coverage for the exposure may be made effective by endorsement, deleting the theft exclusion except for specified valuables.

SECTION II

High limits of personal liability coverage can be important because of the exposures associated with condominium living in addition to those of other dwelling occupancies. Consider the potential for major fire loss to a condominium building, other units and personal property within brought about by alleged negligence on the part of a unit owner. Another loss that can be severe is water damage to a unit below that of an insured. Leakage from pipes or fixtures in the insured’s unit, or overflow from a bathtub or lavatory can cause substantial damage to neighbors’ property. High limits are a good investment for peace of mind.

Loss assessment coverage, usually in the amount of $1,000, is basic under Section II in forms used by most insurers. It applies to bodily injury or property damage within the scope of Section II, and also to liability for an act of an association director, officer or trustee in that capacity.

Basic personal liability insurance under Section II does not cover claims arising from an insured’s rental or holding for rental of any part of the unit premises. Exceptions include rental that occurs only on an occasional basis and occupancy by the unit owner with no more than two roomers or boarders.

This exposure underscores the importance of adding unit owners rental to other coverages by endorsement, applicable to Section II as well as Section I. It eliminates the basic exclusion for rental or holding the residence premises for rental. The importance of the rental coverage option is clear when we note the high percentage of residential condominium units that are second homes acquired for eventual retirement living.

Homeowners unit owners policies have been designed to dovetail with the insurance carried by condominium associations for structures and the common risks of all unit owners. The two policies blend in such a manner that one or the other applies to covered situations. An insured unit owner should be encouraged to carefully read the association bylaws provided at the time of purchase. This not only will help to differentiate between unit and common property but also will help the unit owner to observe rules—such as not screening a balcony or hanging clothing on railings to dry! No one likes to be humiliated by official requests pertaining to the appearance of his or her condominium. *

The author
Roy C. McCormick is a contributing editor with The Rough Notes Company.