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August 7, 2007
May a Condo Association Mandate Individual Homeowners Coverage?
When you purchase a California condominium, the governing documents usually require the Association to purchase insurance to cover the buildings for fire and other common casualties and for liability for accidents in the complex. If they don't, be very concerned. (Besides the serious risk of loss, when buying or selling you may run into trouble finding a policy that will be satisfactory to the lender, as your individual insurance would not cover the unit next to yours, and if there is a fire destroying both of them, it will be difficult to rebuild only one).
The next inquiry is whether the documents require the Association to purchase earthquake insurance. It is hard to tell which is more common - that they do or don't. In either event, there are other articles on the subject right here on the blog so I suggest you search them out.
The question I have not yet addressed is whether the Association can mandate that owners purchase individual coverage. What would be the need of that, you ask. Many people believe the Association's insurance covers "everything." It does not.
Owners should have an individual policy called an HO-6 policy if they reside in the condo. If not, they should have a landlord's policy.If every owner had individual coverage, that would provide important protection for everyone. What are some examples of how this individual coverage would pay off:
If there is a fire and the buildings are severely damaged, there will be a deductible to pay which may result in a special assessement and the individual coverage should include loss assessment coverage for this situation - you can increase the basic loss assessment coverage without breaking the bank.
If there is an accident in your unit and someone is hurt, the Association's coverage will probably not cover it (unless it occurred because of some condition in the common area portion of the unit) - you need this protection!
If there is a fire in your condo only, the association may (assuming the governing documents allow it) charge the deductible to you as a special assessment. An HO-6 should cover this. And if the fire burns up your furniture, which is your responsibility, you will be happy you had the contents insurance that is provided in the HO-6 policy.
If there is a fire and you have to move out during the rebuild, you would be very relieved to have coverage for this expense.
If your refrigerator tubing breaks or your washer hoses fail and the result is a flood of yours and the lower or next door units, the people below you whose personal property is damaged have the right to seek compensation from you. Having protection in the form of an HO-6 policy would come in very handy - these situations can become very expensive. Even if your neighbor's personal property is not lost, the damage to your own unit could be devastating.
Each owner is at risk if all do not have the separate individual coverage for such incidents as this last one. In fact, with regard to earthquake, where the chance of a very large development-wide special assessment is high if there is earthquake damage, the whole of the development can benefit greatly if each individual has coverage. (Note that it is very important to understand that an HO-6 policy does not cover earthquake or earthquake special assessments - so again, read the other blogs on this subject.)
Associations can get into deep trouble if the owners do not help carry the load of risk by purchasing individual coverage on top of the master coverage purchased by the association, and there is a big fire, flooding of units because of faulty pipes, or an earthquake. This is because when an owner suffers a large loss of property because of a fire or flooding, they often try to squeeze the money from the Association, leading to legal disputes and costs. They try to make claims on the master policy when the claims are not justified.
I believe requiring individual earthquake insurance might be going to far, but requiring owners to have liability coverage for accidents in their units and loss assessment coverage for special assessments, and personal property coverage would be reasonable, if the members approved an amendment to the CC&Rs for the condo association carrying the requirement. However, "policing" the purchases could become cumbersome and having the obligation to do so could also create extra liability for the Association if it fails to keep after the owners to get the policies. So my suggestion is to require the purchase of a homeowner's policy (HO-6 or appropriate landlord policy) for owners that carries liability, loss assessment and personal property coverage (if a resident), and suggest that the owners should consult with a condominium-knowledgeable insurance agent or broker; however, also include in the verbiage that the requirement does not impose on the Board the obligation to collect copies of the policies or actively enforce the requirement. It is better in my opinion to write something to the effect that the Owners need to procure the policies to protect themselves and cannot look to the Association for losses covered by such policies.
I am sure there are attorneys that disagree with this assessment of the matter, so as always, consult your own attorney and rely on his or her advice. There may be something about your situation that suggests deeper inquiry about what is best.
If nothing else, take away the idea that everyone in the association needs to be better educated about what the master insurance policy covers, if there is one, and what it does not cover. Owners should be encouraged to consult with a knowledgeable agent and find out what they need to "close the gaps" between the association's coverage and the extent of their risk and exposure to loss. There is an annual disclosure required by statute (Civil Code Section 1365(e) that has specific verbiage indicating that the association's master policy does not cover everything. (You can look this up at www.ca.gov by navigating to the Legislature and the Laws.)
Posted by Beth Grimm at August 7, 2007 9:52 PM