Insurance May Not Cover Damages to Homeowners Association Common Spaces. This is Where Loss Assessment Coverage Comes In
Article Courtesy of The Next Door Advisor
By Elizabeth Rivelli
Published June 13, 2021
Whether you live in a single-family house, a condo, or an apartment, having property insurance is important to protect your personal items and your liabilities, among other things. But when you belong to a homeowners association (HOA), you’re responsible for more than just your own property — that’s why you should also consider getting loss assessment coverage.
As of 2020, more than 53% of the owner-occupied dwellings in the United States are governed by an HOA, according to Homeowner Associations USA. Being part of an HOA means taking collective responsibility for certain claims, which the HOA can charge you for. HOAs don’t usually require homeowners to carry loss assessment coverage, but it can help you save some money in the event of a qualifying claim.
What Is Loss Assessment Coverage?
If your home or condo is part of an HOA, the owners are collectively responsible for damage that occurs to common spaces, as well as certain liability claims. If the HOA master policy does not have enough coverage to pay for the claim in full, it usually falls onto the owners to pay the difference, in what’s called an assessment.
If you live in a community with an HOA, get loss assessment coverage to help cover your portion of damage, deductible, and liability claims.
“Loss assessment coverage would be used if the association assesses the members of the community for a portion of the damages not covered by the master policy,” says Matt Woodford, president of North Carolina-based insurance broker, Independent Property and Casualty Group. Without loss assessment insurance, you would be responsible for paying the assessment cost out-of-pocket.
How Does it Work?
When you belong to an HOA, part of the annual dues goes towards the HOA master policy, which is the first line of defense when a covered peril or event occurs. If the master policy doesn’t have enough coverage and the owners get assessed, you can use loss assessment insurance to pay for your portion of the assessment.
When you receive the official assessment notice, you can contact your insurance company and start the claim process. Loss assessment coverage can be used retroactively, meaning the time and date of the claim doesn’t matter, as long as your policy is active when you get notified.
“Another important aspect of loss assessment is that the claim occurs when the member is notified they are being assessed, not when the loss initially occurred. The assessment can come three years after a loss, and as long as the policyholder has the coverage on their policy, they can use it,” says Peter Conte, account executive at Honig Conte Porrino Insurance Agency, an insurance broker in the New York City area.
How Much Coverage Do I Need?
Loss assessment insurance will help pay for third-party liability and property damage claims, as well as medical expenses if a resident or guest gets injured in a common space. Before you choose a coverage limit, it’s also helpful to know what types of assessments you might face:
Damage assessment: A damage assessment occurs when there is damage to a common space that all owners use and have access to, like a clubhouse or tennis courts. If the HOA’s master policy does not cover the full amount, the amount owed is usually divided equally among the owners.
Liability assessment: A liability assessment occurs when someone gets injured in a public area of the association. The HOA’s master policy typically includes high liability limits for these situations. If the claim exceeds the master policy’s limit, the loss assessment coverage portion of your home or condo insurance policy should cover this assessment for you.
Deductible assessment: A deductible assessment occurs when damage occurs in the community and the master policy’s deductible is less than the cost of repairs. In this case, the association can require the owners to each pay a small portion of the deductible, even if the claim is covered by the master policy.
So, how much coverage should you get? Well, the amount of loss assessment coverage you need is different for everyone. “It depends on your risk appetite, as well as the type of building you live in, and the types of loss that can occur,” adds Conte.
To determine how much loss assessment insurance you should have, start by checking your HOA’s bylaws. There may be a recommended guideline. Additionally, look at the HOA’s master policy limits. If the policy already has a high coverage limit, you might be able to get away with less coverage.
Also look to see how much loss assessment coverage is built into your home or condo insurance policy. Most policies offer some protection, but not much. You can call your provider and ask these questions to see if additional coverage is needed.
Keep in mind that loss assessment coverage doesn’t help pay for damages that occur within your home or unit, nor does it cover guest injuries that happen in your residence. Make sure you have adequate homeowners or condo insurance coverage to protect you in those situations.
How to Sign Up for Loss Assessment Coverage
Getting loss assessment coverage is a straightforward process. You can purchase coverage through your home or condo insurance provider. Most providers sell loss assessment coverage as an endorsement, which can be added to your existing policy for an extra fee.
Start by contacting your provider and explain your coverage needs. If your policy already has some loss assessment coverage built in, it might be as easy as increasing the policy limit. Your provider will let you know how much your premium will increase, and your coverage will start once you make the first payment.
Why is Loss Assessment Coverage Important?
Although loss assessment coverage is not required, it’s an important policy for any HOA member.
“Loss assessment coverage helps hedge against out-of-pocket expenses in the event of a loss that is assessed,” says Woodford. Because loss assessments are often unexpected, loss assessment insurance prevents you from dipping into your savings account to cover your share of damages or lawsuits that occur within the community.
“In extreme cases, if you are unable to pay your portion of the loss assessment, it could result in legal action,” Woodford adds. When you purchase a home or condo within an HOA, you typically sign a contract that says you agree to follow certain rules, one of which is paying for loss assessments.
If you are unable to pay for an assessment, it’s possible that the HOA could take you to court and attempt to collect their portion of the money. If that were to happen, you would be financially responsible for your legal fees and lawyer costs, in addition to the assessment funds you owe.