What Is Loss Assessment Coverage?
Loss assessment coverage is a type of insurance for condominiums, co-ops or other residences in buildings with common areas. It covers damage and liability in the building outside of your own unit.
Owners of condos and other residential units with shared property are typically covered by a type of homeowner's insurance known as an HO-6 policy. This is different from a standard HO-3 policy for a standalone home and is geared towards the special conditions of owning a unit within a shared property.
Though it covers the shared property within a multi-unit building, loss assessment coverage is not a standard part of HO6 condo-owner's insurance. However, it can be purchased as an additional endorsement to an HO6 insurance policy.
Do you need loss assessment coverage? If you live in a condo or any other residence with common areas that are managed by a homeowner's association (HOA), you should at least look into it.
How Does Loss Assessment Coverage Work?
When you own a unit in a building, you are completely responsible for what happens within that unit but you also share responsibility for shared property such as the external structure of the building plus any common areas. These are generally not covered with an HO6 policy.
The HOA agreement probably charges regular fees to cover routine maintenance of those common areas and the building structure, but what about damage from accidents, fire, windstorms, vandalism or various other perils? The common areas and structure of a collectively-owned building need to be insured for events like these, so part of your HOA fees go towards what's known as a master policy for the building.
The HOA's master policy does not cover damage within the individual units, but it does cover all other parts of the building. However, that coverage is likely to be subject to deductibles and maximum limits.
That leaves the unit owners to pay for any deductibles or damages that exceed the master policy's limits. Loss assessment coverage pays for your share of those expenses, so you don't have to cover them out of your own pocket.
What Does a Loss Assessment Policy Cover?
In thinking about what a loss assessment policy covers, it's important to consider three things:
What parts of the building does this coverage apply to?
What types of harm are covered?
What types of expenses will it pay?
What parts of the building does a loss assessment policy cover?
Your HO6 insurance policy should cover everything that happens inside your unit. The same is true of other unit owners and their insurance policies.
So now think of all the parts of the building outside those individual units. This might include shared property such as:
Fitness rooms and other shared facilities
Damage to these areas means that there is a deductible you need to pay on the master policy, and you may be responsible for the cost of repairs that are in excess of the master policy's limits. If you have a loss assessment endorsement on your HO6 policy, the coverage would apply to that cost.
What types of harm does a loss assessment policy cover?
Loss assessment coverage is typically what's known as a named peril insurance policy, which means that it only covers things that are specifically named in the policy.
According to the Insurance Information Institute, a loss assessment rider to an HO6 policy would typically cover the following named perils:
Common Named Perils for HO6 Policies
Fire or lightning
Riot or civil commotion
Weight of ice, snow or sleet
Damage caused by aircraft
Accidental discharge or overflow of water or steam
Damage caused by vehicles
Breakage of a heating, air conditioning or fire protective sprinkler system
Freezing of plumbing, heating, air conditioning or fire-protective sprinkler system, or of a household appliance
Vandalism or malicious mischief
Electric power surges
With any named peril policy, it is crucial to see what covered perils are specifically listed in your policy.
What will a loss assessment policy pay for?
These are the types of expenses loss assessment coverage would pay for:
Repair of damage to shared property resulting from the policy's named perils
Medical expenses for people injured in common areas
Your liability for damage to the common areas or building structure resulting from an incident that originated within your unit
Why Is Loss Assessment Coverage Important?
Loss assessment coverage is important for the same reasons that homeowner's insurance is important. Buildings are exposed to several hazards, and the resulting repairs or liability can be very expensive. There may be significant gaps in how the HOA's master policy covers those potential expenses.
In fact, loss assessment coverage is most important because you don't control what goes on in the common areas of a building. You also don't get to pick what repairs to make and when.
How Much Loss Assessment Coverage Do I Need?
To determine how much loss assessment coverage you need, you should consider three things:
What coverage gaps are created by the HOA's master policy? Get a copy of that policy and look at the deductibles and the coverage limits. The higher the deductibles and the lower the coverage limits, the more costs you could potentially have.
What are the potential costs of damage to the building structure and common areas? You may have to work with the HOA and/or an insurance agent to accurately assess this.
How many other occupied units are there in the building? Generally, the more participants there are in the HOA, the lower the costs because the risk would be spread amongst more people.
What Is Loss Assessment Coverage FAQs
As part of a co-op, how am I financially responsible for damage to common areas of our building?
Your HOA agreement should spell this out in detail. Typically, that responsibility is shared by occupants of the building. Your HOA may have a master insurance policy to cover these costs, but any deductibles or expenses over the policy's coverage limits would have to be paid for by the building's unit owners.
How do I assess the potential cost of damage to common areas?
You should probably speak to a qualified insurance agent about your particular home, but it's usually a function of how many common areas there are, how fragile and expensive the construction materials are and the risks to which they are exposed. These are difficult things for the average person to put a price on, which is why the assistance of a professional may be necessary.
What types of damage need to be covered by loss assessment coverage?
This depends on the risk exposure of the area. A building could suffer damage from a range of perils like fire, burst pipes and vandalism so it's important to have insurance against a wide variety of factors.
Finding the Right Loss Assessment Coverage
Loss assessment coverage is a very specialized type of insurance because assessing the risks of a multi-unit building is a complex process. You need an insurance company that can provide both specialized expertise and competitive rates for this type of insurance.
Do some comparison shopping to find an insurance company which can offer the right coverage at the right price. Just enter some information in the space below to start the process for free.
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