HO-6 Insurance: An Update for Owners and Associations

Having the right insurance coverage can give homeowners peace of mind in otherwise stressful circumstances. When it comes to Homeowner Associations, there are two types of insurance policies. First, Associations obtain master insurance policies to cover damage to property the Association is responsible to maintain. This obligation is specified in the Association’s Declaration of Covenants (“Declaration”) and usually includes common elements, as well as other building components such as roofing and siding. Second, individual homeowners (“Owners”) obtain insurance policies to cover the components and property that the Owner is responsible to maintain, as outlined in the Declaration, which usually include the interior components. These individual policies are known as HO-6 policies.

HO-6 policies are a must-have for Owners in condominium and townhome Associations. As mentioned above, these policies cover damage to individual Owners’ property caused by things like water intrusion, fire, or theft.  Importantly, those policies also cover an Owner’s allotted portion of the Association’s master insurance deductible (the “Master Deductible”). The Association incurs its Master Deductible when the Association makes a claim for things like hail or wind damage affecting numerous units. The Master Deductible is then divided amongst the affected Owners.

An Owner’s portion of the Master Deductible can range anywhere from a couple thousand dollars up to tens of thousands. For instance, many policies calculate the deductible as a percentage of the total value of the building. In a condominium, if the deductible is 5% for a building worth $50 million, the deductible would be $2.5 million. If there are 100 units in the building, each Owner’s share of the deductible would be $25,000. This would be a substantial amount to cover out-of-pocket, which is precisely where the HO-6 policy becomes indispensable.

HO-6 policies are vital (and often required) in condominium and townhome Associations because of the coverage provided for these divided Master Deductibles. Ultimately, whether the HO-6 policy covers the Master Deductible or not, the current Owner at the time the Master Deductible is assessed will be responsible for the cost. Many Owners in condominium and townhome Associations are familiar with these policies and already carry them. However, there has been a recent development that Owners and Associations should be aware of. Some insurance companies have updated the terms of their HO-6 policies to redefine the triggering event of the claim.

Previously, an HO-6 policy would often pay the Owner’s portion of the Master Deductible, so long as the Owner owned the unit and held the policy on the date the Master Deductible was assessed to the Owners—essentially providing coverage no matter when the actual storm and damage occurred. Now, some insurance companies also require that the Owner owned the home at the time the storm damage occurred—denying claims if the policy was not in place at the time of the storm. What this means in practice is that an HO-6 carrier may deny a claim to cover a Master Deductible if the Owner did not own the home or carry the current insurance policy when the storm damage occurred.

This becomes an issue because many wind and hail damage insurance claims can take years to finalize, and the Master Deductible is typically not incurred until the claim is fully settled. Because there is so much time between a storm and the resolution of an insurance claim, many Owners may end up buying or selling their homes before the claim is settled. While this should not affect Owners who have lived in their homes for several years, this will almost certainly affect Owners who have purchased their homes or obtained a new HO-6 policy more recently—within the last couple years—as well as anyone who purchases a home in an Association in the coming years.

This development leaves new Owners and new HO-6 policy holders vulnerable to claim denial if they purchase their home or obtain new insurance while a claim is still being adjusted. In light of this development, we encourage Owners to review their HO-6 policies carefully to make sure they are covered appropriately. Additionally, we encourage Associations and property managers to complete Resale Disclosures carefully, disclosing any potential Master Deductibles or Special Assessments, even if they have not been incurred or approved at the time of the disclosure—especially if the deductible or assessment will certainly occur, only leaving a question of when.

At Smith Jadin Johnson, we help Associations finalize their insurance claims as efficiently as possible while still ensuring proper coverage and payment by insurance companies. Once claims are finalized, SJJ also helps Associations obtain reimbursement of the Associations’ Master Deductible from the Owners. We make the process as efficient as possible by drafting Board Resolutions and cover letters that include all the relevant information required by insurance companies so they can be provided directly to an HO-6 carrier for prompt coverage. Being so involved in every aspect of this process, we want Owners and Associations to be aware of these developments to ensure everyone is covered when these claims inevitably arise. Call us today to set up your complimentary consultation regarding your insurance policies.