Since all the housing and financial market mess, lenders are paying more careful attention to what kind of protection you have on your condo, since ultimately this insurance would pay to replace or rebuild their collateral against your loan if it were to be destroyed or damaged, who would blame them. Freddie Mac and Fannie Mae and FHA all have new requirement out now to make sure you have this Walls in coverage. Often I see folks in Northern Virginia who have purchased coverage and are paying too much for the wrong type, or are under the false impression that they don’t need an individual policy, because the master policy protects them fully.
Condo homeownership is a bit more complex than a single family home so let me fill you in on some background to help make sense of it all.
With Condos there are master insurance policies, and there are individual policies. The type of master insurance policy the board of directors purchases for your condo association will dictate what kind of individual policy you will need.
There are two types of master insurance policies;
1. Bare Walls Master Insurance Policy- This type of policy insures the outside structure of the condo only from the studs in the walls in. It is the responsibility of the individual to buy insurance on their personal policy. This type of policy puts the burden of repairing or rebuilding the interior of your unit onto your individual policy.
2. Single Entity Type Master Insurance policy- This type of policy covers everything that conveys at settlement, including the carpet, the walls, the cabinets and fixtures. Some even cover any improvements or betterment that have been made to the unit. This type of policy provides the Walls in coverage your lender is looking for. However, it is imperative that you understand that you still need a personal policy to fill in the gaps where the master policy does not cover.
Whether your Condo association has a Bare Walls or Single entity type policy you are leaving yourself up the creek without a paddle if you don’t buy an HO-6.
If your master policy is bare walls you need to buy insurance for the cost to rebuild your unit from the studs in the walls in as building coverage on your HO-6. In order to determine how much to it would cost to rebuild you should consult with a appraiser, or builder. Often If you look at page 3 or 4 of your appraisal there is an estimated cost price new listed that you can use. It is often listed as a cost per square foot. Simply multiply that cost per square foot by the number of square feet in your unit and you have an estimate of how much it would cost to rebuild.
You also need to buy insurance for the dwelling if your master insurance policy is a single entity type, in order to prevent you from having to pay the master policy deductible if there is a loss that effects your unit. Most master policies carry a deductible of $5000 or more, most individual policies carry a deductible of $500 so unless you want to pay. ask the question. If you have it set up properly the $500 deductible under your personal HO-6 is the most you should have to pay out- of- pocket. Your individual policy will pay the $4500 difference in this example until the master policy kicks in. This is what I refer to as difference in deductible protection.
Also some single entity type insurance policy does not cover the cost of upgrades and improvements to what was in originally constructed..another key question to ask..
Many insurance companies handle this difference in deductible differently, some as dwelling coverage, some as loss assessments coverage, you should consult with your insurance professional to make sure they are aware of the master policy deductible so they can design an HO-6 accordingly.
The HO-6 or condominium unit owner policy fills in the gaps where there is no coverage under either type. Let me give you some more examples of things that are not covered under any master insurance plan.
1. Your personal property-all of your personal property should be insured at 100% of replacement cost value so you can replace those items lost from a fire, or theft.
2. Your personal liability-The liability for bodily injury or property damage that occurs within the walls of your unit is not covered by any master policy.
3. Loss of use coverage.- This coverage pays to put you up in a hotel and also pays for your additional expenses included food, shelter and related items while your home is damaged and uninhabitable from a covered loss.
If you are renting your condo out everything I have told you above holds true. There are a few slight variations. This type of policy is commonly referred to as a landlord policy, or a rental condominium unit owners policy.
Instead of loss of use coverage you need loss of rents coverage. This coverage will reimburse your loss of rental income while you home is under repair and uninhabitable following a covered loss.
Now that you are armed with the knowledge you need to get the right type of HO-6 policy for your individual circumstance, you should be able to sleep better at night. I know I will.