One of the least understood aspects of shared-interest community ownership is how the protection provided by the condo association or HOA’s insurance policies fits with the policies held by individual residents. In short: in the event of a claim, whose policy covers what?  

This question is often further complicated by jargon-y industry terms and concepts like ‘walls-in’ and ‘loss deductible’ that may not mean a lot to a layperson. Complicated as it may be however, it’s important for boards and residents alike to understand both the scope and the limits of the various policies covering the place they call home before they find themselves having to navigate through the claim process.

To Oversimplify…

Let’s start with the absolute basics: Insurance coverage is necessary to protect against the many and varied risks that come with home ownership. In a stand-alone, single-family home, the homeowner is responsible for everything on the property, both inside and outside of that home. If someone is injured in the driveway, on the porch, or inside the house, the liability for that injury falls to the owner. If a bathtub overflows and floods the ground floor, again it’s solely the owner’s problem, both to fix and to pay for.

In a shared interest community like a condo association, HOA, or co-op, it’s a different matter. Liability for a slip-and-fall incident in the lobby falls upon the association or cooperative corporation, not on individual residents; if a unit owner lets their bathtub overflow, neighboring units and common spaces could suffer damage as a result, making it everybody’s problem. That’s why in addition to carrying general liability insurance, multifamily communities also require residents to carry separate insurance on their individual units. But that often leads residents to ask, where exactly does my ‘unit’ begin—and end?

Walls-In

Generally speaking, a condominium association or HOA (and by extension its board of directors) is responsible for insuring the association’s common elements, including the structural and mechanical elements of the property, while unit owners are generally responsible for insuring the contents of their units ‘from the walls in’—but what does that mean, exactly? Which walls are we talking about? 

According to David Fitzhenry, a partner at the law firm of Moritt Hock Hamroff in New York City, “The term ‘walls-in’ is an industry term applied to both condo unit owners and co-op shareholders, meaning the interior of their apartments, including their personal property, appliances, and built-in fixtures.  

“Both condominium associations and apartment corporations typically carry liability insurance,” Fitzhenry continues, “as do the unit owners in a condominium and the shareholders in a co-op.” In co-ops, the cooperative corporation holds a master policy that covers the building’s structural elements, common spaces, and mechanical systems, as well as the ‘as-built’ original fixtures within the apartments (the original flooring and moldings, for example). Co-op shareholders typically obtain an HO-6 policy, which is a type of insurance specifically for co-op residents.  

While that might seem pretty straightforward, Vickie Grandmaison, Director of Essential Services for Evergreen Management based in Bedford, New Hampshire, points out that “in condominium and cooperative communities across the country, many residents assume their building’s insurance policy covers far more than it actually does. It’s a persistent, potentially costly misunderstanding, because when disaster strikes—whether that’s a fire, flood, or liability claim—the line between association coverage and individual responsibility can quickly become painfully clear.” 

Grandmaison goes on to explain that this ‘insurance gap’ is prompting industry experts and boards to take a closer look at how risk is shared—and where it’s often misunderstood. “At the core of the issue is a simple but frequently misunderstood division,” she notes. “The association or corporation typically insures the building structure and common areas, while the unit owner is responsible for everything ‘walls-in’, meaning everything inside the unit’s interior boundaries: flooring, cabinetry, appliances, fixtures, any improvements and betterments, as well as personal belongings.” That’s where the disconnect often happens. “Even if original developer-grade items were initially covered,” says Grandmaison, “if any upgrades are made to those items, those improvements then become the owner’s responsibility. Simply put, if you can walk on it, touch it, or remove it from inside your unit, you likely need to insure it.”

In places like Florida, where insurance issues have taken center stage in recent years thanks to the deadly Champlain Towers condo collapse and increasingly severe hurricane seasons, things can get even more complicated, explains Lisa Magill, an attorney with Kaye Bender Rembaum in Pompano Beach. “Statutes outline the association’s responsibility for insurance coverage,” she says, regardless of whatever coverage requirements are described in the association’s declaration of condominium. 

“The association’s master policy must provide primary coverage for all portions of the condominium property as originally installed, or replacement of like kind and quality in accordance with the original plans and specifications, as well as any authorized alterations or additions to the common elements or association property made for the benefit of the membership as a whole,” she says. “That coverage specifically excludes all personal property within [individual] units or limited common elements, including any floor, wall, and ceiling coverings, electrical fixtures, appliances, water heaters and filters, built-in cabinets and countertops, window treatments like curtains, drapes, and blinds, or replacements of any of the foregoing located within the boundaries of the unit and serving only that unit.”

However, Grandmaison continues, “Florida law doesn’t require unit owners to purchase personal coverage, although some communities mandate individual coverage in their governing documents. The purpose of the statutory scope of master coverage is to ensure a condominium building can be rebuilt after a substantial casualty.” 

Loss of Use

According to the pros, loss-of-use may be the single most important clause in your coverage.

“Loss-of-use coverage is important because it covers the expenses incurred by an owner from their inability to use their apartment in the event of damage,” says Fitzhenry. “Those expenses might include the cost of a temporary dwelling such as a hotel or a rental apartment, additional food costs, storage expenses, etc. These expenses are often significant, so this coverage is crucial for many owners.”

Magill and Grandmaison concur, noting respectively that “it may take months, or even years, for the building to be restored to a habitable condition,” and that “even a fully-insured unit offers little comfort if the owner cannot afford to live elsewhere during repairs.”

When the Lines Are Gray

“When it comes to who pays claims and deductibles, frequently the answer is, ‘it depends,’” says David Haynes of HUB International New England, located in Wilmington, Massachusetts. “If the association has a per occurrence deductible, many will allocate the deductible among the units affected by the claim based on their percentage of damage. If there is a per unit deductible, then each unit owner is responsible for their individual deductible. If the damage is to a common area, depending on the association’s financials, the claim could be allocated amongst all unit owners or paid out of general funds.”

When an insurable event occurs—say a washing machine breaks down and it floods three floors underneath it—“It’s important to analyze whether the apartment owner was negligent in any way,” says Fitzhenry, “and as such contributed to the cause of the leak. Secondly, it’s always a good rule of thumb to review your governing documents, as the proprietary lease or the condo’s bylaws may speak directly to this type of situation. Absent a showing of negligence or a contractual obligation set forth in the governing documents, the condo or co-op will likely be responsible for paying the deductible for its own insurance.”

“In Florida,” Magill points out, “any costs of repairing casualty damage are payable as a common expense, so the deductible is absorbed by the association as an entity, regardless of the cause of the casualty loss.  Damage must be due to a casualty and a covered cause of loss to trigger coverage. The statute says that all reconstruction work after a property loss must be undertaken by the association, so the association may have obligations to repair items insured under its policy, even if the carrier denies coverage due to an exclusion. Sudden, unexpected floods or burst pipes are considered casualties for the most part, but damage from a slow leak may be considered a lack of maintenance or due to wear and tear and not covered.”

Neighbor to Neighbor

There are obvious financial benefits in having individual apartment owners and their association or co-op corporation all properly insured, but there is also substantial benefit to a community in having neighbors simply look to their insurance carriers when damage occurs, rather than just lawyering up and suing each other. Furthermore, when litigation is necessary, it’s fairly standard for unit owners’ insurance providers to engage and pay for legal representation to handle the matter.

 On a case-by-case basis, says Fitzhenry, “It’s important to analyze your governing documents, as they may contain language providing for owners to obtain insurance with a waiver of subrogation requirement.” Subrogation is the legal process where an individual’s insurance company pays for the policyholder’s claim and then ‘steps into their shoes’ to recover those costs from the responsible at-fault party and (hopefully) keep premiums under control.

A waiver of subrogation essentially prevents one unit owner’s insurance provider from bringing a subrogation claim against the other unit owner that may have caused the underlying damage,” Fitzhenry explains. “So each party looks only to its own insurance provider for recovery, and litigation between the unit owners and insurance companies is essentially avoided.”

Deductible Assessments

If a condo or co-op resident causes damage for which their association or cooperative corporation has to pay a deductible, the board may charge that resident a deductible assessment to recover the amount of that deductible. An HO-6 insurance policy or equivalent often includes coverage for this type of charge, enabling the unit owner being assessed to look to their own insurance provider for this sum, rather than paying out of pocket. 

“Condo associations may not have funds readily available to cover the deductible,” explains Magill. “Since repairs are a common expense, the board may need to levy a special assessment to amass funds for uncovered losses, including the deductible. Florida law requires coverage for condo unit owners to include $2,000 in loss assessment coverage, but most industry experts recommend increasing that coverage. However, it is extremely important for owners to purchase an individual policy that includes assessments based on an insurance deductible.”  

With so many industry-specific terms, coverage options, and rising premiums, it’s critically important for boards and residents alike to work with experienced, reputable insurers, and to develop at least a working understanding of how community and individual coverage fit together. That way, when the unexpected happens, the focus can be on rebuilding rather than recrimination. 

A.J. Sidransky is a staff writer/reporter for New England Condominium, and a published novelist. He may be reached at alan@yrinc.com.