As downsizing Baby Boomers join first-time buyers in their initiation to condominium living, industry professionals say both groups have a lot to learn about condominium insurance.

Many new owners mistakenly believe that unit owners do not need to carry insurance on their own unit- —and that coverage for replacement value of the unit itself is included in their monthly condo fee. Other condo residents, even many longtime owners, don't know enough about condo insurance to adequately protect their financial assets and personal property.

Both new and old condo owners benefit from a review of the basics of condominium insurance, which is distinct from the insurance that covers single-family homes.

Start at the Beginning

Before beginning to grapple with the subtleties of condominium insurance, it is first necessary to understand just what is covered by condominium insurance.

Insurance coverage in condominiums is divided into two major areas, reflecting the split between commonly-owned property and the privately-owned unit.

All the condominium common areas—the grounds, the pool, clubhouse, tennis courts, parking lot, and the outside of the condominium— are covered under the condominium's master insurance policy, which is negotiated and purchased by the board of directors.

The coverage included in the master policy, however, often ends at condominium's inside walls, leaving the homeowner responsible for insuring everything inside the unit. This type of coverage goes by the name "bare walls" coverage. Sometimes the master policy also covers permanent fixtures, like sinks and cabinets. This type of more inclusive master policy is known as "all-in" coverage. But even with all-in coverage, a master policy often specifies a large deductible for damages, often $5,000 to $10,000, which the unit owner is responsible for paying in the event of a loss.

Because master policy coverage does not extend to the unit itself, unit owners must purchase an individual homeowners' policy—known in the industry as an HO6—to cover any damage incurred inside the unit. In addition to protecting the unit owner from the expenses of repairing damage to the inside of their unit, the HO6 covers the unit owner's personal possessions.

Unexpected Outcomes

In his experience, many unit owners who do not carry HO6 policies are surprised when they have to shell out money after a disaster, says Bernie Gitlin, president of Global Insurance Network, Inc., in Needham, Massachusetts.

Gitlin advocates for unit owners taking the time to educate themselves about the intricacies of condominium insurance to protect their assets. "Very often the unit owner is responsible for repairing damage that happens in their unit, even if the association is insuring it," says Gitlin. For example, he says, "A kitchen fire could burn up your cabinets. If the repair cost was $5,000 and the association has a $5,000 deductible, the unit owner may have to pay for it."

Gitlin advises that the first step is for a unit owner to talk with the community's property manager, or board members to pinpoint the deductible on the association master policy. Once that figure is known, the HO6 policy can be dovetailed to cover up to that amount, protecting the homeowner.

Another Pitfall: Replacement Value

Another problem inherent in many condominium master policies is that the policies pay only to restore a damaged condominium unit back to its original condition. In this case, "original condition" translates to the condition of the unit when it was first constructed—which may have been years or even decades earlier.

Not covered under most master policies are improvements that owners have made inside their units over the years, including, but not limited to, new hardwood floors, bookshelves, or home theaters.

For this reason, it's worthwhile to purchase "additions and alterations" insurance, says Bud O'Neil, account manager at CV Mason & Co Inc. in Bristol, Connecticut. "The owners want their unit to be put back to what it used to be, not what it was originally. But the unit won't be unless the owners have the [additions and alternations] coverage," he says.

Another Perpetual Problem: Water

Yet another area frequently not covered by association master policies is flooding. In fact, says O'Neil, more associations are deciding not to carry this coverage.

Important to note, says O'Neil, is that standard HO6 polices cover only water damage that results from broken windows, when rain is allowed in. Not covered by standard HO6 policies, says O'Neil, is damage from ground water seeping up through a basement. To protect themselves against flood-related expenses, O'Neil singles out two particular groups of unit owners for a strong recommendation that they purchase flood insurance: any unit owner whose unit it located in a flood plain, and any owner of unit that includes a finished basement.

Personal Possessions

Often overlooked when purchasing HO6 insurance are high-value items like jewelry, art, or antiques, which may exceed policy limits, says Gitlin. These items should be covered under a "floater policy," which is purchased in addition to the HO6 policy, recommends Gitlin. To insure their high-value items under a floater policy, owners must supply to the insurance company original sales receipts or documentation of professional appraisal. Gitlin also recommends photographing the items.

High value items aside, it makes good insurance sense to photograph or video everything in a unit, says Gitlin. "It's useful to walk around your unit with your digital camera and take a picture of everything you've got. If everything is destroyed, who remembers how many pairs of pants they have?"

Another area in which owners are often underinsured is personal liability, says Gitlin. The association's master policy coverage ends at the front door of every unit, just the point where guests walk into a unit. Typical HO6 policies carry only $100,000 in liability coverage, which, Gitlin says, is inadequate.

The best way to increase liability coverage is through an "umbrella" policy, which is typically sold in increments of millions of dollars, Gitlin says. An umbrella policy also covers the policyholders wherever they go, both inside and outside the condominium, says Gitlin.

"If you happen to have a boat, [an umbrella policy] can give you high limits to your boat. [The coverage is] on any personal liability that you have," Gitlin says. "You hit somebody on the head with a golf ball, there's potential liability. Or you're on the golf course and you run into somebody with your golf cart. It could cover you in that situation."

A final mistake that many new condo owners make is not purchasing insurance right after they close on the unit, says Gitlin. This situation can be a costly and painful mistake. Gitlin notes cases in which damage occurred in the unit between closing and the new owner actually moving in. The new owners "should get insurance the minute they move in and, in some cases, the minute they take possession of the unit."

Getting condominium insurance in the correct amount right out of the starting gate leads to a safe and secure initiation into condominium living.