If you own a condo or co-op, you’ll be dealing with two policies. The homeowners association or co-op board will have a master policy that covers the common areas such as roof, basement, elevator, boiler, and walkways for both liability and physical damage. The other policy (HO-6) that you are responsible for getting covers your personal possessions, structural improvements to your apartment, and additional living expenses. It also covers you for fire, theft, and other disasters listed in your policy, as well as liability protection. To insure your apartment adequately, it is important to know which structural parts of your home are covered by the condo/co-op association and which aren’t. You can find this out by reading your association’s bylaws and/or proprietary lease. If you have questions, talk to your association or board as well as to an insurance professional. Some associations insure the individual condo or co-op units as they were originally built, including standard fixtures. In this case, the owner is responsible only for alterations to the original structure of the apartment, like remodeling the kitchen or bathtub. Sometimes this includes not only improvements you make, but also those made by previous owners.
In other situations, the condo/co-op association is responsible only for insuring the bare walls, floor, and ceiling. The owner must insure kitchen cabinets, built-in appliances, plumbing, wiring, bathroom fixtures, etc.
Other coverage options you may be able to get depending on area, association, or board are:
Unit assessment. This reimburses you for your share of an assessment charged to all unit owners as a result of a covered loss. For instance, if there were a fire in the lobby, all the unit owners would be charged any costs of repairing the loss. Water backup. This insures your property for damage by the backup of sewers or drains. Water backup may not always be included in a policy. Check to see that it’s included. Umbrella liability. This is an inexpensive way to get more liability protection and broader coverage than is included in a standard condo/co-op policy.
Flood or earthquake. If you live in an area prone to these disasters, you will need to purchase separate flood and earthquake policies. Both flood and earthquake insurance can be purchased through your insurance agent. Flood insurance is covered later in this chapter.
Floater or endorsement. If you own expensive jewelry, furs, or collectibles, you might consider getting additional coverage, since there is generally a $1,000 to $2,000 limit for theft of jewelry on a standard policy.
When you’re buying insurance, it’s important to find an agent or company that specializes in condominiums or co-ops. You can reduce your rates by raising your deductibles and by installing a smoke and fire alarm system that rings at an outside service. Also, don’t forget to check on discounts if you insure your unit with the same company that underwrites your building’s insurance policy. Shop around and get at least three quotes, since costs can vary considerably.
It’s important to look at your basic policy components: structure, personal property, and liability to see if you have enough protection. Even if you don’t live on the San Andreas fault or collect antique firearms, you’ll probably need to get additional coverage for peace of mind.
Structure
Many common problems such as earthquakes, floods, failed sump pumps, and backed-up sewers aren’t covered in basic policies. To get this additional coverage, you’ll need to add endorsements or riders. The higher a certain risk is for your area, the more important it is to add this coverage. Coverage for sewer clogs is usually less than $50, but it’s a must, especially for older homes. A sewer backup is especially expensive because it takes special cleanup procedures caused by contamination. This is why Dale and Janelle had to call in a disaster cleanup company to handle their sewer backup mentioned earlier, and it added a couple of thousand dollars to their cleanup costs. I do hope someone send them a nice condolence letter.
Personal Property
All polices include coverage for the contents of your house, but often the amount isn’t enough. Basic plans commonly pay 50 to 70 percent of the policy amount. For example, a $175,000 policy would likely give you anywhere from $87,000 to $122,000 for the contents. This may sound like a lot, but when you go through your home and total up everything you’ve got, it’ll be a shock. The value adds up fast when you total furniture, electronics, wardrobes, power tools, a stamp collection, and so on.
If you have expensive items such as gun or art collections, antiques, jewelry, and computer equipment, you may want to consider extra coverage based on their actual value.
Liability
Most policies have a $100,000 minimum liability that protects you in case someone is injured on your property. Whether that’s enough depends on how much you have to lose if someone sues you. You can pay for more protection or add an umbrella policy that covers you for incidents away from home also.
For a home business or office with people coming to your home, your liability can skyrocket. Adding a $1 million umbrella policy for about $200 a year makes good sense.
The next step up in coverage is extended replacement. You insure the home for the appraised value, and the policy will pay up to 125 percent to cover unforeseen problems. But the best protection is guaranteed replacement cost, which has no present limit on what it’ll take to replace your home and contents. However, because of big losses in recent years, many insurance companies have dropped this policy. You may have to shop around to find it, but it’s definitely worth considering. You’ll need this rider if you buy an older home. Don’t assume that if your policy reads guaranteed replacement that you’re fully covered in case of a disaster. The guarantee can mean different things with different companies, but it usually applies if the cost of rebuilding a home is higher than the face value of your policy. If you buy an older home, chances are some of the wiring, plumbing, heating/ cooling systems, and structure may no longer meet newer building codes. If you have a fire, the insurer is required to replace what you had, not what you’re required to have in order to rebuild. So here’s the catch—when you rebuild, you’ll need to include the newer building codes and upgrades. That expense isn’t included in your policy. And those upgrades can cost you a bundle.
You can solve this potentially expensive problem by getting Ordinance and Law coverage. This is a rider to your policy that applies to the costs of upgrading your home to meet existing building codes. However, keep in mind that this rider will pick up the tab only for bringing the damaged part of the house up to code. It will not pay for bringing the undamaged part of structure up to code. In other words, you could be better off if the house were totaled rather than partially damaged.
Rick and Andrea had this happen
when they bought a 1940s brick bungalow with the dream of restoring it. They loved the wood floors and trim, the brick construction, and the wide front porch.
The home still had the old-style wiring through a fuse box that should have been the first upgrade project. But Rick and Andrea were excited and instead started on the floors, wood trim, and interior decorating in aztec styles. Sometime during the second week of restoration, debris got into an electrical receptacle after the faceplate was removed. The old wiring sparked and ignited partially stripped wallpaper and engulfed the wall in flames. Fortunately, the fire department was close and reacted quickly. Only the front part of the house was gutted. After getting together with the insurance adjuster and their agent, Rick and Andrea were shocked to find out that it would cost them more than $12,000 out of their pocket to restore the house. Their insurance policy would restore the home to ‘‘as was’’ condition but not pay to bring it up to code. And they could not get a building permit unless the house incorporated building code upgrades.
So what’s the bottom line of all this? If you buy an older home, make sure the home inspector gives you a list of items that don’t meet current building codes. Wiring and heating systems are often at the top of the list for potential fires. As your budget allows, upgrade those items on the list that don’t meet code first. By doing this, you’ll not only make your home safer but also increase its value. If disaster strikes, it will be replaced to ‘‘as was’’ condition, and you won’t be out the money you spent on improvements.
Also, be sure to keep all the contracts, receipts, and paperwork in a safe place so that you can document these improvements. This is where photos or a video can be worth thousands of dollars to you.
Most insurance companies offer replacement cost coverage. For an additional 10 percent or so, insurers will pay what it costs to replace your home and belongings up to the amount of your coverage. For example, if your TV set that cost you $700 is damaged in a fire, you’ll get the full cost covered. But, under standard coverage, you would get the replacement cost minus depreciation. In the case of electronics, the depreciation schedule is steep. You would be lucky to get 50 percent, or $350, for the TV. Or, a $50,000 tile roof that’s rated for 20 years and your home burns when it’s 10 years old would get you a $25,000 reimbursement for the roof under standard or actual cash value coverage.
Extended coverage is the minimum you should carry if you have a high LTV (loan-to-value) mortgage. With standard coverage, a major fire would most likely leave you with an insurance check many thousands of dollars less than your mortgage balance. This is why many mortgage lenders require you to have this level of protection.
The standard policy (HO-3) typically covers damage to both structures and personal property from fire, lightning, windstorms, hurricanes, tornadoes, hail, explosions, aircraft, vehicles, smoke, theft, vandalism, falling objects, damage from ice, snow, or sleet, and freezing pipes. Personal liability is also covered if you or your property injures someone. Just about everything is covered unless specifically excluded.
Typical exclusions are flood, earthquakes, neglect, intentional loss, earth movement, power failure, and damage caused by war. Also, if you have a loss and the building codes have changed, increasing the repair or replacement costs, you’ll pay the difference.
For example, if you have a fire and your home’s electrical system is an older 60 AMP fuse system, you’ll end up picking up the cost to upgrade it, plus all other upgrades needed to bring the home into code compliance. Also, there are limits on the losses that can be claimed for items such as cash, furs, jewelry, or hobby collections. You’ll need to decide if you want to buy supplemental coverage to increase your protection. One worthwhile supplemental item is coverage for living expenses if your home is destroyed or damaged and you have to move out for a while. It covers hotel bills, restaurant meals, and other living expenses incurred while your home is being rebuilt. Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20 percent of the insurance on your house. You can increase this coverage, however, for an additional premium. Some companies sell a policy that provides an unlimited amount of loss-of-use coverage but for a limited time. It doesn’t take much damage to a home for you to be glad you added this option to your policy.
Homeowner’s insurance evolved in the late 1950s, when the insurance industry needed a single comprehensive policy to cover not only the house, but also the contents and liability. The standard policy has two parts: property insurance and personal liability. The most common policy, HO-3, covers the house and other structures for everything except flood, earthquakes, and other policy exclusions. This is the policy that most mortgage lenders require you to carry as a loan condition.
Other options are HO-2, which is a cheaper policy, and HO-1, a bare-bones policy that covers only risks that are specifically insured, but it is not available in most states. HO-4 is designed for renters, and HO-6 covers condominiums and co-op owners. HO-8 is designed for older homes and reimburses you for damage on an actual cash value basis. That means replacement cost minus depreciation. Depending on the area and house, full replacement cost policies may not be available for some older homes. In fact, they are getting harder to find in just about all areas.
For many homebuyers, insurance is a back burner item that has to be done before closing or just another cost that appears on the closing statement. But, that’s changing in a big way. Many areas with a history of high insurance claims such as Florida and Texas have experienced skyrocketing rates, more exclusions, and closer scrutiny of applicants. Some states are also revising their purchase offers to include a provision that makes the offer subject to the buyer being able to obtain homeowners insurance.
Actually, there are several different insurance policies that are part of every home sale, namely, homeowners, flood, private mortgage insurance, title insurance, homeowner warranties, and sometimes mortgage life insurance. These policies stay in the background, hardly noticed until a problem occurs; then they become very important.
Dale and Janelle found this out just one day after they closed on an updated bungalow they found in an upscale but older area. They had a professional inspection on the property, and the inspector didn’t find any problems.
During the move in, Janelle turned on the tub and another faucet to flush out the drains but got distracted for a few minutes and let the water run. Later, when she went downstairs, she found to her horror that there was a foot of water in the basement. Water had backed up through a floor drain in the laundry and flooded the finished basement. A plumber, in checking out the line to the street, found that tree roots had invaded the sewer pipe and created a partial obstruction. Normal flow of a toilet or faucet was not a problem, but the line couldn’t handle the larger volume from two faucets opened to full force.
The damage was considerable, with soaked sheetrock, carpets, and some furniture. Luckily, Dale and Janelle had a good homeowner’s policy (HO-3) that paid for the damage, less their $500 deductible. With so many unknowns that can carry a big price tag, homeowner’s insurance and some of the other insurance options become an investment, not an expense.
This chapter covers these different insurance programs that are important to homeowners, along with how to shop for the best deal.
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Before you sign a purchase offer, conduct a reality check and walk through the neighborhood. Ask at least three neighbors the following questions:
- How long have you lived here?
- Do you feel the board is doing a good job?
- Do you have a management company, and is it doing a good job?
- Do you attend the association’s meetings?
- What do you like best about the community?
- What do you like least about the community?
- What do the dues cover, and how often have they been increased?
- Ask someone in an adjoining unit about the soundproofing. This is the
- number one complaint of condo owners
Typically, green fees cover grounds maintenance, insurance, garbage removal, snow removal, and amenities upkeep. Some communities include cable TV or other perks that the majority of homeowners are willing to pay for.
Here again, you want to look at the community closely to see if you’ll fit in. A clubhouse, swimming pool, and tennis courts are great if you use them. But if all you want is a quiet condo to get away from yard work, you’ll soon resent the higher fees. Not surprisingly, one of the biggest areas of contention among homeowner association members is finances. If the board is responsible and runs the association professionally, it will accumulate a reserve. However, this doesn’t always happen. So it’s important for you to find out before you buy how much money the development has in reserve. Otherwise, you may get an assessment (one-time bill) or a hefty increase in your monthly fee right after you move in. Homeowners associations have the right to put a lien on your unit if you don’t pay an assessment or the monthly fee. Also, if you break the rules or incur a fine, it’s going to cost you, and there’s not much you can do about it.
So what can you do if you don’t like the way your fees are spent? You exercise one of the basics of American democracy and get enough neighbors together to vote in a new board or have a recall election. The project’s bylaws and articles of incorporation contain the rules for elections and picking board members.
A must-read manual for anyone who buys a home in a project with a homeowners association is Joni Greenwald’s book Homeowner Associations, A Nightmare or a Dream Come True?
The bottom line is that condos can be a good way to go, and there are many areas that have a stable market where you can build equity. However, you don’t have as big a margin of error with condos as you do with detached homes. This is why your homework and planning have to be a little more rigorous.
If you buy a condo or co-op, your insurance needs will be slightly different than if you buy a detached single-family home.
When you buy a condo, you’re investing a lot of money, time, and energy into what will hopefully be a happy home. To make sure this doesn’t turn into a disappointment, make your offer subject to your approval of the association’s financial documents. It should be the seller’s responsibility to get you the following paperwork from the association:
- A copy of the association’s financial statement.
- Copies of bylaws, CC&Rs, and articles of incorporation.
- Copies of the minutes for the last six to twelve meetings. If there aren’t any, that’s not a good sign.
- A copy of the reserve study that outlines the repairs that can be expected in the future and how much of the current assessment is going into that fund.
For example, if the project has 200 units, a clubhouse, and a swimming pool and there’s not enough money to meet future pool and reroofing costs, you’ll be buying into steep assessments in the future. These documents, along with talking to at least three residents in the project, should give you a good idea of whether this community is for you. All this homework is worth it if it’ll save you costly selling and moving expenses later on.
Since the decisions of the board have a big effect on you and your pocketbook, it’s important to get a copy of the bylaws and read them before you commit to buying in a CC&R governed development. Getting copies of the last several board meeting minutes can’t hurt. They can give you an idea of what problems the development has and if any major cost assessments are looming. It’s also good to know how much the association has in reserve.
Sarah learned about the importance of checking the association’s finances the hard way. After she bought a condo, she learned that the secretary/treasurer had been arrested for embezzlement of nearly $13,000 from association funds. A special $400 assessment was levied against each homeowner to make up the loss so bills could be paid. True, this may rarely happen, but you could buy into other problems that can easily cost as much if you don’t check the finances.
First of all, a homeowners association is usually a corporation that has a set of articles of incorporation that defines the purpose and powers of the association. The articles of incorporation are filed with the state the development is in.
The bylaws of an association contain the basic governing rules. They can be amended or changed by majority vote of the members, subject to state statutes that govern homeowners associations. Ideally, the community is run like a small city government, with elected board members representing the will of the owners. Federal laws as well as local ordinances and laws such as zoning, building codes, parking, and traffic restrictions and even resale regulations and rent control provisions apply to homeowners associations and CC&Rs.
CC&Rs are the rules that govern what you can and can’t do with your property. For better or worse, it’s one of the homeowners association’s responsibilities to enforce these rules to protect the value of the community.
Conflict between the association and the homeowners can arise when differing interpretations of the rules occur. Some owners want strict rules and uniformity to keep values high, while others give individuality and a looser interpretation higher priority.
The number of directors, term of office, and duties are found in the declarations, articles, or the bylaws. Most boards have three to five directors or an odd number to avoid voting deadlocks. Terms of elected office are usually for one to three years. However, if there are five or more members, the terms are usually staggered.
