If you live in a community with a homeowners association (HOA), you will pay a fee that goes toward covering costs associated with ongoing maintenance and services around the property. In most cases, the HOA will use its insurance policy to cover costs associated with common areas. However, in cases where damage exceeds the master policy’s limit, the remaining amount may be passed onto HOA members. If that happens, loss assessment coverage is available as an endorsement that provides you with coverage for these costs so you won’t be stuck paying entirely out of pocket. It’s good to know what loss assessment coverage includes and how it can protect you in case of damages being passed on to you.

What is loss assessment coverage?

Loss assessment coverage may differ from one insurance company to the next. However, most loss assessment coverage will include protection from three kinds of losses: damage, liabilities and deductibles.

When you live in a neighborhood that is part of a condo or homeowners association, the HOA takes out an HOA insurance policy, sometimes referred to as a master policy, to provide coverage for losses to the common areas and building. In a single family home development, the HOA’s master policy will typically insure common areas — such as the swimming pool, tennis courts, playground and amenity center —  while a master policy for condos and some townhomes will also provide coverage for the residential structure but not individual units.

Even though HOAs have a separate insurance policy, there are instances where members may be required to pay some of the expenses that are not covered under the HOA’s master policy, in the form of a special assessment. Loss assessment coverage helps protect homeowners from paying these additional expenses themselves.

What is covered under loss assessment coverage?

Although the details of a loss assessment coverage may differ from provider to provider, most include protection from three kinds of losses.

Damage assessments

When a common area in an HOA is damaged by a covered peril, the HOA’s master policy typically covers the damages. If the repair costs exceed the limit of coverage in the master policy, however, the HOA may assess members and require them to pay the difference. If the damages cost more than what the master policy will pay for, loss assessment coverage in an individual condo or homeowners insurance policy could cover the cost assessed to members.

Usually, HOAs will divide the remaining cost evenly among HOA members, but not all HOA bylaws or master policies are the same. It’s important to read the details in your contract or policy carefully before joining an association so that you are aware of all the costs you may be required to pay. If the master HOA policy is unclear, ask your association to clarify any areas that are confusing. You should request a copy of the master policy so that you can review it with your insurance agent before determining what individual coverage you need to purchase.

Liability assessments

Liability assessments include accidents in a common area. For example, when someone is injured in a common area of a residential development, such as the amenity center, parking garage, playground, swimming pool or tennis court, they might sue the HOA for damages. The HOA master policy typically has coverage for these instances. Once again, though, the cost of the settlement could exceed the liability limit in the master policy.

If liability damages that the HOA is held legally responsible for exceed the policy limits, members may be assessed for the remaining cost. The loss assessment coverage on your homeowners or condo owners insurance policy could protect you from having to pay these costs out of pocket.

Deductible assessments

When an HOA purchases a master policy, it also needs to choose a deductible amount for coverage. A deductible is how much the policyholder, which would be the HOA in this case, will pay out of pocket in a claim.

If the HOA’s common areas are damaged and the HOA has a high deductible, the cost of repair may be less than the deductible. In this case, the master policy will not cover the damages and the HOA might assess members to pay for the costs of repair. The HOA may also place a special assessment on owners for having to pay the deductible, even if the claim is covered by the master policy. Loss assessment coverage can help to protect members from deductible assessments by paying the member’s share of the cost up to the limit of the coverage.

Do I need loss assessment coverage?

Loss assessment coverage is something to consider if you own a condo or buy a home or townhome in a neighborhood or community with an HOA. People who move into neighborhoods with HOAs can be liable for damages that are no fault of their own. Buying loss assessment coverage can help protect homeowners from financial risk if an assessment occurs. If you choose to add loss assessment coverage, the cost associated is included in your overall home insurance premium. However, it is important to note that property policies may also include loss assessment coverage, depending on your insurer. Check your policy or talk with your insurance company to see if you need to add the coverage should you decide to get it or if you already have it on your policy.

Home insurance companies may also offer different limits of coverage for loss assessment. When deciding how much loss assessment coverage to buy, look at the HOA’s master policy to see how it handles assessments and how those assessments will affect members. If an HOA needs to assess members for an uncovered loss, the HOA will usually divide the cost evenly between members. If the HOA has many members, the loss assessment per owner would be less compared to an HOA with fewer members.

Consider this scenario when determining if loss assessment coverage is right for you and how much to purchase. If a storm causes $500,000 in damage to the amenities in a shared area and an HOA master policy only has $400,000 in coverage, there is an excess of $100,000 that would likely be assessed to the homeowners. If the policy has a high deductible of $25,000, the association may also assess the cost of the deductible among the owners in the community. Loss assessment coverage could help you to cover the cost of your share of the assessment.

How to buy loss assessment coverage

Loss assessment coverage is offered by most home insurance providers. When signing up for a condo, townhome or homeowners insurance policy, loss assessment will typically be offered by the provider as an optional coverage that can be added to your policy as an endorsement.

When deciding how much coverage to purchase, consider the number of residents in your neighborhood and what kind of common areas the HOA provides. Common areas can include swimming pools, playgrounds, the lobby, elevators, parking lots and other places people may get injured or could be costly to repair. These factors could increase the chances of an assessment and increase the amount of that assessment.

Frequently asked questions

    • If an HOA needs repairs that far exceed the master policy’s coverage limits, members could end up paying a lot of money in the form of a special assessment. Being assessed for guest injuries or other damages are also reasons you may purchase loss assessment coverage. Take these factors into consideration when purchasing loss assessment coverage, which is generally affordable even at higher limits.
    • When a HOA is found to be liable for a loss covered under the master policy, that policy will pay up to the limit of coverage. If the loss exceeds the limit of coverage or if the master policy has a high deductible, the excess loss and deductible cost passed to members is a loss-based assessment.
    • If the guest wins the lawsuit and the HOA has to pay damages that exceed the limits of coverage in the master policy, the HOA could assess members for the remaining cost. In this case, having loss assessment coverage in place ahead of time could help mitigate the financial burden of the additional expenses incurred in settling the suit.
    • The triggering event for a loss assessment claim is the moment that you receive a letter from your HOA informing you of a loss assessment; it is not the moment that the event that caused the loss occurred. Once you receive the letter from the HOA, you can submit the claim to your insurance provider under your loss assessment coverage. If approved, your insurance provider will pay the assessment fee in part or in full, depending on your level of coverage.
    • Loss assessment coverage is typically available through your insurance provider as an endorsement on your existing homeowners insurance coverage. In most cases, this endorsement will carry a low cost that will be added to your existing premium. However, the exact amount will depend on the level of coverage that you purchase.