Homeowners associations (HOAs) are common for people who live in a condominium, townhome or single-family home. The association takes care of maintenance of common areas, services and amenities within the community. Each homeowner or condo owner pays fees to cover use and maintenance of common areas. When damage occurs in the common areas or someone gets injured there, the cost for repairs and medical expenses are typically passed onto the association members. In this scenario, having loss assessment coverage on your individual home or condo insurance policy would cover the damages so you are not directly responsible for the cost.

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What is loss assessment coverage?

Loss assessment coverage is an optional coverage most homeowners and condo owners can purchase as part of their home insurance policy. Although loss assessment is often associated with condo associations, any home or townhome located within a homeowners association may benefit from loss assessment coverage.

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 members from paying these additional expenses themselves.

What is covered under loss assessment coverage?

Although the details of a loss assessment coverage will 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 cost of repair exceeds 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 between HOA members, but not all HOA bylaws or master policies are the same. Read the details carefully when joining the association so you know what to expect if this situation ever happens to you. 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

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 choose to sue the HOA for damages. The HOA master policy typically has coverage for these instances. Once again, though, the cost of the settlement could be more than 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 each coverage. A deductible is how much the policyholder, which would be the HOA in this case, will have to pay out of pocket when a claim is filed.

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 fully covered by the master policy limits. 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 strongly consider if you own a condo or if you buy a home or townhome in an HOA community. People who choose to join HOAs can be liable for damages that are no fault of their own, and buying loss assessment coverage can protect HOA members from taking a financial hit when an assessment occurs. Home insurance companies typically offer different limits of coverage for loss assessment, ranging from $1,000 up to $100,000 or more. According to the Insurance Information Institute, purchasing a $100,000 limit on loss assessment coverage typically costs less than $75 annually in additional premium.

When deciding how much loss assessment coverage to buy, look at the HOA’s master policy to see how they handle assessments and specifically 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 people living in the HOA and what kind of common areas are provided by the HOA, like swimming pools, playgrounds 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.

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