You have just purchased that new home.  What insurance do you need to purchase?  That answer depends on how the property is deeded and what the CC&R’s require. NRS116 requires all common interest communities to obtain and maintain certain types of insurance.  In the case when an association provides coverage for the residential buildings, that coverage is primary subject to the terms and conditions of the insurance policy. 

You live in a single family home; you will need an HO-3 Homeowners policy.  You live in a condominium; you will need a unit owner’s policy known in the insurance industry as an HO-6 policy.  Your property is deeded as a townhouse; you will need to review the CC&R’s to determine who provides the property coverage for the individual units.  If you do, you will need an HO-3.  If the association provides the property coverage you will need an HO-6.

Everyone needs some sort of homeowner’s policy.  If you do not have insurance and are subject to a loss, then you are self insured.  All homeowner’s policies contain at least five coverage parts:

            Coverage A      Dwelling
            Coverage B      Other Structures (sometimes excluded from HO-6)
            Coverage C      Personal Property
            Coverage D      Loss of Use

            Coverage E      Personal Liability
            Coverage F      Medical Payments to Others

            Additional Coverage:
                        Loss Assessments

You should discuss each line of coverage with your insurance agent and also discuss the need for the addition of Flood and Earthquake coverage. 

To prepare an HO-3, you set a limit for each line of coverage and choose a deductible.  The HO-6 is much more complex and we will discuss that in more detail. 

Remember insurance is a contractual transfer of risk to the insurance company.  The form and terms of that contract are very important, much more important than the price.  Low cost insurance may result in low or no coverage.

Increasing the amount of deductible and imposing a per unit deductible for water damages has the affect of re-allocating some of the risk and re-allocating the responsibility for the payment of a portion of a claim from the association, as a common expense, to the unit owners as an owner expense.  In addition, owners are responsible for the cost to repair any part of a unit not covered by either an association policy or their personal property policy.  The potential cost to a unit owner is enormous, yet it is estimated that less than 50% of unit owners have insurance to cover these claims.

An association policy that provides single entity coverage will, subject to any limitation in a policy, pay to replace the unit and property included in a unit in accordance with the original plans and specifications or replacement of like kind and quality of such property.   Coverage generally applies to: machinery and equipment, cabinets, plumbing fixtures, heating, ventilating, and air conditions, appliances such as those used for refrigeration, cooking, dishwashing, laundering, security, or housekeeping, floor coverings, wall coverings, paint and tile.   Property NOT covered includes betterments and improvements made to units, personal property- furniture, clothing, electronics and jewelry.  A betterment or improvement is considered any up-grade or improvement made to a unit after a unit is first occupied.  Obviously, the older the unit, the harder it is for a new owner to know what was original and what is a betterment or improvement made by a previous owner.  That increases the risk that some of the damaged property in a unit will not be covered by an association policy.

Owners can and should purchase insurance coverage on their individual units.  It is generally known that HO-6 policies provide coverage for personal property (contents), liability (for injuries that occur in a unit), and an owner’s share of the master policy deductible up to $1,000.  What is generally unknown, and has been overlooked, is that an HO-6 policy also provides coverage known as “Coverage A”, for damages to those portions of a unit which are not insured by an association policy, including betterments and improvements.  If an association’s policy has a $10,000 per unit, per occurrence, water damage deductibles and a unit sustains damages of $8,000, the association’s insurer will not pay anything and the unit owner will be responsible for the entire $8,000.  Depending on the policy, Coverage A of an HO-6 policy will pay the $8,000, subject to any deductible, since the claim is for damage to property owned by the insured and not covered by the association policy.  It is not a claim under the deductible coverage of an HO-6 policy, but is a claim for the cost to repair or replace the damaged property.  The same analysis applies to betterments and improvement in a unit.  Betterments and improvements are not covered by a single entity policy, so they are property not covered by the association policy, which triggers the HO-6 coverage.

Loss Assessment coverage (sometimes known as Special Assessment Coverage) provides payment of your share of an assessment charged against all unit owners for an uninsured loss that the association sustains.  You should purchase as high a limit as the insurance company will write, as the cost is very inexpensive.

You should review the exact limits with your individual insurance agent.  A quick rule of thumb is to set building coverage at the value of:  window and wall coverings, plus any upgrades or improvements, plus $10,000, a reasonable estimate for personal property, and the maximum offered by the insurance company for personal liability, loss of use, and loss assessment.

Tips for Purchasing an HO-6 policy

1. Verify with association/manager the extent of building coverage on the master policy via resident letter of fact sheet to determine your insurance responsibilities.
2. Verify if flood insurance is required.
3.  Review with our agent which items are covered as additions and alterations and what is considered your personal property.  Many companies vary in their definitions.
4. A company that offers to “blanket” the additions and alterations with your personal property is the best option.
5. An assessment should be made to determine the value of your personal property.  Making an inventory and taking pictures to keep off premises while doing this is very helpful information to have at the time of a loss.
6. Ask your agent for a quote on an “all risk” policy and have them explain the advantages over a standard HO-6 policy.
7. Purchase “replacement cost” coverage for your personal property.   In the event of a loss you will receive “new for old” instead of receiving a settlement for the depreciated value of your belongings. 
8. Ask if sewer backup is available. 
9. Does the company offer a “master policy deductible endorsement”?  If not, ask how they would respond to a loss if you become responsible for the master policy deductible. 
10. Check to see if your additional living expense is “actual loss sustained” or if there is a dollar limit.
11. Discuss limitations on specialty items such as jewelry, furs, fine arts, and collectables and how to best insure them.
12. Discuss loss assessment coverage, and how to select a limit.
13. Purchase the highest liability limit available (usually $500,000), and consider purchasing an umbrella policy for additional liability coverage.