Loss Assessment, Hurricanes and Townhomes

One of the most misunderstood coverages—and one that is of growing importance—is the loss assessment coverage in a homeowners policy. It is estimated that one in six Americans lives under a homeowners association, whether it be a condominium, townhouse or single-family home.

Along with the many benefits of HOA living come some disadvantages, one being that HOA living creates the possibility of being assessed by the association. In many cases, if not most, there may be no limit on the amount of the assessment. In addition, homeowners might have joint and several liability so that their assessment increases to offset those who cannot pay.

Individuals who live in or own homes in a home association face increased financial risks from assessments. Personal lines policies can help cover some of the assessments that may be made. Increased limits of loss assessment coverage should be purchased where available, and individuals who live in an HOA should have their policy endorsed to include personal injury liability claims. For some assessments, loss assessment coverage provided by the standard homeowners policy can provide a financial security blanket for the resident.

A full discussion of the coverage issue, along with claims examples, is presented in a comprehensive Virtual University article by personal lines guru David Thompson.

It examines the loss assessment coverage provided by the industry standard homeowners policy, written by the Insurance Services Office. While not all companies use ISO forms, the coverage provided by those proprietary forms often closely tracks the ISO form.

In some cases, homeowners associations will not make loss assessments for damages until a year or more following the loss. The question is, which homeowners policy responds—the one in force at the time of damage or the one in force when the assessment is made?

According to several agents, some carriers are interpreting ISO-equivalent language to deny claims under policies in effect at the time the loss assessment is made. That is incorrect. The policy language says: “We will pay up to $1,000 for your share of loss assessment charged during the policy period….”

It couldn’t be any clearer that the policy in force at the time of the assessment is the one that pays,
not the policy in force at the time of damage. Loss assessment coverage is analogous to claims-made coverage without a retro date.

Visit the Virtual University for a complete discussion of this issue, including a link to an excellent article from the Big “I” Florida state association.

A small lakefront development of townhomes includes five buildings, each with two units in it. The agent feels that the best way to insure the buildings is via a master policy. The developer’s attorney thinks individual HO policies are the best way to go. Who is right?

As usual, the short answer is, “It depends.” There are advantages and disadvantages to each approach, with the superior one depending on what type of situation arises from a particular claim. The master policy is appealing in that it allows a consistent approach and control over rebuilding. One advantage of individual homeowners policies is that this avoids turning over control of a major asset to others with regard to insurance.

The observations and musings of the VU faculty can be found on the Virtual University, along with a link to an article from IIABA’s Florida state association, which has a lot of experience with these types of communities.