Condo insurance (HO-6): what your policy needs to cover

How the two policies split the work

Master policies come in different scopes, and your association's governing documents decide what the association must insure. The Colorado Division of Insurance's HOA insurance toolkit describes the range this way: a master policy typically covers common areas and the building structure, including roofs and exterior walls. An "all-in" policy also covers fixtures within units, while a "bare walls-in" policy covers only the exterior and common areas, leaving interior finishes to owners. Many policies fall somewhere in between.

Ask the association or its manager which applies, and get the master policy's declarations page. HUD's condo questionnaire for FHA loans asks the same question: whether the master policy covers interior unit coverage, including improvements the borrower may make. If not, it says the borrower needs a walls-in HO-6 policy.

When Fannie Mae requires an HO-6

Fannie Mae's Selling Guide, section B7-3-04, requires a unit owner's policy when either is true:

• any part of the unit's interior or improvements is not covered by the master policy, or
• the master policy includes a per-unit deductible.

The guide says the policy should be written on a "Special" coverage form or equivalent. At a minimum, it must cover fire or lightning, explosion, windstorm including named storms, hail, smoke, aircraft, vehicles and riot or civil commotion. If the master policy has a per-unit deductible for a specific peril, your policy must cover that peril.

How much coverage, and on what basis

Section B7-3-04 sets the minimum coverage as the greater of:

1. enough to restore any part of the unit's interior or improvements not covered by the master policy to its condition before a loss, or
2. the amount of the master policy's per-unit deductible, if it has one.

The policy must pay on a replacement cost basis. Fannie Mae recommends that borrowers work closely with an insurance professional to decide what they need.

The deductible cap

Fannie Mae limits the deductible on your HO-6 for the required perils to the greater of 5 percent of the coverage amount or $2,500. On a policy with $40,000 of dwelling coverage, 5 percent is $2,000, so the cap is $2,500. On $80,000 of coverage, the cap is $4,000.

Loss assessment coverage

When the building has a large loss, the association pays its master deductible and may pass that cost to owners through an assessment. Loss assessment coverage in an HO-6 can help pay your share.

The Colorado Division of Insurance's HOA insurance toolkit flags several problems with this coverage. It notes that not all HO-6 policies offer loss assessment limits as high as some owners now need, that not all allow the limit to be raised outside renewal and that policies are not standardized on whether the coverage applies at the time of the claim or at the time of the assessment. The toolkit also reports that some associations' deductibles have risen sharply.

Read your association's rules on how the master deductible is shared and ask your insurer how its loss assessment coverage works.

Other coverage to consider

• Personal property for your belongings, usually on a replacement cost basis if available.
• Personal liability for injuries or damage you cause.
• Loss of use for living expenses if the unit cannot be lived in after a covered loss.
• Water backup and flood, which are often excluded or limited in standard policies. Flood insurance is separate.

Keeping it current

Master policies change at renewal. Associations can raise deductibles, switch insurers or change what is covered. Ask the association to send you the new declarations page each year, and adjust your HO-6 if the master coverage or deductible changes.

The bottom line

Your HO-6 covers what the master policy does not. For Fannie Mae loans, it is required when the master policy leaves interiors uncovered or charges a per-unit deductible, it must cover at least the larger of those gaps on a replacement cost basis and its deductible is capped at 5 percent of coverage or $2,500, whichever is greater. Check loss assessment coverage carefully.