Insurance for Homeowners and Homeowner Associations
Under Chapter 47C for condominiums and 47F for other planned communities, a homeowner’s association is required to purchase certain types of insurance. In both types of communities, the HOA is required to provide insurance for damage to the common elements of the association. A common element is anything owned by the association, and not an individual owner, and not an individual lot or condominium unit. Typical common elements include parking lots, pools, clubhouses, and green spaces. For condominiums, common elements also include shared walls or structural elements between townhomes. The amount of insurance must be at least 80% of the replacement value of the insured property. It must be insured for all “direct physical loss commonly insured against including fire and extended coverage.” “Extended coverage” is not defined in the statutes. The standard definition in the insurance industry for “extended coverage” generally covers physical damage due to wind, hail, fire, smoke, riot, civil commotion, aircraft, and vehicle damage. Currently, these coverages are typically included in the standard insurance policy rather than as an extended coverage endorsement. Note that this does not include flood insurance, and therefore, depending on the restrictions in the declarations, the HOA may not be required to purchase flood insurance.
For condominiums where the individual units are stacked, one on top of the other, the insurance includes not only the common elements, but the units themselves. This does not include any improvements or betterments that were installed by the homeowner. For example, if the base unit includes carpet and Formica counters, the insurance will cover the replacement cost of those materials, even if the homeowner had installed hardwood floors and granite counters.
The HOA is only required to purchase this insurance if it is reasonably available. If certain coverages are unavailable or unreasonably expensive, the HOA simply has to notify the unit owners of the gap in coverage.
Even though a homeowner in a stacked condominium has coverage under the HOA’s policy, I would recommend that he purchase additional coverage. Known as an HO6 policy, the condominium unit owner insurance would cover personal property, interior walls, floors and ceiling, including any improvements. Although there may be some overlap between the HOA’s policy and the owner’s policy, keep in mind that one way HOAs keep down the cost of insurance is to agree to a high deductable. The owner’s policy could cover part of that deductable.
To illustrate, assume that a tenant in an upstairs condominium unit leaves the water running in the bathtub. The upstairs unit fills with water which soaks down through the walls and ceiling, and damages the lower unit’s furniture and hardwood floors. The insurance company for the HOA accepts the claim as a covered peril. After subtracting their deductable (let’s say that amount is $10,000), the insurance company pays for the damage to the upstairs floors, the areas within the common wall and between the floor and ceiling of the stacked units, and the amount to replace the damaged hardwood floors with the original carpet. They do not pay for the cost to replace the more expensive hardwood or the furniture. The below unit owner has an HO6 policy which pays for the furniture and the additional amount to replace the hardwood after subtracting their deductable (let’s say that amount is $1000). The HOA then assesses the upstairs unit owner for the $10,000 deductable amount as they caused the damage with their negligence. If the damage did not come from the negligence of the upstairs neighbor, (assume a faucet broke rather than the owner left the water running) then the HOA would likely assess both owners for the $10,000 deductable. At that point, the downstairs neighbor’s HO6 policy may pay part of that assessment that goes to damage to the ceiling, walls and floors.
–Bradley A. Coxe is a practicing attorney in Wilmington, NC with Hodges & Coxe PC who specializes in Personal Injury, Medical Malpractice, Homeowner's Associations, Contract and Real Estate disputes and all forms of Civil Litigation. Please contact him at (910) 772-1678 or at firstname.lastname@example.org.