Condo Unit Owners and Increased Loss-Assessment Coverage

Question: I insure a condo unit owner, but I’m not sure I fully understand the need for increased loss assessment coverage. Is it really needed?

Answer:

Like anything else, it is up to the customer to make a decision on what they want to cover and for how much. As a producer, however, you should offer the coverage and be able to explain how it works. Let’s look at it this way: If you offered the coverage and it was declined, you are obviously less vulnerable to an E&O claim than if you didn’t offer the additional coverage at all.
Initially, you may need to educate your customers about what loss assessment coverage is. Contrary to what some unit owners think, the insurance will not pay when they are assessed for a new roof, repaired sidewalks or new carpet in the hallways if they result from a maintenance expense. The coverage will only pay for an assessment that results from a covered cause of loss.
Example of covered property claim – A new roof is needed after damage from a storm. The condo association’s policy deductible was $25,000 and unit owners are assessed a portion of that deductible.
Example of covered liability claim – A significant payout is incurred after a child is severely injured on the premises. The condo association policy limits are insufficient, and all unit owners are assessed for the difference.
That’s where loss assessment coverage comes in. In some cases, the loss assessment can be significant. Needless to say, it is not generally something the unit owners had budgeted for. In addition, in recent years, an increasing number of condo associations have selected higher deductibles to contain premium increases. This can affect a unit owner’s likelihood of being hit with an assessment. So, is the coverage useful? Yes.

How does the policy respond?

As a producer, you already know that ISO’s unendorsed unit owner’s policy (HO-6) only provides $1,000 of property loss assessment coverage and the same for liability. The increased loss assessment endorsement will allow the unit owner to select a different limit, e.g. $10,000.
However, if you are using an ISO policy, the edition date for the HO 04 35 endorsement (Supplemental Loss Assessment Coverage) is important. The increased loss assessment form has recently been modified as part of the commercial changes implemented by ISO. This change is for the better, but what your carriers are using and what your customers have on their policies today may not match the new language. It’s important to keep that in mind as you review your accounts. Naturally, many companies use proprietary forms, and you should inquire as to your carriers’ position on this issue:
  • 10 00 version – even with a $10,000 increased limit, the unit owner’s policy still contains a $1,000 sublimit for any assessment that stems from a condo association deductible.
  • 05 11 version – The endorsement does away with the $1,000 sublimit due to an association deductible. The coverage will be triggered up to the endorsement limit (in this case $10,000), even if the unit owner is assessed for the deductible.
Maryland members have an additional item to keep in mind: The condominium statute was amended to provide that a condo association may recoup the cost of the deductible up to $10,000 from a unit owner if the cause of damage originated from his or her unit, regardless of negligence. Whether this exposure will be covered under Coverage A or under an Increased Loss Assessment endorsement may also need to be a part of your discussion with the carrier. [In the original version, the most that could be recouped was $5,000. This amount was increased to $10,000 during the 2020 legislative session, effective 10/01/2020]
The information contained in this resource is current as of the date published. Published date: May 29, 2013 – Revised Oct. 5, 2020
This document is not a legal opinion and should not be relied upon as such. The intent of this document is to provide a general background regarding the topic or topics discussed, not to provide legal advice. Producers and agencies should consult an attorney regarding specific situations and specific questions with respect to the topic or topics covered in this document. Neither the Insurance Agents & Brokers nor any of its employees shall be responsible for any errors or omissions regarding any statements made in this document, nor any errors or omissions regarding any statutes, regulations, court rules, and/or any other government documents cited in this document.
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