✅ What is the most common homeowner insurance policy for condos and its drawbacks?

✅ What is the most common homeowner insurance policy for condos and its drawbacks?

January 07, 2021

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What is the most common homeowner insurance policy for condos and its drawbacks? ▶

Common-interest development (CID) is the fastest growing form of housing in the world today. They include condominiums, community apartments, planned developments, and stock cooperatives. The ownership benefits of a CID are having rights to an undivided interest in common areas and amenities which might prove to be too expensive to be solely owned.

But those who buy into CIDs soon learn the depth andd breadth of what they have in common with neighbors, particularly if the residence is a condominium. As the reader of TRILOPEDIA will learn, some of that consideration has to do with common perils.

What are the eight (8) types of homeowner insurance (not including earthquake)?

Here’s a rundown of the different homeowners insurance policy forms:

HO-1 - The most basic and limited type of policy for single-family homes, HO-1s are all but nonexistent nowadays

HO-2 - A more commonly used policy and a slight upgrade from the HO-1

HO-3 - The most common type of homeowners insurance policy with broader coverage than the HO-2

HO-4 - A policy type that is specifically for renters

HO-5 - The most comprehensive form of homeowners insurance and the second most common policy type for single-family dwellings

HO-6 - A type of coverage designed for condo owners

HO-7 - The type of policy you get if you own a mobile or manufactured home

HO-8 - A special type of homeowners insurance for homes that don’t meet insurer standards for other policy forms

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CONDOMINIUM ELEMENTS

CONDOMINIUM ELEMENTS

COMMON INTEREST DEVELOPMENTS (CIDs)

Common-interest development is the fastest growing form of housing in the world today. They include condominiums, community apartments, planned developments, and stock cooperatives. A CID's ownership benefits are having rights to an undivided interest in common areas and amenities that might prove to be too expensive to be solely owned.

BOARD OF DIRECTORS

The board of directors in larger complexes are elected and govern the HOA. They make the everyday decisions to keep your HOA and complex running smoothly. The board of directors duties can include enforcing the rules, assessing finances, changing the bylaws and rules as necessary, establish a reserve and directing the management company.

The budget is the condominiums guide to making financial decisions. It predicts the expenses for the upcoming year. It shows how much money is predicted in income from HOA fees, late fees, usage fees etc…. and than expenses are proposed for various line items such as landscaping, electric bill, management fees, etc…

The bylaws are usually part of the declaration of trust and they are the rules that govern the the operation operation of the board of trustees. Generally covering elections, length of service, voting, responsibilities and such.

If you buy a home, like a single-family home, in a planned, covenanted community, you'll most likely be required to be part of a homeowners’ association (HOA). The rules of the HOA community are described in what's called the Declaration of Covenants, Conditions, and Restrictions (CC&Rs). The CC&Rs describe the requirements and limitations of what you can do with your property. The goal of the CC&Rs is to protect, preserve, and enhance property values in the community.

COMMON AREA

A common area is paid for and used by everyone. A common area can include pools, tennis courts, parking lots, walkways, landscaping and grounds. Everyone owns a share in the common area and gets to use the common areas.

CONDOMINIUM

A condominium is a dwelling or residence that is individually owned. But a condominium typically shares common areas and expenses. Common areas could be parking lots, roofs, pools, walls, plumbing etc…. Each owner will be assigned a percentage share of common areas usually based on square footage.

CONDO QUESTIONNAIRE

The condo questionnaire is a document requested by a bank that is financing an individual unit. The questionnaire is used to make sure the condominium meets its underwriting guidelines. The bank will want to know if there is pending litigation, the percentage of home owners that are late on their condo fees, how much money is sitting in reserves and more.

The point of the questionnaire is to ascertain the stability of the condominiums finances.

DAVIS-STIRLING ACT

The Davis–Stirling Common Interest Development Act is the popular name of the portion of the California Civil Code beginning with section 4000, which governs condominium, cooperative, and planned unit development communities in California. It was authored by Assemblyman Lawrence W. "Larry" Stirling and enacted in 1985 by the California State Legislature. In 2012, the Act was comprehensively reorganized and recodified by Assembly Bill 805.^[

DECLARATION OF TRUST

The Declaration of Trust lays out the formation of the condominium board. The document lays out their responsibilities and how they are to govern the HOA.

DISASTER INSURANCE

No matter where you live, natural disasters can occur suddenly and without warning. Your house could be at risk for flooding, fires, earthquakes, tornadoes, and everything else Mother Nature may throw your way. Without insurance to cover against these potential risks, you may not be able to recuperate from damages you may experience. Though these types of incidents are uncommon, it is wise to be prepared for anything that could happen to your home. Here are 6 types of insurance you can get to cover your home in the event of a natural disaster.

1. Home insurance

The average homeowner’s insurance policy covers ordinary damages. From a busted pipe in your basement to hailstorm damage to your roof, you should be covered by your home insurance. Keep in mind that each policy is different, and it’s important to know exactly what coverage you have with your insurance company (ideally before you have to file a claim).

2. Disaster insurance

After you’ve checked with your insurance company and made yourself aware of the details of your homeowner’s policy, it’s time to shop around for disaster insurance. There are many unforeseen natural disasters that are not covered by typical home insurance that you need to be prepared for. Remember to call your insurance agent if you have any questions.

3. Flood insurance

According to Ready.gov, “floods are the most common natural disaster in the United States.” Get a flood insurance policy to protect your home from damages caused by rising water, especially if you live on the coast or in low-lying areas where flooding occurs more frequently. Depending on your mortgage’s conditions, you may also be required to purchase this insurance whether you live in a high-risk area or not. There is usually a waiting period of around a month before flood insurance coverage begins, so it’s best to sign up as soon as possible.

4. Earthquake insurance

The last thing you want to do after an unexpected earthquake is pay to rebuild your home and restore your property. Earthquake insurance is a type of disaster insurance that fills in the coverage gap left behind by your homeowner’s insurance policy even if you don’t live in an area prone to earthquakes. It’s smart and proactive to get an earthquake insurance quote, especially because of the unpredictable nature of this natural disaster.

5. Region-specific insurance

It’s important to be aware of which specific disasters could potentially affect the area you live in.

Depending on the region—and especially in high-risk areas—many states have subsidized insurance pools that provide appropriate coverages to residents. When you have questions, visit FEMA’s website for information on common natural disasters, history in certain areas, and urgent alerts.

6. Additional coverage

There are supplemental policies and endorsements that you can purchase in addition to your regular coverage, which can be a good move if you have things like an above-ground pool, outdoor spa, or anything else home-adjacent that could be affected by a natural disaster. Some events can be covered by an extra clause in your general policy as well, but it’s best to talk to your insurance agent to see what additional coverage can be added to your existing plan.

EMERGENCY ASSESSMENTS

Regardless of what restrictions may be contained in the association’s governing documents, the board may not without membership approval “impose special assessments which in the aggregate exceed 5 percent of the budgeted gross expenses of the association for that fiscal year.” (Civ. Code § 5605(b); See also “Limitations on Assessment Increases.”)

However, Civil Code Section 5605 does not limit assessment increases “necessary for emergency situations,” where “emergency situations” include any one of the following:

Court Order – An extraordinary expense required by an order of a court; (Civ. Code § 5610(a).)
Safety Threat – An extraordinary expense necessary to repair or maintain the development or any part of it for which the association is responsible where a threat to personal safety on the property is discovered; (Civ. Code § 5610(b).)
Unforeseen Expense – An extraordinary expense necessary to repair or maintain the development or any part of it for which the association is responsible, where such expense “could not have been reasonably foreseen by the board in preparing and distributing the annual budget report under Section 5300.” (Civ. Code § 5610(c).)

Unforeseen Expense; Resolution Requirement
Where a board seeks to impose an emergency assessment for an unforeseen extraordinary expense pursuant to Civil Code Section 5610(c), the board must first “pass a resolution containing written findings as to the necessity of the extraordinary expense involved and why the expense was not or could not have been reasonably foreseen in the budgeting process.” (Civ. Code § 5610(c).) The resolution must be distributed to the members with the notice of assessment required by Civil Code Section 5615. (Civ. Code § 5610(c).)

EXCLUSIVE USE

There may be common areas that are designated as exclusive use to one owner. A deck off a unit is typically an exclusive common area. The maintenance is paid for by everyone, but only that one owner has the use of the deck.

HOME OWNERS ASSOCIATION

A home owners association is a group that directs, manages and enforces the rules of the condominium as spelled out in the Declaration of Trust. Often referred to as an HOA. By buying in a condominium you are automatically are a member of the HOA.

HOA ATTORNEY

Homeowners' associations (HOA) exist for the benefit of residents in a condominium, townhome, or other planned community. This benefit can sometimes feel like an obligation, however, when the HOA enforces community rules. The HOA's governing board is usually made up of volunteers from within the community, who are doing their best to interpret the rules, and not always successfully.

To help HOA board members with such interpretation and enforcement tasks, and to resolve legal disputes with or affecting individual homeowners, the HOA may retain an attorney. In addition, there are times when the HOA will need to hire an attorney to prepare legal documents or to negotiate or resolve disputes with outside parties such as vendors or contractors.

Your HOA fee or Condo fee is typical a monthly fee you send into your management company. It goes towards ongoing maintenance. It covers thing like snow removal, garbage removal and management. All your monthly ongoing expenses will be covered as well as a portion being put into reserve funds for any large maintenance projects or emergency repairs.

INSURANCE SHORTFALL

Shortfall covers are a useful way to manage risk through insurance. Realistically, any insurance contract is likely to include some gaps, since the cost of insuring against all possible risks can quickly become prohibitively expensive. Usually, insurance customers decide what gaps to tolerate based on their individual risk tolerance, the perceived risk of those events occurring, and the likely cost if those events do occur.

What Is a Shortfall?

A shortfall is an amount by which a financial obligation or liability exceeds the required amount of cash that is available. A shortfall can be temporary, arising out of a unique set of circumstances, or it can be persistent, in which case it may indicate poor financial management practices. Regardless of the nature of a shortfall, it is a significant concern for a company and is usually corrected promptly through short-term loans or equity injections.

MANAGEMENT COMPANY

The HOA will hire a management company to manage the daily operations of running a condominium complex. There duties could be collect condo fees, accounting, hire vendors for snow removal, trash removal, landscaping etc… While the HOA decides what needs to be done for the common good of the condominium complex, the management company executes the operations.

MEETING MINUTES

Meeting minutes are a recap of what is discussed during board and association meetings to keep members of the HOA informed.

MASTER DEED

The master deed is the document that describes what is an individuals property and responsibility and what ares are common areas. Typically a unit owner in a condominium complex owns from inside stud to inside stud. But then who owns the roof or is responsible for the roof above. Or what about water pipes, or electrical in the wall.

Referring back to the master deed will clearly state who owns and who is responsible for maintaining certain areas through out the complex.

OWNER OCCUPANT / NON OWNER OCCUPANT

Pretty self descriptive but an owner occupant lives in the unit they purchased where a non-owner occupant typical rents the unit out.

OWNER OCCUPIED RATIO

The ratio of owner occupants to non-owner occupants: Lenders are particularly concerned with this ratio when lending on a unit. So, the higher the occupancy of owners the better for the bank. Owners tend to want to take better care of a property they live in.

Some condominiums will only allow a certain percentage of units to be non-owner occupied as spelled out in their bylaws.

REGULAR ASSESSMENTS

Regular assessments (aka “dues”) are the assessments which must be paid by the owner of each separate interest to the association every year, often on a monthly basis. The level of regular assessments is determined by the funds required to meet the association’s annual operating expenses. Regular assessments may be increased over time for a variety of reasons (i.e., improving the health of the association’s reserve account, defraying increases in the association’s expenses, etc.). An association’s board of directors may, without membership approval, increase the level of regular assessments each year by up to twenty percent (20%) over the prior year’s level, subject to certain requirements. (Civ. Code § 5605; See also “Limitations on Assessment Increases.”)

RESERVE FUNDS

A reserve fund is established for long term maintenance or unexpected emergencies. A portion of your monthly HOA fee should be funding a reserve fund in a well established complex. A well managed complex will have money every month from your condo fee go into reserve based upon projected long term maintenance projects.

RULES AND REGULATIONS

The rules and regulations are what specifically what a unit owner can or cannot do. They usually discuss noise levels, pet policies, satellite dishes, parking and so on. The goal of the rules and regulations are to allow all owners peaceful enjoyment and to maintain a uniform look

SPECIAL ASSESSMENTS

It is impossible to predict every repair. Items can fail earlier than expected or unforeseen damage can occur such as trees falling down in a windstorm, etc… The board will need to borrow money if the repair is costly. Each owner will then be responsible to hlep repay that loan on a monthly basis.

A townhouse is a style of condominium. It will be a unit that has no other unit above or below but it can have a unit on either or both sides.

UNIFORM LAW COMMISSION

The Uniform Law Commission (ULC), also known as National Conference of Commissioners on Uniform State Laws (NCCUSL), now in its 123rd year, provides states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law.

ULC members must be lawyers, qualified to practice law. They are practicing lawyers, judges, legislators and legislative staff and law professors, who have been appointed by state governments as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands to research, draft and promote enactment of uniform state laws in areas of state law where uniformity is desirable and practical.