Many investors focus on condominiums or other homes or units that are located in a homeowners association or condominium association. And from time to time, every investor may have an investment opportunity that involves this type of property. Many times, these properties can offer an excellent investment opportunity. But there are two areas of insurance that every investor needs to be aware of:
The Master Association Insurance Policy –
In the insurance industry, there is no “standardized terminology” for this type of insurance. Terms and policy types used by one insurance company, may not mean the same thing with another insurance company. So, before you buy, find out exactly what the ‘master policy’ is supposed to cover. This information is best obtained from the insurance agency that services the policy. You may get a variety of different answers if you were to ask the management company for the association, someone on the association board, or an owner in the complex; you will get the most accurate explanation of the policy by talking to the agency that issued the policy. Some policies cover a lot, while others cover next to nothing – an example of the latter is sometimes referred to as a “Bare Walls” policy. While this term is not well defined, in most cases coverage will be at a minimum. The “Bare Walls” policy is actually against the law in many states …recently was outlawed in Utah…but is still legal in Arizona.
Why is this important to know? An investor-owner will need to buy coverage for additional protection which the master policy does not cover. A very low association fee or dues, often correlates with lower insurance coverage, so consider that a ‘red flag.’
You should also be aware of the master policy deductible. As the unit-owner, you will usually be responsible for that deductible if you have a claim that originates in your unit. Master policy deductibles are usually higher, like $5,000, $10,000, or more.
Investor-Owner Unit Policy –
The next important insurance coverage to consider and understand is your own separate owner’s policy. The association policy is never enough protection for an owner, and that policy protects only the association, not you as an individual owner.
In the event of a lawsuit, the association may be named, but you can also be named as an individual owner. For your lawsuit “firewall”, many investors consider $2 million per occurrence of liability protection, to be a minimum. In the event of a property claim, such as a kitchen grease fire caused by your tenant (typical damages $35,000 or more), do you want to pay that $5,000 or $10,000 deductible (or more) on the association master policy? If you carry a landlord’s unit-owner’s policy for investors, that policy will pay the entire master deductible for you, less your own policy deductible of (usually) $1,000. Condo/townhome/patio home owners who think they do not need an insurance policy of their own, are poorly informed and ‘skating on thin ice.’
There are great investments contained in a condominium or homeowners association, but like every part of real estate and investing, the most successful investors are the ones that are knowledgeable and informed.
By Clark Sanchez
* * * * * * CLARK SANCHEZ is a 38 year Arizona insurance agent who has been a VendorAffiliate with AZREIA for over 13 years. You can contact Clark if you have any insurance related questions at firstname.lastname@example.org or (602) 803- 2179.