Navigating Insurance as a Condo Owner

Many people opt to purchase condos instead of a traditional home with a yard. In some crowded cities, the lower cost of a condo is a primary motivating factor, but for many condo-dwellers, the reduction in responsibilities is the real driving force behind condo living. However, even without lawns to mow, pools to clean or a roof to maintain, condo living comes with its own responsibilities—including purchasing the right insurance.

An individual condominium owner is responsible for the safety, maintenance and upkeep of the interior space of their unit. The condominium association, which is the collective sum of condo owners in the complex, is responsible for all other areas, including hallways, stairs, elevators, sidewalks, lawns, external plumbing and wiring, pools if applicable and other shared areas. The association should have ample insurance coverage in place, which is funded by part of the condo association fees paid collectively by the individual unit owners.

Where to begin

The first thing anyone should know is exactly what is owned and must be covered by the purchaser of the unit before selecting insurance. Not all condominiums are created--or divided--equally. There are basically three types of ownership coverage terms: Bare Walls, All-In or Single Entity coverage. The type of insurance the condo owner will want to purchase will hinge heavily on the existing policy structure set by the condominium association.

Bare walls coverage

Under a bare walls agreement, the association insures the bare structure of the unit and buildings in addition to the common areas. In addition to coverage that includes personal property, a condo buyer would want to purchase insurance which covers damage to everything inside of the unit, including fixtures such as sinks, built-in features like cabinets, flooring, doors, wallpaper and any improvements or "betterments" the unit owner makes to the interior space.

All-inclusive coverage

With an all-in policy structure, the condo association is responsible for providing insurance to cover everything inside the unit, including the framing walls. All fixtures, flooring, sinks, built-in features and improvements or additions to the unit are covered by the association. The unit owner is only responsible for covering personal property such as clothing, furniture and jewelry if damaged.

Single entity coverage

The details can vary, but single entity coverage generally covers everything inside the unit as purchased but excludes any improvements or betterments made by the unit owner. Under this scenario, the unit owner is only responsible for their own personal property, and any upgrades they make, but not any fixtures or structures inside the condo at the time of the sale. The type of insurance policy the owner may want would include coverage of personal property, such as furniture and jewelry, as in a typical renter's agreement. This in addition to coverage for any improvement to the unit, such as cabinet upgrades or remodeled bathroom fixtures.

Shared risks, shared costs

The common areas owned collectively by the association are insured, but it's important to know what additional costs might be incurred by the unit owners if something major goes wrong. The deductible as set forth by the master policy has to be shared equally among all condo owners in the event of a disaster. If there are 20 unit owners, the amount of the deductible is split between the 20 owners, even if only a small number of units are affected. This makes it important to know how much additional money should be kept on hand in an emergency fund or if insurance cover is available for unit owners to meet deductibles.

How much coverage?

The coverage put in place by the association must be realistic and adequate to cover any major losses. While it is beyond the scope of this article to define necessary coverage amounts, be sure to talk to a professional about whether or not the insurance obtained by the association provides adequate coverage and if other individual protections are available to the unit owner.

Types of coverage

Insurance can pay a claim in two ways: cash value or replacement cost. Policies which offer cash value will generally cover an item less its expected depreciation. For example, if 10-year-old flooring is destroyed under a Cash Value policy, the amount covered would be the original cost minus depreciation and wear and tear. This could leave a serious deficit for replacing materials and goods in the event of a loss, but these policies generally carry lower premiums. On the other hand, a Replacement Cost policy would pay the cost of replacing the flooring with comparable brand new flooring. The trade-off is a higher annual premium.

If you're looking for a mortgage on a condominium purchase, check out our mortgage page to learn about rates.