Condo insurance is one of the topics that are often brought up due to its complexities that condo owners will need to pay close attention to in order to avoid major financial losses and make sure that they have enough insurance coverage on their real estate property.
This blog aims to explain the different aspects of condo insurance that are often misunderstood or that condo owners are usually misinformed about in order to help them acquire the best insurance coverage for their real estate property.
The Difference Between a Condo and a House
Before talking about condo insurance, it is important to understand that a condo and a house are two different things, and they have different laws and insurances related to them.
A condo is different from a house in that the owner of a condo will only have ownership over the interior of the structure, or the space within the four exterior walls of the real estate property (this can differ from complex to complex). Meanwhile, the rest of the space in the complex, such as the surrounding of the condo, is considered a common area and is collectively owned by all the other residents of the complex.
For this reason, condo insurance can be very different from a house insurance, because it will include two parts: your personal property insurance, which will cover the condo that you own, and a collective insurance which is shared by everyone in the complex to cover the rest of the areas inside the complex.
Understanding Your Master Policy
While the condo owner is responsible for insuring his/her personal belongings and properties within his/her own condo, the rest of the complex, including the hallways, the pool area, or the gardens should be insured by the condo’s association which in turn collects monthly dues from the unit owners and uses a portion of the collected funds to insure the common areas.
The condo association’s master policy and the association rules should clearly indicate which parts of the complex will be insured and covered through the association dues and which parts should be covered by the individual condo owners.
There are two main types of a master policy that a condo owner needs to understand:
Bare Walls-in: This insurance covers all property from the exterior framing inward. It does not, however, cover the fixtures and installations that are within the individual condo unit, which includes things like bathroom and kitchen fixtures and installations. Master policies of this type will mean that the condo owner will probably need more insurance coverage.
All-in: This insurance covers fixtures and installations within the interior surfaces of the condo unit. Master policies of this type will mean that the condo owner will have limited need for coverage.
While there are other sub-sections of these two types of master policies, your condo association bylaws should have clear indication of the type of master policy that is being used.
One of the major downsides related to condo insurance is the deductibles.
Master policy deductible coverages have been increasing exponentially in the past years, which leads to higher risks for individual owners. The average rate of deductibles has been rising, and in some cases, it has reached up to $50,000. This increases the risk for individual owners by reducing their chances of having sufficient coverage, and condo owners should make sure to read all documents related to their condo in order to buy a master policy deductible coverage.
If a master policy deductible is $10,000, and a loss is only $9,000, not all insurers will cover the $9,000, which might leave the condo owner in an undesirable place.
Amount of Coverage
After understanding your condo association’s master policy and the exact parts of your condo that you are responsible for insuring, you should determine the amount of coverage that is appropriate for you.
In order to determine how much coverage to acquire, you can roughly estimate the amount based on the other condo owners and how much they paid for any recent upgrades that they have made, such as installing new floors.
Cash-Value vs. Replacement-Cost
After determining the amount of coverage that you will need for your real estate property, it is time to decide the type of coverage that you will need to purchase.
There are two types of coverage to consider:
Cash-Value: Cash-value coverage will only replace the value of the insured item minus its depreciation. This means that an item that is covered under cash-value will be replaced by a lower value than what you had initially paid for it, taking into account its depreciation in value over time. In different words, a cash-value coverage will cover the value of the item based on its current market value after depreciation by use and age.
Replacement-Cost: Unlike cash-value coverage, replacement-cost coverage will not take into consideration the item’s depreciation. This means that a replacement-cost covered item that is 3 years old will be replaced with a brand new item of the same type, which results in a higher value.
Insuring Contents and Structure
When considering your condo insurance, you should keep in mind that there will be two parts of your condo that you will need to insure.
A condo and its components are not all considered a whole part, and they can be split into two categories that need to be insured separately:
Contents: If you take a box and you shake it, anything that moves inside of the box is considered its contents. The same applies to the condo: the contents of the condo are the movable parts inside of it, such as your personal belongings or your furniture.
Structure: The immovable parts of a condo, such as the walls, floors, and ceilings are all considered structural parts, and they require their own insurance coverage.
Condo insurance can sometimes be a hassle, and some people fall into the trap of not having the appropriate insurance for their condo or believing that their condo insurance falls under the responsibility of the condo association. It is important for any condo owner to understand and be able to set apart the areas that fall under their own responsibility and those that fall under the condo association’s responsibility when it comes to condo insurance.
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