One of the biggest misconceptions I hear from condominium buyers is, “The HOA has insurance, so I don’t really need to worry about it.” Unfortunately, that’s not how condominium insurance works. In reality, condominium ownership involves two separate insurance policies. The homeowners association carries a master policy covering portions of the building and common areas, while each owner is responsible for maintaining their own individual condominium policy, commonly referred to as an HO-6 policy. Understanding where one policy ends and the other begins can save thousands of dollars after a major loss.
The first thing every buyer should review during escrow is the HOA’s master insurance policy. Some associations carry what is known as an “all-in” policy, which generally insures much of the original interior construction of each unit, including drywall, cabinetry, countertops, flooring originally installed by the builder, and certain built-in fixtures. Other associations maintain a “bare walls” policy that stops at the unfinished drywall, leaving nearly everything inside the unit to the individual owner. Two condominium communities located across the street from one another may have entirely different insurance responsibilities, so buyers should never assume their HOA coverage matches another development.
The California insurance market has changed dramatically over the past several years, and condominium owners are feeling the effects. Across Contra Costa and Alameda Counties, homeowners associations have experienced significant increases in insurance premiums. Many communities have accepted higher deductibles, reduced certain coverages, or moved to different insurance companies simply because traditional insurers have reduced their exposure in California. Rising wildfire losses, inflation, increasing construction costs, and water damage claims have all contributed to a much more challenging insurance environment.
One term buyers are beginning to encounter more frequently is “non-admitted insurance carrier.” At first glance, that sounds alarming, but it isn’t necessarily a bad thing. An admitted carrier is licensed and regulated by the California Department of Insurance and participates in the California Insurance Guarantee Association, commonly known as CIGA. If that insurance company becomes insolvent, policyholders may receive certain statutory protections through CIGA.
A non-admitted carrier, sometimes called a surplus lines carrier, is different. These companies are legally authorized to insure property in California but operate outside many of the state’s traditional insurance regulations. They frequently insure risks that admitted carriers are unwilling to insure, including many condominium developments. The important distinction is that non-admitted carriers generally do not participate in CIGA. That doesn’t mean they’re financially weak. In fact, many are exceptionally strong insurers. It simply means buyers should understand who is insuring their community and why the HOA selected that carrier.
This issue has become increasingly common throughout the East Bay. Condominium communities in Walnut Creek, San Ramon, Concord, Oakland, Emeryville, Richmond, Berkeley, and Hayward have all experienced insurance challenges in recent years. In many cases, the homeowners association had little choice but to move to a surplus lines carrier because traditional admitted insurers either declined to renew coverage or quoted premiums that were financially unsustainable.
Individual owners also need their own insurance policy. An HO-6 policy generally covers personal belongings, interior improvements, personal liability, additional living expenses after a covered loss, and loss assessment coverage. That last item is particularly important. If the HOA suffers a major insured loss and its insurance is insufficient to cover the damages, owners may receive a special assessment. Depending on the policy purchased, loss assessment coverage may help pay part or all of that assessment.
Another issue buyers should ask about is earthquake insurance. Many condominium owners assume their HOA automatically carries earthquake coverage simply because they live in California. In reality, many associations do not because the premiums can be substantial. Even when earthquake insurance exists, deductibles are often very large. Understanding whether the community carries earthquake insurance should be part of every buyer’s due diligence.
The Millennium Tower in San Francisco illustrates why buyers should pay attention to more than just the individual unit. After significant settlement of the building became public, years of litigation followed involving developers, contractors, engineers, neighboring construction projects, insurers, and lenders. While the circumstances surrounding Millennium Tower are highly unusual, the case serves as a reminder that condominium ownership involves much more than the four walls inside your residence. Buyers are investing in the financial health, structural integrity, insurance coverage, and governance of the entire homeowners association.
When reviewing HOA documents, I encourage buyers to ask a few simple questions. Has the HOA experienced significant insurance premium increases? Does it use an admitted or non-admitted carrier? What is the deductible? Does the association carry earthquake insurance? Are there any pending insurance claims or litigation? Those answers often provide valuable insight into the overall health of the community.
Condominiums remain one of the best ways to enter the Bay Area housing market, offering affordability, low-maintenance living, and excellent amenities. The goal isn’t to avoid condominium ownership because insurance has become more complicated. The goal is simply to understand what you’re buying before closing escrow.
If you’re purchasing a condominium or townhome anywhere in the East Bay, I’d be happy to help you review HOA documents, explain how insurance affects financing and resale, and help you understand the questions every buyer should ask before becoming an owner. A little due diligence today can prevent costly surprises down the road. Derek Wagley, Broker Associate at Keller Williams Realty can be reached at 925-451-6679 or dwagley@kw.com