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Townhouses: HO-3 or HO-6?

Author: David Thompson

Over the past few weeks I've received a flurry or emails about a customer who owns a fee simple home inside a Homeowners Association (HOA). There are various coverage options, but none of them being the “silver bullet." Every solution has shortfalls.

While presenting classes at an insurance company about a month ago, several underwriters asked my view of the way to structure coverage. Their position, shared by many underwriters whom I know, is that they will not write a HO-6 policy unless it's truly a condominium. They would not write a HO-4 policy, either, because their guidelines are that an owner-occupied dwelling does not qualify for the HO-4. That left them with the HO-3 as the only option. One underwriter stated, “Our agents don't like that for a variety of reasons, two being price and the duplication of coverage between the master policy that often covers part of the dwelling and the HO-3 policy." He asked, “What information do you have that I can use with agents." Below are some of the points I made with the staff. Some of the points are my personal view, but I think they hold merit.

  • Technically under ISO rules the HO-6 can only be used for a condominium unit or cooperative unit; it's not available for a dwelling. Of course, some companies ignore ISO rules and make their own decisions.
  • My main concern is trusting a HOA board to insure my investment that is typically in the hundreds of thousands of dollars. Why trust the board to buy a policy on my house? To me, it's akin to asking someone, “Will you please buy my automobile insurance and take care of the payments?"
  • The master policy could lapse and, without a HO-3, the owner is left in a bad situation. That exact occurrence took place about two months ago (and it's not the first time I've seen it) when the HOA lost coverage and was unable to replace coverage timely. The agent in question received a phone call from a panicked customer who had no personal coverage of her own. The agent submitted an application for a HO-6 to an insurer who, once they underwrote it and saw it was not a condominium, issued a 20-day cancellation notice.
  • The master policy could be underinsured, resulting in a coinsurance or ACV penalty for the homeowner.
  • The master policy may be lacking coverages. For example, there may be no ordinance or law coverage, losses might be settled on an ACV basis, the policy might not include water/sewer backup, and many more important coverages could be missing.
  • Property loss checks would be paid to the HOA, not the property owner. Thus, the owner has no control over those funds and they are at the mercy of the HOA. In one recent instance involving roof damage, the association would not sign the claim check because only part of the roof was damaged and if that part was replaced then the entire roof would not match.
  • Lenders may not accept a HO-6 policy with a Coverage A limit less than the replacement cost of the structure.
  • Even with a HO-6 policy, there is the “duplicate coverage" issue between the HO-6 and the master policy. Whether the policy is HO-3 or HO-6, duplicate coverage exists.
  • How is a Coverage A limit going to be determined under the HO-6? Regardless of HO-3 or HO-6, the best option is Coverage A equal to the replacement cost of the structure. How many customers will buy that much coverage under a HO-6 policy? How will they determine the Coverage A limit needed? It's certainly not the agent's job to do that.

As mentioned earlier, every solution has problems. I joke that if you Google “Control Freak" my photo appears! I'd never trust someone to insure my property. I'd buy the HO-3 policy and ignore any coverage provided by the HOA. I'd certainly rather have double coverage as opposed to no coverage.

Copyright FAIA, 12/2019

Last Updated: January 3, 2020

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