Ho 6 policy

HO-6 Policy: Definition, Example, and FAQs

An HO-6 policy, commonly known as condominium insurance or condo insurance, is a specialized type of property and casualty insurance designed for individuals who own a unit within a condominium or cooperative (co-op) building. Unlike a traditional homeowners insurance policy that covers an entire house and the land it sits on, an HO-6 policy specifically protects the interior structure of the individual unit, personal belongings, and provides liability coverage for the unit owner. This policy works in conjunction with the condominium association's master policy, which typically covers the building's common areas and exterior.

History and Origin

The concept of condominium ownership, and consequently the need for specialized insurance like the HO-6 policy, grew significantly in the United States starting in the mid-20th century. As multi-unit dwellings became a more common form of housing, particularly in urban areas and vacation destinations, the traditional homeowner's policy proved inadequate for the unique ownership structure of condominiums. In a condominium, an individual owns the interior space of their unit but shares ownership of common elements like roofs, hallways, and recreational facilities with other unit owners.

To address this specific insurance gap, the Insurance Services Office (ISO), a leading provider of statistical and actuarial information to the insurance industry, developed standardized policy forms. The HO-6 policy is part of ISO's homeowners forms portfolio, specifically designed for unit owners in condominiums or cooperative buildings. This standardization helped insurers offer consistent coverage tailored to condominium living, clarifying the division of responsibility between the individual unit owner and the condominium association's master policy.² The Department of Housing and Urban Development (HUD) has also played a role in standardizing requirements for condominium financing, including aspects related to insurance, to facilitate mortgage availability for these types of properties.¹

Key Takeaways

• An HO-6 policy provides coverage for the interior structure of a condominium or co-op unit, the owner's personal belongings, and personal liability.
• It is distinct from a condominium association's master policy, which covers shared areas and the building's exterior.
• Most mortgage lenders require an HO-6 policy for condominium unit owners.
• Coverage typically includes protection against perils like fire, theft, and vandalism, and may offer loss of use coverage.
• Understanding the specifics of your condo association's master policy is crucial to determine appropriate HO-6 coverage.

Interpreting the HO-6 Policy

An HO-6 policy is crucial for condominium and co-op owners because the association's master policy generally does not cover everything inside an individual unit. The interpretation of an HO-6 policy largely depends on the type of master policy the condominium association holds. There are typically three types of master policies:

1. "Bare Walls In" or "Studs In" Coverage: This policy covers only the bare structure of the building and common areas. In this scenario, the HO-6 policy must cover everything from the drywall inward, including fixtures, appliances, flooring, and improvements.
2. "Original Specifications" or "Single Entity" Coverage: This type covers the original fixtures and finishes within each unit, along with the common areas. The HO-6 policy would then be responsible for personal belongings and any upgrades or improvements made beyond the original specifications.
3. "All-In" Coverage: This is the most comprehensive master policy, covering the structure, fixtures, and any improvements within the units. Even with "all-in" coverage, an HO-6 policy is still necessary to protect the unit owner's personal property and provide personal liability protection.

Regardless of the master policy, an HO-6 policy fills the vital gaps in coverage for the individual unit owner, ensuring protection for their personal space and possessions.

Hypothetical Example

Consider Jane, who owns a condominium unit. The condominium association has a "bare walls in" master policy. Jane's unit experiences a fire due to an electrical malfunction in her living room, causing significant damage to the walls, floors, built-in cabinets, and all her furniture.

1. Association's Master Policy: This policy would cover the cost to repair the structural integrity of the building's exterior walls and the common hallways, as these fall under its purview.
2. Jane's HO-6 Policy: Jane's HO-6 policy would activate to cover the damage to the interior of her unit, including the cost to repair or replace the damaged drywall, flooring, and built-in cabinetry, as these were beyond the "bare walls" covered by the master policy. It would also cover the replacement of her personal property like furniture, electronics, and clothing, up to her policy limits. Additionally, if the fire made her unit uninhabitable, the HO-6 policy's loss of use coverage would help pay for temporary living expenses while repairs are underway.

This example illustrates how the HO-6 policy provides essential protection for a condominium owner's unique stake in their property.

Practical Applications

The HO-6 policy is a fundamental component of risk management for anyone purchasing a condominium or co-op. Its applications are broad, covering various aspects of condominium ownership and financial planning:

• Mortgage Requirements: Nearly all mortgage lenders require borrowers to maintain an HO-6 policy as a condition of their loan, safeguarding their investment in the property. This ensures that the collateral for the loan—the individual unit—is protected from covered perils.
• Personal Asset Protection: Beyond lender requirements, an HO-6 policy protects a significant financial asset for the owner. It covers valuable personal possessions like furniture, electronics, clothing, and other items within the unit. Many policies cover these items even if they are temporarily away from the unit, such as in a storage locker or vehicle.
• Liability Shield: The liability component of an HO-6 policy is critical. If a guest is injured within the unit or the unit owner accidentally causes damage to a neighboring unit (e.g., a burst pipe causing water damage downstairs), the policy can cover legal expenses and potential settlements up to its limits.
• Special Assessments: Many HO-6 policies include loss assessment coverage. This is vital if a shared area, like the roof or common lobby, suffers damage from a covered event (e.g., a severe storm), and the condominium association levies a special assessment on all unit owners to cover the repair costs that exceed the master policy's limits. This coverage helps the unit owner pay their share of such an assessment.
• Rental Units: For owners who lease their condo units, an HO-6 policy remains important even if renters have their own renter's insurance (HO-4 policy). The HO-6 policy continues to protect the owner's structural improvements, appliances, and liability as the unit owner.

The National Association of Insurance Commissioners (NAIC) provides consumer information on the importance of condo insurance, highlighting its role in protecting unit owners from various risks. NAIC Condominium Insurance (Consumer Information)

Limitations and Criticisms

While essential, HO-6 policies have specific limitations that unit owners must understand to avoid coverage gaps:

• Exclusions: Like other insurance policies, an HO-6 policy does not cover all perils. Common exclusions often include damage from floods, earthquakes, nuclear hazards, and sometimes even sewer backups or intentional acts. Separate policies, such as flood insurance from the National Flood Insurance Program (NFIP), are necessary for these specific risks.
• Deductibles: All HO-6 policies come with a deductible, which is the amount the policyholder must pay out-of-pocket before the insurance coverage kicks in. Higher deductibles typically lead to lower premiums but mean higher initial costs during a claim.
• Coverage Limits: There are limits to the amount an HO-6 policy will pay for specific categories of personal property, such as jewelry, firearms, or collectibles, unless additional endorsements are purchased. It is crucial for unit owners with valuable items to schedule them for specific coverage.
• Coordination with Master Policy: A major challenge is effectively coordinating the HO-6 policy with the condominium association's master policy. Misunderstandings about what each policy covers can lead to unexpected out-of-pocket expenses for unit owners in the event of a loss. For example, if the master policy has a high deductible for building damage, unit owners might face a loss assessment coverage charge to cover the master policy's deductible.
• Rising Premiums: Like other forms of property insurance, HO-6 policy premiums can be subject to increases due to various factors, including rising construction costs, increased frequency of natural disasters, or general market conditions. Reports from organizations like the Consumer Federation of America have noted significant increases in homeowners insurance premiums across the country, which can also impact condo owners. Consumer Federation of America "Overburdened" report

HO-6 Policy vs. HO-3 Policy

The primary distinction between an HO-6 policy and an HO-3 policy lies in the type of dwelling they are designed to insure and the scope of coverage provided.

Confusion often arises because both are considered forms of real estate insurance. However, the unique shared ownership model of a condominium necessitates the specialized HO-6 policy to avoid gaps between the individual owner's responsibilities and the collective responsibilities of the association. An HO-3 policy, the most common type of homeowners insurance, is structured to provide broad protection for a property where the owner is solely responsible for the entire structure.

FAQs

Q: Is an HO-6 policy mandatory?
A: While not always legally mandated by state laws, an HO-6 policy is almost always required by mortgage lenders as a condition for financing a condominium purchase. Condominium associations also frequently require unit owners to carry an HO-6 policy to ensure adequate protection for all units and to potentially cover special assessments.

Q: What is "loss assessment coverage" on an HO-6 policy?
A: Loss assessment coverage is an important part of an HO-6 policy that pays your share of expenses if the condominium association levies a special assessment for damage to common areas that exceeds the association's master policy limits or for its deductible. This helps protect unit owners from unexpected collective repair costs.

Q: Does an HO-6 policy cover floods or earthquakes?
A: Typically, standard HO-6 policies, like most homeowners insurance policies, do not cover damage from floods or earthquakes. For protection against these specific natural disasters, unit owners usually need to purchase separate policies, such as flood insurance or earthquake insurance. It's important to review your policy's named perils and exclusions carefully.

Q: How much HO-6 coverage do I need?
A: The amount of HO-6 coverage needed depends on several factors, including the value of your personal property, the cost to rebuild the interior of your unit (especially if your association has a "bare walls in" master policy), and the amount of liability coverage you desire. It's advisable to consult with an insurance professional and review your condominium association's master policy to determine appropriate coverage limits.

Q: What is the difference between "named perils" and "open perils" in insurance?
A: An HO-6 policy generally covers personal property on a "named perils" basis, meaning it only covers damages caused by the specific events listed in the policy (e.g., fire, theft, windstorm). Structural coverage for the unit itself might be "open perils" (also known as "all-risk"), covering all events unless explicitly excluded. An open perils policy offers broader protection than a named perils policy.