Loss assessment coverage explained
By Christine Barlow
Loss assessment coverage is one of the more confusing additional coverages provided by a homeowners policy. It applies only to insureds who are part of a homeowners association and are charged by that association for damage to property collectively owned by all residents, such as swimming pools, clubhouses, or other recreational or community areas. The homeowners form provides both physical damage and liability coverage. An endorsement exists that increases limits.
Physical damage coverage
Under the physical damage section, coverage is provided for damage to collectively owned property as long as two conditions are met: the damage must be direct loss to property and must be the type that would be covered by the policy if the property were solely owned by the insured. For example, if a fire burns the clubhouse, there is assessment coverage. If the insured's house had burned, the insured's policy would provide coverage for that loss. The other condition is met because the insured is a collective owner of the clubhouse, and can be assessed with all other owners in order for the property to be repaired. The policy provides a maximum of $1,000 for any one loss, regardless of the number of assessments. An assessment could be made to the insureds for fire damage to the clubhouse and a later assessment made for debris removal, but the policy will only pay $1,000 for that one loss and will not pay a second $1,000 for the second assessment.
If a governmental body charges either the insured or the association an assessment, no coverage is provided. For example, if the government assessed the association for testing and possible clean up of a chemical spill, there is no coverage.
Of interest is the fact that the clause stating that the policy applies only to loss that occurs during the policy period does not apply to loss assessment coverage. The date of loss and date of the assessment may be separated by a certain length of time. For loss assessment, coverage from the policy applies to assessments made during that policy period, regardless as to when the actual loss took place.
Assessments can be made for liability issues as well as physical damage losses. With liability issues, assessments stem from two causes. One is when bodily injury or property damage is the result of an occurrence covered under section II. The second is when liability is for the act of a director, officer, or trustee of the association acting in such capacity as long as the person is elected by the association and derives no income from serving the association.
Similar to the physical damage coverage, the limit of $1,000 is the maximum available regardless of the number of assessments. Repeated or continuous exposure to the same general harmful condition is one accident. Likewise an act that involves more than one director, officer, or trustee is considered a single act.
The homeowners endorsement HO 04 35 10 00 allows the insured to list a scheduled amount of additional insurance for assessments. This form can also be attached to the HO 00 06, the condominium policy. Also, the form makes payment for one or more assessments arising out of a single loss as long as it is covered under the loss assessment coverage in the policy itself. This applies to both section I and section II.
Additional locations may also be added to this endorsement. When additional locations are added, coverage applies the same as when it applies to the residence premises. The scheduled limit is the maximum amount paid for one or more assessments. A separate, special limit is provided on the endorsement for situations in which an assessment is due to the application of a deductible from the association's policy. That limit is $1,000. This separate limit for a deductible assessment causes a lot of confusion. It is not unusual for the deductible limit to be taken as an overriding limit for the entire form, but this is not correct. If an assessment is applied for coverage, then the scheduled limit applies. If an assessment is applied because of an association's policy deductible, the $1,000 limit applies.
An example will help clarify exactly how the endorsement works. An insured owns a home in a community with a homeowners association that provides a pool, tennis courts, a clubhouse, and an exercise room for all the residents. The insured buys the HO 04 35 endorsement and schedules an additional amount of insurance of $10,000. A category 5 tornado comes through the area destroying the clubhouse, exercise room, and swimming pool. The association files a claim with its carrier, but the extent of the damage exceeds the association's limits. The association then assesses each homeowner $5,000 for the damage to the collectively owned property. With the HO 04 35 endorsement attached, the insured's policy will pay that $5,000 assessment since the additional limit is $10,000. The association also has a rather large deductible on its policy, so the association also assesses the homeowner his share of that deductible, which is $2,000. Since this assessment is for the deductible, even though the insured has additional coverage scheduled, the most the endorsement provides is $1,000, the special limit listed for deductibles.
Although somewhat confusing, loss assessment coverage is an important additional coverage. Assessments can occur regularly in communities with associations, and the insured needs protection. While the basic policy only provides $1,000 of coverage for one assessment, the endorsement broadens that coverage to whatever the insured feels is necessary for assessments due to property damage. Deductible assessments are always restricted to the $1,000 limit.
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