Loss Assessment Coverage is not like other property coverages. Loss Assessment Coverage – What is it?
Homeowners or Condo owners may be subject to mandatory membership in a homeowners or condo association. These associations typically impose regular dues on each member to support their operating and reserve funds. They may also maintain insurance to cover unanticipated losses, such as damage to an outdoor play structure or liability arising from the use of common areas.
Losses sustained by the association could have impacts on the customer in the form of a mandatory loss assessment.
Common reasons for loss assessments include:
- The association sustained a loss not covered by their commercial policy.
- The association sustained a catastrophic loss that exceeded commercial policy limits.
- The association sustained a loss covered by their commercial policy but the deductible is significant enough (say, $20,000) that the association decides to divide the cost among all members.
- Illustration: A ruptured sewer is covered for $250,000, but the actual cost of repairs is $300,000, so there is a $50,000 shortfall to recover. If the association has 50 members, each member could be assessed $1000 (or a prorated amount).
Coverage on policies can vary- many with a standard $1,000 built in, and a special deductible can apply (for example, $250)
- Scenario (Condo policy): In the illustration above, the Condo policy includes $1000 basic coverage with a $250 special deductible, so the policy would pay $750 of the $1000 assessment owed by the policyholder to the association and the policyholder would be responsible to remit the remaining $250 (special deductible) to the association.
How is Loss Assessment different from other property coverages? Here’s what makes Loss Assessment Coverage (LAC) different from other property coverages:
- Most condo policy coverages are evaluated based on whether they were in force at the time of the loss, even if the policy or coverages were subsequently cancelled.
- Loss Assessment Coverage applies only if the policy is in force at the time that the loss is assessed (charged) against the policyholder – the date of the loss itself may not be relevant.
Example 1 – $500 Loss Assessment Coverage (with Homeowners policy) John Richard Simon owns a house in the Oak Street Village Estates, insured with a homeowners policy that has $500 of Loss Assessment Coverage built-in. On June 1, a fire starts in the association clubhouse and spreads to John’s dwelling, resulting in a total loss. On June 2, John considers cancelling (Why pay the premiums any longer?), but he decides to maintain his policy. On June 3, John’s neighbor Mary, who is not a member of the association, files a liability claim against the association alleging that smoke from the clubhouse fire damaged her home.
Almost one year later, the Oak Street Homeowners Association levies a loss assessment on all its members to cover unmet costs associated with the liability claim. John’s share of the assessment comes to $1200.
- Assuming the Homeowners policy was in force at the time of the fire, the loss of his dwelling is covered.
- When the loss assessment is imposed, assume the policy and LAC are still in force. The assessment is partially covered, up to the $500 limit stipulated in the Homeowners policy. John will be responsible for paying $700 ($500 special deductible and $200 in excess of policy limits).
Example 2 – $1000 Loss Assessment Coverage (with Condo policy) In this example John Simon owns a unit in the Maple Street Condominium Tower, and the claim details are as before, with John’s share of the loss assessment still being $1200, but in this case John has a Condo policy that includes $1000 of Loss Assessment Coverage, which he decides to maintain.
- Assuming the Condo policy was in force at the time of the fire, the loss of the condominium is covered.
- When the loss assessment occurs, the policy and LAC are still in force. The assessment is partially covered. John will be responsible for paying $250 for his deductible. The remaining $950 is covered under the $1000 in LAC.
Example 3 – Loss Assessment Coverage cancelled In this example John owns a home in Parkwood Village, the fire loss and liability claim are as before, with John’s share of the loss assessment being $1200. This time his policy includes $5000 of Loss Assessment Coverage, with $250 of special deductible. However, this time he decides to cancel the policy the day after the fire, thinking “There’s nothing left to insure.”
- Assuming the Condo policy was in force at the time of the fire, the loss of the condo is covered.
- Since the loss assessment occurs almost a year later, after the policy and its associated LAC were cancelled, it is not covered. John must pay all $1200 despite carrying $5000 in LAC at the time of the fire.
Built-in LAC for Condominium Policies
A Condo policy can have Loss Assessment Coverage built in as part of the base policy.
Condominium owners may each choose to augment their basic LAC by purchasing additional coverage. Built-in coverages and additional coverage options may vary by carrier.