Loss Assessment Coverage

A personal insurance coverage that many people don’t understand is Loss Assessment Coverage.

Every association has a set of bylaws, and in those bylaws the association’s board is given the authority, under certain circumstances, to make assessments against the individual unit owners. There are two reasons an association might need to make an assessment:

1. If the association needs additional funds to complete a community improvement
2. If the association finds itself with inadequate association insurance to cover a particular claim

It’s this second type of assessment which can be insured on your individual unit owner’s insurance policy

First of all, we should reassure everyone that it is very unlikely that the association would have inadequate insurance. The board takes its fiduciary responsibility very seriously and obtains expert advice about the types of coverage to purchase.

Having said that, the purpose of insurance is to protect you against this unlikely event. In simple terms, what loss assessment coverage on your personal policy does is this: If you receive an assessment from the association to help pay for loss or claim against the association, and if that claim would have been covered by your insurance policy if it had been made against you directly then the loss assessment coverage will pay the assessment, up to the limit you have purchased

Example: There is a fire in an association building which for some reason either had no insurance or inadequate insurance. The association assesses each unit owner $2,000 as their share of the total cost. Because fire is a covered peril on your personal insurance policy (if the fire had been in your home instead of the association building, it would have been covered), your policy will pay the assessment. Note that the limit of coverage that is needed is only for the individual unit owner’s assessment amount – not the total amount the association needs to collect. So if there is a $1,000,000 assessment in a 500 unit community, each unit owner would be assessed $2,000, and that is what the unit owner’s policy would cover. Be aware that the loss assessment coverage available from most insurance companies will pay up to $1,000 for an assessment that is due to the application of the association’ insurance deductible. But again remember that $1,000 limitation is for each unit owner’s portion of the deductible, not for the whole deductible.

Example: There is a devastating fire in the community which kills or injures many people, and it is determine that the cause of the fire was the association’s responsibility. There are so many claims that the association’s liability insurance limit is used up and there is an assessment against each unit owned to cover the difference. Because those claims would have been covered if the injuries had occurred in your home, the policy will pay the assessment.

Example that is not covered: The association decides to build new tennis courts and assess the cost to all unit owners. This would not be covered because your insurance policy wouldn’t ever pay for you to build yourself a new tennis court.

Example that is not covered: The association suffers a flood loss that is not adequately insured. This assessment would not be covered even if the unit owner has a flood insurance policy, because flood insurance policies never include loss assessment coverage.

We are often asked whether a unit owner’s personal umbrella policy would cover an assessment that is due to liability claims against the association (such as the injuries and deaths in the example above). That answer is no, because the umbrella policy covers claims made directly against the unit owner for their own personal liability. In this case the unit owner isn’t liable to the claimant, as co-owners they are financially liable to the association.

Also, assessments are only covered when they are made against ALL unit owners. If there is an assessment made only against your unit, because of the specifics of the need for the assessment that would not be covered no matter what the reason for the assessment.

One more thing – do you own a deeded time share? If so, you should talk to your insurance agent about adding it to your personal insurance policy. If it is deeded, the time share association has the right to make assessments against you.