Understanding “Loss Assessment” Insurance

Loss Assessment coverage is not insurance that is purchased by a homeowners association. It is insurance that a homeowner purchases as a part of their own insurance coverage to provide benefits that will pay the homeowner’s share of a special assessment that resulted from a loss that was not fully covered by the homeowners association’s insurance policy coverage limits. The coverage comes into play when the homeowners association has experienced an event that would have been covered by the association’s insurance policy, but there were insufficient coverage limits to pay for the entire loss. To make up the shortfall, the association levies a special assessment against its members so that each member pays their pro-rata share of that shortfall. For owners that have loss assessment coverage as part of their homeowners insurance policy, the insurance will pay their share of the assessments– up to the maximum limits of the loss assessment coverage and subject to a deductible. The homeowners who do not have loss assessment coverage are personally liable for payment of the special assessment.

Examples of events that could trigger a need for loss assessment coverage are:

• A judgment for $1,500,000 has been rendered by a court against your homeowners association as a result of an accident that occurred in the common area that the association was found negligent in maintaining. Because the association only had $1,000,000 of liability insurance coverage, in order to satisfy the judgment the association will have to levy a special assessment on the members to raise the additional $500,000 that is required to satisfy the judgment.
• A storm has caused major damage to the association’s common area property that is going to cost $550,000 to repair and the homeowners association only has $500,000 in coverage for this loss. The association will have to levy a special assessment on the members to raise the additional $50,000 that is required to do the necessary repairs to the common area property.
• A fire has burned down or caused serious damage to the association’s community center and the cost of the repairs and replacement of the damaged or destroyed real and/or personal property exceeds the limits of the association’s insurance coverage. A special assessment will be necessary in order to cover the shortfall.

Homeowners should understand that even if their homeowners association has insurance coverage limits that are high and are believed to be sufficient to cover an anticipated loss, there are always insurance deductibles that will reduce the amount that is actually paid by the insurance company for the loss. Additionally, some insurance policies charge attorney fees incurred by the insurance company in defending an action against the total amount of the coverage, thus resulting in a reduction of the amount actually received by the homeowners association to an amount that will not fully cover the loss.

Loss assessment coverage may or may not be included as a standard item in a homeowner’s insurance policy so it is important for homeowners to confirm with their insurance agent whether or not the coverage is part of their policy. If not, it can be added. Like all insurance, there are going to be requirements for the coverage to apply (i.e. the existence of proper insurance coverage by the homeowners association). Additionally, there are limits to the amount of the insurance that should be considered. Higher limits will necessitate higher premiums for the cost of the coverage.

To understand their potential exposure for special assessments resulting from uninsured or underinsured losses suffered by their homeowners association, individual owners need to make decisions concerning their own homeowner policies and need to know what insurance the association carries, the limits of the coverage provided, and the amount of the deductibles. Association insurance policy information should be provided to the homeowners on an annual basis but frequently that information is either not provided, or the information that is provided is limited in scope and does not include all of the information that a homeowner should be aware of.

Obtaining complete information regarding the association’s insurance coverage may necessitate a special request from the homeowner for the information. Forms that may be utilized for requesting insurance policy information from a homeowners association and for summarizing policy information may be accessed via the below links.

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