What is Condo Insurance?
Buying a condo comes with a few insurance questions that you may not run into when buying a traditional home.
Your lender will typically want you to have condo insurance before closing, but what exactly are you insuring when you don't own the entire building? What happens to the roof and siding? How much should you insure the inside of the condo for? And what are all those things like escrow, mortgagee clauses, and replacement cost that suddenly seem to matter?
If those terms sound confusing, you're definitely not the only one. Most people aren't taught the ins and outs of buying a home or condo.
Let's break down what condo insurance covers, what information you'll need for a quote, and what you should expect when you're getting your policy set up.
What Is Condo Insurance?
Condo insurance is designed to cover the portion of the property that you are responsible for, along with your personal belongings and certain liability risks.
A traditional homeowners policy generally covers the entire structure, including the exterior. A condo policy is different because the condo association is typically responsible for the building's exterior, including things like the roof and siding.
Think of it as insuring the part of the property that belongs to you.
This is sometimes described in insurance as coverage "from the studs in." Your condo policy can cover the interior portion of your unit, along with your belongings and other applicable coverages.
Townhomes can also sometimes be insured under a condo policy. The important question is who is responsible for the exterior of the property. If your townhome association handles the roof and exterior, a condo policy may be appropriate. If you are responsible for the roof and exterior, you may need a homeowners policy instead.
The same distinction matters when you are buying a property to rent out. A home or condo that you rent to tenants generally needs a landlord or dwelling fire policy rather than a standard homeowners or condo policy.
What Is Included in a Condo Policy?
Condo policies have several major coverage categories, each serving a different purpose.
Coverage A: Dwelling
This covers the portion of the dwelling that your condo policy is responsible for. It is based on the cost to repair or rebuild the covered portion of the property rather than the market value of the condo or the value of the land.
Coverage C: Personal Property
This covers your belongings inside the condo, including furniture, clothing, electronics, kitchen items, and other personal property. Certain valuable items may have special limits.
Coverage D: Loss of Use/Additional Living Expenses
If a covered loss makes your condo uninhabitable while repairs are being made, this coverage can help with additional living expenses while you are displaced.
Coverage E: Personal Liability
This provides coverage for certain claims made against you when you are legally responsible for injury to another person or damage to someone else's property.
Coverage F: Medical Payments to Others
This coverage can help pay smaller medical expenses for another person who is injured in certain circumstances, potentially helping resolve a situation before it becomes a larger liability claim. Common limits include $1,000, $3,000, and $5,000.
Deductibles
Your deductible is the amount you are responsible for paying toward a covered loss before the insurance company pays the remaining covered amount.
You may have different deductibles depending on the type of loss.
Wind/Hail: Applies when a covered loss is caused by wind or hail.
Other Perils/Other Losses: Applies to covered losses such as fire, theft, vandalism, or certain types of water damage. Always review your policy for exclusions because not every type of damage is covered.
Hurricane: In states where hurricane deductibles apply, this deductible can apply to covered damage caused by a named storm. The exact timing and requirements depend on the insurance company and policy, so ask your insurer how its hurricane deductible works.
How to Quote a Condo Policy
Once you've determined that a condo policy is the right type of insurance, you'll need to provide information about the property so the insurance company can determine the appropriate coverage and premium.
One of the first things you'll be asked about is the roof.
Yes, even though you may not be responsible for insuring the roof, the roof still matters. It is the first line of defense against weather and other damage, and insurers may use information about the roof when determining risk.
The age and material of the roof can matter. A flat roof, for example, can have different water exposure than a pitched or gable roof. Your insurance company may also want to know whether the roof has architectural shingles, composition shingles, or another type of material.
Your plumbing can also come up during the quote. Not every insurance company looks at plumbing the same way, but older plumbing systems can be a concern because of the potential for water damage.
Polybutylene plumbing, commonly found in homes built or renovated during the 1970s through 1990s, can be an issue with some insurers. Galvanized steel plumbing can also raise questions because of its potential to corrode over time.
Then there is the inside of the condo itself.
The insurance company needs to know the interior square footage and enough information about the interior finishes to determine how much it could cost to rebuild the portion of the property you are responsible for.
This is where condo insurance can get a little different from homeowners insurance.
With a traditional home, the insurance company's system may calculate the replacement cost based on the information entered about the entire structure. With a condo, the amount needed for the interior may require additional consideration from the buyer, lender, or insurer.
If you have a lender, ask whether they have a specific rebuild cost requirement.
If they don't, a starting point may be around $75 per square foot for a lower-grade interior with features such as Formica counters, linoleum floors, and basic drywall; around $100 per square foot for a moderate-grade interior with features such as granite counters, vinyl floors, and carpet; or around $150 per square foot for a higher-value interior with features such as quartz counters, marble flooring, and higher-value bathrooms.
For example, a 900-square-foot condo with a moderate-grade interior could start around $90,000 in Coverage A, or dwelling coverage.
These numbers are starting points rather than guarantees of what your particular condo should be insured for. Your lender's requirements and the insurance company's evaluation of the property are important when determining the final amount.
How Much Personal Property Do You Own?
Your condo policy isn't only about the walls and interior of the unit. Your belongings need coverage, too.
Think about what you would actually have to replace if something happened to the condo. Furniture, clothing, televisions, computers, kitchen appliances, electronics, and other personal belongings can add up much faster than people expect.
This is your Coverage C, or Personal Property coverage.
Imagine walking through your condo and having to replace everything inside it tomorrow. How much would it cost?
That is a much better way to think about your personal property than looking around and thinking, "I don't own that much."
Certain types of property can also have special limits under a policy.
Jewelry, firearms, furs, and other higher-value belongings may have specific limits, so particularly valuable items may need additional coverage or a scheduled personal property endorsement.
Escrow and Insurance
When you're buying a condo with a mortgage, you'll probably hear the word "escrow" quite a bit.
An escrow account is typically used to collect money for expenses such as your mortgage payment, property taxes, and insurance. The lender uses the money collected through escrow to pay those bills on your behalf.
This is important when setting up your condo insurance because the insurance company needs to know whether the policy will be paid directly by you or through your mortgage escrow.
If your insurance is being paid through escrow, you'll need your mortgagee information and loan number so the insurance company can send the bill to the correct place.
If you are paying the insurance yourself, you can generally set up direct payment instead. Monthly payments may be available, although paying the policy in full can sometimes save money.
Even if you pay the insurance yourself, your mortgage lender will still need to be listed on the policy because they have a financial interest in the property.
What Is a Mortgagee Clause?
A mortgagee clause is the information that tells the insurance company where to send the insurance bill when your lender is paying through escrow.
It is different from simply entering the name of your mortgage company. The mortgagee information can contain specific wording and an address, along with your loan number, so the payment is credited to the correct mortgage.
You will often see terms such as ISAOA or ATIMA in mortgagee information.
ISAOA means "Its Successors and/or Assigns."
This allows the original lender to sell the loan while ensuring the new holder of the loan remains protected by the insurance.
ATIMA means "As Their Interests May Appear."
This helps extend protection to entities with a financial interest in the property, rather than limiting it to the original lender.
Getting this information correct matters. Incorrect mortgagee information can cause problems with escrow billing, closing documents, or the lender's approval of the policy.
If you're unsure what information to use, your lender can provide the exact mortgagee clause and loan number.
Final Thoughts
Buying a condo means figuring out exactly what you own, what the association is responsible for, and what your insurance policy needs to cover.
The roof may belong to the association, but its condition can still matter to your insurance quote. Your mortgage company may handle the payment through escrow, but you still need the correct mortgagee information. And your condo's market value isn't the same thing as the amount it may cost to rebuild the portion of the property your policy covers.
Getting these details right from the beginning can make the insurance and closing process much smoother.
Up Next: Condo insurance protects the part of the property you're responsible for, but there is another cost that comes with owning the property: property taxes.
If you’re renting a home or apartment instead of owning one, your insurance needs look a little different. Next, we’ll take a look at what renters' insurance is, what it covers, and why your landlord’s insurance policy doesn’t cover your personal belongings.
Pardon our ads, they allow us to keep our site running and keep our helpful content free to access.
Comments