Question: We have purchased several single family homes, and our lender has always insisted that we obtain a hazard insurance policy before settlement. We are about to purchase our first condominium unit, and our real estate agent has advised that we do not need any insurance, since the entire association is covered under what they call a master policy.

Is our agent correct?

Answer: No.

Let's quickly understand the makeup of a condominium. It has three separate parts:

Units: This is your space; this is where you live; you own it. You pay real estate tax on your unit and can obtain a mortgage loan using your unit as security.

In order to determine what is your space, you have to read your Declaration. Additionally, the units will be shown on the condominium Plat and Plans.

Limited Common Elements: (referred to as ALCE) This is a common element and is reserved exclusively for use by one or more, but less than all, of the unit owners in the condominium. Limited Common Elements may include balconies, roof decks, storage areas and parking spaces. The Declaration will define Limited Common Elements and the Plats should show where in the complex they are located.

General common elements: This relates to those portions of the property used by all of the unit owners in general. Everything that is not a unit or a limited common element is a general common element. For example, the general common elements include, in addition to the land, such items as foundations, roofs, slabs, perimeter walls, boiler rooms, corridors, laundry rooms, common stairs, building lobby, trash areas, utility rooms, and water mains.

Every condominium association must have a master insurance policy. The Declaration will spell out the minimum insurance coverage which is required, and many State condominium statutes also require a minium amount of coverage.

The master policy will cover problems and issues relating to the common elements and the limited common elements. For example, if there is a common element water pipe that bursts, causing flooding and water damage to the common halls, elevators and individual units, the master policy will pay the damage claims, subject of course to the amount of the deductible which is in the policy.

However, the master policy does not provide all-inclusive coverage. In our example, when the water flooded into your apartment, it not only damaged your walls, but ruined your carpet and destroyed your expensive 50 inch plasma television set.

The master policy will pick up the cost to repair your walls, but you are on your own regarding any personal belongings. Additionally, most master policies exclude what is known as Abetterments. If you have the original floors in your unit, coverage will probably be available should they get damaged as a result of the flooding. But if you (or your predecessor) installed parquet flooring, this is a Abetterment and will not be covered under the master policy.

Here is where a policy known as an H0-6" comes into play. This is a separate policy which will cover your personal losses. It should also supplement what the master policy does not cover, such as theft in your apartment, vandalism, and personal liability coverage in the event you are personally sued and a money judgment is issued against you.

The cost of such insurance is nominal generally between $250-300 per year.

Several years ago, a Washington, D.C. condominium suffered significant loss because of a massive fire in the building. All of the unit owners had to vacate the property for one full year. I know one owner who had an HO6 policy with coverage for alternative lodging Band he was receiving $1800 a month from the insurance company to pay for his rental of an apartment while his unit (and the building) was being repaired. His neighbor who did not pay the yearly $300 premium B not only had to pay his mortgage on the condominium unit, but had to shell out a lot of money in order to rent temporary lodging while the repairs were being made.

You should carefully review the terms and conditions of your master policy. Talk with your insurance agent to see what kind of supplemental coverage you need by way of the HO-6 policy.

Shop around; there are many insurance companies that offer this kind of insurance protection. But here's a suggestion: consider obtaining coverage from the same company that issued the master policy.

Why?

I have often encountered this situation. After a fire (or other casualty) the master policy says that this is not a covered event, but is the responsibility of the individual unit owner. However, the HO-6 carriers says, wait a minute! This was a common element disaster which should be the responsibility of the master policy

When both the master and the HO-6 policies are issued by the same company, I have simply told the insurance agents: Guys, your company is responsible either under the master or the HO-6 policy, so you get together and decide which arm of your company will pay the claim. We don't have to litigate the issue when both policies are covered by the same company.

We often ignore insurance issues until it is too late. But when disaster strikes such as a fire, flood, or vandalism you should be prepared, and a good HO-6 policy should be in the possession of every unit owner throughout this country. Indeed, many condominium associations are amending their legal documents to require such coverage.