How Does Homeowners Association Insurance Work?

Identifying HOA Insurance

Understanding how Homeowners Association (HOA) policies work requires some knowledge of what an HOA policy is to begin with. Typically this type of insurance is purchased by members of a Homeowners Association to insure the community areas, or common use areas, of the housing development. An HOA is a nonprofit legal unit created to manage the amenities of its community.

The Function

HOA insurance functions to minimize exposure of the community to any possibility of financial loss from an event, peril or single activity. How well an HOA policy works depends on how involved the association is with its community.

Association insurance works much like business liability insurance because the policy works to cover against overall liability of the financial operations of the association. How an insurance policy works depends on the different parts of the policy. These parts sometimes include commercial general liability, which works to protect against a range of business liabilities; property insurance, which covers damage to common areas and personal property owned by the association; and auto insurance, which is needed when an association owns vehicles used for maintenance and security. HOA polices can also work to cover parkland, wooded lots, pools or recreation areas.

Time Frame

HOA insurance policies will work for as long as the association is active and pays its premiums. Because of this fact, any damage to association property is covered and the association can collect reimbursement from the unit owner or owners; this is still the case if the person sells the unit and moves since any damage caused was during their membership in the association. HOA polices come with a legal clause which enables the association to use the policy as a fund for legal defense if needed at any time.

How the Policy Works

Features that are a part of an HOA insurance policy work together as part of a simple package or a master package policy. Master polices work to cover more areas including interior and exterior walls, installed appliances, floors, ceilings and often all improvements made since the initial construction of the building. In the case of townhouses or condos, an HOA policy covers areas where the walls and roofing join units together and are shared by more than one unit. Other coverage included in a policy can be used to protect fences, gatehouses, garages, landscape, signs or antennas.

The Effects of a Policy

How an HOA insurance policy works depends on the association by-laws and the policy wording. Most often a policy can cover reconstruction of buildings, wiring, plumbing and bare walls. HOA policies are almost never used to replace carpeting, light fixtures or cabinetry.

HOA policies can also work against a unit owner in some cases. This is a possibility when an association requires a unit owner to carry home insurance for their own unit while also paying for HOA insurance as part of the association membership. While not required by state laws, this clause is often written into the purchase agreement.