I received an email over the weekend that asked an interesting question with implications for homeowners and homeowner associations. The question came from an individual who handles the association insurance policy for a community of duplexes owned by active adults over 55. Her question addressed a concern she has about several homeowners who have paid off their mortgages and, as a result, may not carry home insurance. She asked, “If one side of [a] duplex is damaged who repairs the whole roof?”
To fully answer her question, I first needed to understand whether the HOA carried property insurance in addition to general liability and Directors and Officers coverage. As it turns out, the association does not carry property coverage, which brings us to several interesting points for HOAs, owners of duplexes, and whether those who have paid off their mortgage should maintain home insurance.
Duplex Owners: I’ve talked about home insurance for duplexes recently (see https://wiseinsurancegroup.com/home-insurance-and-duplexes/), however, there’s one point I didn’t address. In the above situation, the community is comprised of people who own their side of the duplex. The other side is owned by another individual or couple. If Couple A has a mortgage, then they will have a home insurance policy on their half of the duplex. However, if Couple B has paid off their mortgage they are not required, as of today, to have home insurance.
In this case if there is a hail storm which damages the roof, then Couple A will most likely file a home insurance claim. Their home insurance, if the damage is severe enough, will replace their roof. However, the insurance company is not liable for Couple B’s side of the duplex. Since insurance follows ownership, Couple B will either have to pay cash to have their roof replaced, or may choose to leave it in tact as damaged, unless the association compels them according to their bylaws to have it replaced at their own expense.
Homeowner Associations: To the dismay of the association representative, the bylaws do not contain anything requiring homeowners to have home insurance. While the HOA bylaws do address a variety of items including party walls, appearance, etc., they do not address property insurance, roofs, etc.
This leaves the association vulnerable to a liability claim from members of the association if one of the owners does not carry home insurance and chooses not to replace a roof, or has a major loss that is beyond their ability to pay (such as a fire or major storm damage). In addition, the member who doesn’t have a policy could be held personally liable for such a claim.
Paid Off Mortgage: The underlying issue is whether or not a person who’s either paid cash for their home or paid off their mortgage should carry home insurance. My answer is yes, it’s in the homeowner’s best interest (see https://wiseinsurancegroup.com/home-insurance-paid-home/). Even if the homeowner saved $2,000 a year by not having a policy, they may barely break even on a minor to moderate claim. They also put themselves at financial risk if there is a large claim or worse, if there’s a liability claim. The savings for not having a home policy pales in comparison to a large claim or lawsuit. If you’re that concerned about savings, carry a larger deductible.
I enjoyed this question and the various implications it raises. Based on the information I provided, the association will most likely change their bylaws and require all owners to carry home insurance. What do you think? Share your comments, questions, and experiences with me on my Google +, Facebook, and LinkedIn pages. I’d love to hear from you!