Master Policy vs. HO-6: Where the Building's Coverage Stops

Water comes through a ceiling on the fourth floor. The unit owner calls the managing agent. The managing agent asks whether it came from the unit above or from a common riser, and within about two minutes the conversation has become an argument about insurance that nobody in the building is equipped to have.

This is the most predictable dispute in New York residential buildings, and boards can defuse most of it in advance by knowing three things.

One: which master policy structure your building has

There are three broad structures, and the difference is not subtle.

Bare walls. Coverage stops at the studs. Drywall, flooring, kitchens, bathrooms and fixtures are the unit owner's responsibility. This is common in large, older cooperatives.

Single entity. Reaches further in, typically covering the unit as originally built — but not an owner's later improvements.

All-in. Reaches furthest, covering the unit including improvements, subject to the policy terms.

Which structure applies is set by your governing documents and the policy itself. A board should be able to state its building's structure in one sentence, because everything a unit owner needs to carry is defined by where that line falls. A board that cannot has unit owners who are either over-insured or, far more commonly, exposed on a gap they do not know exists.

Two: where the line sits in your own documents

In a condominium, the declaration and offering plan define the common elements and the unit. The line is commonly drawn at the unfinished interior surfaces of perimeter walls, floors and ceilings — putting drywall, flooring, fixtures and finishes on the unit owner's side.

In a co-op, the corporation owns the building and the proprietary lease allocates responsibility between the corporation and the shareholder. Same practical question, different governing document.

Read your own. Buildings differ, and a general rule is not a substitute for the clause that actually applies. This is one of several places where the documents are the law in a way boards routinely underestimate.

Three: what happens when the source is upstairs

The recurring dispute has a rule of thumb behind it, and it turns on the source of the water, not on who is most upset.

• An HO-6 typically responds to sudden, accidental water damage originating within the unit — a burst pipe, an overflowing tub, a failed supply line.
• Damage from an outside source — a leaking roof, a backed-up sewer line, another owner's negligence — is more likely to fall to the master policy or to the responsible party.

So the first job after a loss is not to assign blame. It is to establish the source, document it, and let the coverage question follow. A managing agent who photographs and records the source on the day saves the building months of argument later.

The number almost nobody has raised

Here is the single most useful thing on this page, and it costs a board nothing to act on.

Loss assessment coverage is the part of an HO-6 that responds when the association levies an assessment against every unit to cover a shortfall — a building-wide loss that exceeds the master policy limit, or that falls within its deductible.

Standard HO-6 policies include only about $1,000 to $2,000 of it.

For New York condo owners it is routinely increased to $50,000 or $100,000, and the additional premium is commonly in the range of $20 to $50 a year.

Read those two paragraphs together. Most unit owners in most buildings are carrying a limit that would absorb a rounding error, when the meaningful limit costs roughly the price of a lunch, annually.

Why the board should care about somebody else's policy

Because it is the board's assessment that runs into it.

When a building-wide event exceeds the master policy limit or sits inside its deductible, the board levies a special assessment against every unit. Whether that assessment gets collected smoothly or turns into a collections problem depends almost entirely on whether unit owners' policies respond to it.

A building where owners carry $50,000 of loss assessment coverage collects from insurers. A building where they carry $1,000 collects from household budgets, produces hardship, produces arrears, and produces the collection files discussed in condo liens versus co-op arrears.

This is one of the very few pieces of advice a board can give that is free to give, cheap to follow, and directly improves the building's own position. It belongs in the annual owner communication, every year.

Deductible pass-through, decided in advance

Where the master policy deductible is passed through to a unit owner, that owner's loss assessment coverage is what responds to it — again, if the limit is high enough.

How the deductible is allocated should be set out in the governing documents or in a written board policy, not decided after a loss. A board improvising an allocation while a unit owner is standing in a damaged apartment is making a decision under exactly the conditions that produce disputes, and it is doing so without the process protections that minuted, deliberate decisions carry.

What a board should actually do

• State your master policy structure — bare walls, single entity, or all-in — and be able to say it plainly.
• Find the clause in the declaration, by-laws or proprietary lease that draws the line, and keep it to hand.
• Review the master policy at renewal with the broker and the board's attorney, including limits, deductible, and how the deductible is allocated. That is the same renewal conversation that should cover D&O coverage.
• Tell owners annually what the master policy does and does not cover, and to raise their loss assessment limit.
• Establish the source first after any loss, and document it that day.
• Write down the deductible allocation policy before you need it.

Where a managing agent carries this

Knowing the building's coverage structure, getting the renewal in front of the board with the right questions attached, documenting the source of a loss on the day it happens, and putting the loss-assessment advice in front of owners every year is part of condo association management and co-op board management.

If your board cannot say whether the building is bare walls or all-in, schedule a consultation or call 718-568-9278.

This article is general information, not insurance or legal advice. Coverage depends on your building's governing documents and on the specific policies in force. Review both with a licensed broker and the board's attorney.