HOA Insurance Basics

Homeowners Association (HOA) Insurance isn't a luxury; it's a necessity, and not just because it protects your home against damage or theft. Virtually all mortgage companies require insurance coverage for a property's full or fair value and won't issue a loan or finance a real estate transaction without proof of it. Does your association need HOA insurance? Whether it's required or not, it's wise to have this kind of protection. This article discusses condo, townhome and HOA insurance basics, coverage, and how it works so you can make a sound decision on what type of insurance and coverage is best.

                                             HOA Insurance


Property Insurance

Property insurance covers buildings, contents, rents, or property of others in your procession from perils like fire, water damage, theft. The state of Minnesota has the largest volume of townhomes and condominiums located in the 7 County Metro. It's essential to ensure you have the right kind of coverage. Minnesota is now considered a catastrophic state due to the large volume of wind & hailstorms that occur annually.

On average, for every $1.00 taken for townhome/condominium insurance, the industry pays out $1.34. however, all companies have experience operating at a loss. Industry-wide, approximately 72% of all claims paid out are for wind & hail damage. Complexes with over ten buildings perform 25% worse than those with less than ten buildings. Why?  There are more rooves, more siding, windows etc. As a result, carriers are often quick to non-renew policies and even pull out of the Minnesota Market altogether. Rates have increased 5-10% per quarter, with Condos and HOAs on the higher end. Deductibles continue to change, where wind and hail deductibles could switch to a per building deductible or percentage deductible. Water damage deductibles have increased with some carriers and per unit, water deductibles are not uncommon. Then there are the added exclusions, such as unmatched property damage, cosmetic damage and matching property damage exclusions. These are discussed later in the article.


Commercial General Liability Insurance

Commercial General Liability Insurance protects a business from financial loss should it be liable for property damage or personal injury caused by provided services, business operations or employees.  It also covers any 3rd party mishaps, such as bodily injury due to slipping/falling and property damage, or damage to someone else's property.


Directors and Officers Liability Insurance

Directors and Officers Liability insurance covers the board of directors for legal action or claims brought against them from causes of loss such as breach of fiduciary or legal duty while serving on a board or as an officer. Some of the most common types of claims are a breach of fiduciary duty, failure to adhere to or enforce the by-laws, discrimination of any kind, HUD/FHA-related claims, emotional support pets, challenges to the election process, architectural review decisions and employment practices liability. Some of these claims can be monetary; for example, the board decided to use a specific vendor and broke the contract or non-monetary; a homeowner disputes the election process and demands a new election.

Make sure you review your insurance applications closely and keep records of any board decisions in writing and as part of the board's meeting minutes. Next, immediately notify your insurance company of a claim or potential claim. Lastly, READ your community by-laws and declarations to make sure you understand your duties as a board member.

Crime (aka Fidelity)

Fidelity insurance covers losses due to criminal acts such as fraud or theft by employees, directors, principals, partners, or anyone else colluding with an employee. The loss can be of savings or goods and the coverage may be required in respect of one employee or a group of employees.
Fannie Mae and the Federal Housing Association (FHA) require an Employee Dishonesty limit equal to or greater than 100% Reserve Funds plus three months of operating income to cover.

Excess Liability / Umbrella

Most people think excess liability and umbrella insurance are the same, but they are different types of coverages. Excess liability insurance provides additional coverage for one of your liability insurance policies, typically general liability insurance. Commercial umbrella insurance for your HOA provides additional coverage for several of your liability insurance policies. It offers higher liability limits and coverage, whereas your underlying policy may not and kicks in when one of the underlying policies reaches its limit.

Workers Compensation

Workers' compensation insurance protects a business owner from claims by employees who experience a work-related injury or illness either sustained on business premises or due to business operations. In this case, your HOA is the business. Most companies are required to carry workers' compensation insurance for their employees and, often required by contract, recommended for other possible gaps, such as contractors that let their coverage lapse. Typically, workers' compensation covers the employee's medical expenses, rehabilitation costs and lost wages. If you do not have workers' compensation and one of your employees is injured on the job, your business may be liable for any medical expenses that an individual incurs. When these situations occur, you'll want the peace of mind to know that your small business (your association) is covered. And, if they can't return to work at all, workers' comp can provide long-term disability benefits.

If you are an association that does not employ any associates nor has any payroll, it is still recommended to obtain a workers compensation policy. This would protect against potential claims brought by contractors or vendors injured on your premises or association volunteers injured while volunteering on behalf of the association.

Flood / Earthquake

Most people assume they have Flood and Earthquake coverage and only find out that they don't once it's too late. It is excluded from most policies unless you know to ask for it.  Do you need it, living in Minnesota? If you think Minnesota doesn't have earthquakes, think again. Minnesota has had seven earthquakes of magnitude 2.0 or above in 2020 alone.[1] The last quake recorded was 6 miles northwest of Virginia, Minnesota, in October 2020. Minnesota is also prone to flooding during the spring and summer months. Simply put,  Flood and Earthquake coverage is more necessary for your Minnesota condo, townhome or HOA than you might think.

                                                   Flood Insurance for HOAs

Actual Cash Value

What is the actual cash value? It's the amount equal to the replacement cost minus depreciation of damaged property at the time of the loss. ​ For example, say the HOA suffers hail damage to their roofs.  The roofs are 15 years old and cost $1,000,000 to replace. ​

Actual Cash Value​

Replacement Cost​

Cost to Replace Roof​



Actual Cash Value​



Recoverable Depreciation​






Total Payout​




Unmatched Property Damage Exclusion

Exclusions in coverage are when the carrier doesn't pay to repair or replace the undamaged material due to a mismatch between undamaged material and new material used to repair or replace the damaged material. Nor will they cover the loss of value to any property due to the mismatch.

The policy does not cover the cost of replacing undamaged materials to match or otherwise be aesthetically compatible with the damaged materials. So, say the total cost to repair the HOA's siding is $1,000,000.  During a hailstorm, the siding sustained $250,000 in damage, leaving $750,000 of the siding undamaged by the storm.  The siding has been discontinued; therefore, an exact match cannot be found.


Exclusion Example

Standard Example

Total Damage



Undamaged Portion



Total Cost






Total Payout




HO6 Coverage vs HO4 Coverage

What's the difference between HO-4 and HO-6?  HO-4 covers renters and is typically known as renter's insurance. HO-6 typically covers condominiums and co-ops and sometimes townhomes (see below).


HO-6 is home insurance for condominiums, co-ops, retirement communities and vacation timeshares. It provides personal property coverage, liability coverage and specific coverage of improvements done to the unit. This type of policy will cover interior damage, modifications, additions and alterations to the unit/property. It also provides both personal liability coverage and living expense coverage if the condo becomes uninhabitable.


If the townhome shares walls and the association is responsible for the outside of the property (like a condominium), you qualify for an HO-6 policy. If you own the outside structure, you may need a standard homeowners policy.


An HO-4 policy, also called renters insurance, protects a renter's personal property and addresses personal liability. It's essentially a financial safety net for you and your belongings. Along with loss or damage due to theft, fire, vandalism, some types of water losses like burst pipes, it also covers temporary living expenses and certain medical or legal fees.


Primary Coverage Specifications to Consider


  • Bare Walls – Coverage to the studs only. No coverage for carpeting, cabinets, flooring, finishes, permanent appliances, and sheetrock.

  • Original Spec/Single Entity – Provides for replacing original plans or specifications and includes sheetrock, flooring, and cabinets installed by the builder.

  • Modified Original Specifications – Same as the original specifications, but with modification/exclusion to specific items such as flooring or ceiling/wall coverings. Definitions vary per association based on governing documents.

  • All-In – Provides everything included in single entity plus betterments & improvements (upgrades) installed in the unit.

Valuation of Loss

  • Replacement Cost – No depreciation. Property valued at "new for old" to a specific policy limit.

  • Guaranteed Replacement Cost – Replacement cost with no specified limit.

  • Extended Replacement Cost – Replacement cost with specified limit plus extended limit to a certain percentage, usually 125% or 150%.

  • Actual Cash Value – Replacement value less depreciation for wear and tear.

To manage risk, stay current with reserve studies and funding plans, implement effective capital improvement plans, develop a preventative maintenance plan, use available resources to assess safety and property risks, and consider a real estate appraisal for an accurate property valuation. Once you consider all these factors surrounding HOA insurance and know what your HOA insurance requirements are, you will be well on your way to making an informed decision on behalf of your association and community.

[1][1]Pfeiffer, T. (2021, June 14). Earthquake Archive: past quakes in or near Minnesota during the year 2020 - complete list and interactive map.    
       VolcanoDiscovery. https://www.volcanodiscovery.com/earthquakes/minnesota/archive/2020.html#quakeTable.
Tuesday July 06, 2021