Q: A couple lives in a retirement community where they paid more than $700,000 upfront to live in an unfurnished unit. They paid to put in wall coverings and some other real property improvements. If the building is damaged by fire, would the HO4 cover their improvements? Or would they need to buy a HO6 even though it is not a condo?

This same family has a golf cart that they use on the premises because it is a large campus. Would any damage to the golf cart be covered by the HO4 liability coverage? Should they buy a golf cart policy?

Response 1: An ISO HO4 has an additional coverage that will provide up to 10% of Coverage C - Personal Property for: 

Building Additions And Alterations. We cover under Coverage C the building improvements or installations, made or acquired at your expense, to that part of the "residence premises" used exclusively by you. The limit of liability for this coverage will not be more than 10% of the limit of liability that applies to Coverage C.  

Although ISO has an endorsement to increase the 10% limit, many insurers don't offer it. 

The standard HO6 does have coverage for "...alternations, appliances, fixtures, and improvements that are part of the building contained within the insured unit..." or something that is the insured's responsibility under contract, according to The Institutes.

An HO6 may work but ensure that the definition of covered building items is consistent with the improvements that the insured has made. Some forms are specific about covering items that the insured owns or that are their insurance responsibility in a condo ownership situation, not a rental. Confirm coverage with underwriting.

Response 2: The ISO HO4 form provides some coverage in the Coverage C – Personal Property section for additions and alterations. Some HO4 insurers offer coverage for tenant improvement and betterments (TIB), but typically the limit would be too low for $700,000-plus invested by your client. You would need to write an H06, which some—but not all—insurers will do to cover TIB. While H06 typically is thought of for condos, it also is used for apartments with high-value TIB.

Did they purchase the unit? Or did they purchase a right to occupy the unit? It may or may not be eligible for an HO6.

The golf cart may or may not be covered. There would be no physical damage coverage for damage to the golf cart, but there may be liability coverage. If the community contains the insured's residence and is managed by a homeowners association (HOA) that permits operating the golf cart in the community, the ISO policy would provide coverage. Ultimately, it is best to write the golf cart on a recreational vehicle policy.

Response 3: You'll need to see their ownership document to determine the appropriate coverages. You might even need to have the client discuss this issue with their attorney. It's essential to know exactly how the living situation is set up before you can recommend coverage.

With the golf cart exposure, it is important to understand the exact usage and the nature of the coverage provided by the policy you're recommending. You need to be aware that the usage can change at any time without notice, which could void the client's coverage. 

For instance, suppose the client swears that the cart will never leave the premises, but when an old friend comes into town they decide to drive the cart down the block to visit them. If the coverage is limited to their own premises, they could be uninsured for an accident while they are away. You need to take that unexpected operating territory into account when you recommend coverage.

Response 4: I'm not sure the HO4 is the best idea here. When my mother was in a similar arrangement, the documents made it pretty clear that she was assessable for "community" losses, so we got an HO6 for her. We also added coverage for a relative in assisted living to our homeowners policy to cover her liability—a “belt and suspenders" methodology.

This is a question that the family should be addressing with their attorney to understand their legal obligations and the extent of ownership. With that information, you can proceed to work with the family on the correct insurance forms.

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

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