Liability Insurance & HO-6 PoliciesJun 04, 2021
If you take a look at our project proformas, you're going to see an expenses breakdown on page 3 (right side of the page). This section shows our best estimate of what the operating expenses are going to be for the fourplex.
One of those line items is insurance. The HOA carries the majority of the insurance that you'll need on the property. This makes up the master insurance policy. For example, if there's a bad hailstorm or if we get a fire or something like that, it's the HOA's master policy that kicks in.
So why is there a separate insurance line item on the proforma that looks relatively low? This is your liability and HO-6 insurance. Some people call it the "walls-in or condo policy". An example use for this policy... if a tenant wants to sue the landlord, the HOA's master policy doesn't give that kind of coverage. You need liability coverage.
In addition, what if your unit floods from a broken pipe or there's some kind of an insurable event inside that's not covered by the master policy? This is why you have the HO-6 policy in place.
As a residential multifamily investor, you'll need loss assessment coverage that comes from a liability or HO-6 policy. That will cover those events that the master policy, for the most part, won't. Or it pays you so that you can pay your share of the big master policy deductible (if there's a big fire that wipes out the units of multiple owners in an attached structure).
You've got to have an HO-6 policy. Some people try to not do it and we've had a few investors that have had events where they had to come out of pocket with a lot of money because they didn't get the policy. HO-6 policies are usually pretty affordable (on average around $30-70 a month, per property).
Look into the policies and reach out to your FIG agent with any questions.