Do I Need Building Insurance on a Leasehold Flat?

Understanding insurance responsibilities is a common concern for multi-unit dwelling owners. When considering a leasehold flat, questions often arise regarding building insurance. This article clarifies these aspects, providing insights into property ownership structures and the different types of insurance involved.

Understanding Leasehold Property

In the United States, the concept of “leasehold property” in a residential context often applies to condominiums and cooperatives, rather than a direct lease of a single-family home. With a condominium, an individual owns the interior of their unit, while common areas and the building structure are jointly owned with other unit owners through a homeowners’ association (HOA). This differs from freehold ownership, where an individual owns both the building and the land. Cooperative housing (co-ops) involves residents owning shares in a corporation that owns the entire building. In both condominiums and co-ops, the individual has the right to occupy their unit for an extended period, but the overarching ownership of the building structure and land rests with the association or corporation.

Building Insurance and Contents Insurance

Building insurance, often termed property insurance, covers the physical structure of a property against various perils such as fire, flood, vandalism, and storm damage. This includes the walls, roof, foundation, and permanent fixtures like fitted kitchens and bathrooms. Conversely, contents insurance, also known as personal property insurance, protects the personal belongings inside a home. This encompasses items like furniture, clothing, electronics, and appliances. While building insurance protects the shell, contents insurance safeguards the possessions within it.

Responsibility for Building Insurance

In most leasehold arrangements for multi-unit residential properties in the U.S., the responsibility for building insurance typically falls to the condominium association or homeowners’ association (HOA). This master insurance policy, also called HOA master insurance, covers the building’s exterior, including the roof, walls, and foundation. It also extends to common areas shared by all residents, such as hallways, lobbies, elevators, and amenities like pools or gyms.

The cost of this master policy is generally included in the monthly or quarterly homeowner association (HOA) fees or service charges paid by individual leaseholders. While the association handles the purchase and claims process for the master policy, individual unit owners are typically responsible for securing their own insurance (often an HO-6 policy for condos) to cover the interior of their specific unit and personal belongings. This individual policy covers elements like walls, ceilings, floors, fixtures, and personal possessions within the unit.

Leaseholder Interest in Building Insurance

Even though the homeowners’ association or management company is primarily responsible for securing the master building insurance policy, leaseholders maintain a vested interest in this coverage. Leaseholders directly contribute to the cost of the master policy through their regular service charges or HOA fees, making them stakeholders in the policy’s adequacy and terms. Ensuring the building is sufficiently insured protects their investment, as a major uninsured loss could lead to significant special assessments or a devaluation of their unit.

Leaseholders often have the right to request details of the building’s insurance policy from the landlord or manager, including information on the sum insured, the insurer’s details, and the risks covered. Reviewing these documents allows leaseholders to understand the scope of protection for the shared property and identify any potential gaps. In some cases, a master policy’s deductible for a claim might be passed on to unit owners, emphasizing the importance of understanding these financial implications.