Townhouse Insurance: Do You Need an HO-3 or an HO-6 Policy?

The right insurance for a townhouse depends on what your homeowners association's master policy covers, not on the fact that the home shares walls. The Texas Department of Insurance explains that townhouse insurance can cover either the interior and exterior or just the interior, and the difference depends on whether the association has a master policy that covers the exterior. If it does, you can buy a policy that covers only the interior, which is the condo-style HO-6 form. If it does not, you buy a policy that covers both, which is the standard homeowners HO-3 form. Washington's insurance commissioner treats condo and townhome insurance the same way: an owner's policy, often called an HO-6, working alongside a community master policy paid for by owner dues.

Start with the governing documents, not the floor plan

Two townhouses on the same street can need different policies. In a fee-simple townhouse community, each owner holds title to the land and the structure, and the association may insure only common areas such as a pool or a private road, so the owner needs a full HO-3. In a townhouse community organized as a condominium, the association's master policy covers the buildings, and the owner needs only an HO-6 for the inside. Washington's regulator says the coverage for the structure of an individual unit is based on the community's governing documents, and that owners who are unsure should ask the association president or property manager.

Ask for the current certificate of insurance for the master policy. Washington's commissioner notes that unit owners receive a certificate each year when the community policy renews, confirming the limits and the deductible. That document, read next to your deed and the association's declaration, answers the HO-3 versus HO-6 question.

If the master policy covers the exterior: HO-6

When the association insures the building, your policy picks up where the master policy stops. California's Department of Insurance says a condominium unit owners policy covers personal property, loss of use, personal liability, and medical payments to others, and also covers damage to the interior of the unit and improvements the owner is responsible for. The hard part is knowing where the master policy stops, because Washington's regulator describes three common arrangements:

• All-in: the master policy covers the exterior and all interior finishes such as cabinets, flooring, fixtures, and paint; the owner is responsible for the master policy deductible.
• All-in excluding improvements: the master policy covers the unit to its original finishes but not upgrades a current or prior owner made, such as new countertops or flooring.
• Bare walls: the master policy covers only up to the unfinished sheetrock and subfloor, and the owner's policy must cover every interior finish.

Set your HO-6 dwelling limit to match the arrangement. Under bare walls, that limit has to rebuild the whole interior; under all-in, it mainly needs to cover the master policy deductible and any upgrades. Washington's regulator also recommends loss assessment coverage, which helps pay special assessments the association charges owners when a community loss exceeds the master policy's limits, such as storm damage to several roofs at once.

If there is no master policy for your structure: HO-3

When you own the building, you insure the building. A standard homeowners policy covers the structure, attached structures, personal property, additional living expenses, and liability, and Texas's regulator says townhouse insurance of this kind covers the interior and exterior plus personal property, liability, and additional living expenses. Insure the dwelling for the cost to rebuild it, not its market value, and remember that shared walls complicate rebuilding: a fire that destroys your unit and the neighbor's means two separate policies responding to one event, so make sure your limit is enough to rebuild your side regardless of what the neighbor carries.

Coverages that matter either way

• Personal property: both forms cover it, but Washington's regulator notes that high-value items such as jewelry often have specific dollar limits and may be paid at actual cash value unless you add an endorsement.
• Loss of use: California's regulator says condo policies commonly limit this to a percentage of the personal property limit, so check that it would actually cover rent for a long rebuild.
• Liability and medical payments: standard on both forms and worth carrying at more than the minimum.
• Flood and earth movement: Washington's regulator says condo policies do not cover them, and neither does a standard HO-3, so these are separate purchases in either case.
• Loss assessment: an HO-6 feature that an HO-3 townhouse owner in an association may also want, because a fee-simple association can still assess members for a loss to common property.

Buying the wrong form

The two mistakes run in opposite directions. An owner who buys an HO-6 in a community with no master policy covering the buildings has no coverage for the roof and walls after a fire. An owner who buys an HO-3 in a condominium-style community pays to insure a structure the association already insures and may still be caught by a bare-walls master policy that leaves the interior to them. Insurers will usually write whichever form you ask for, so the burden of reading the association documents is on you.

Bottom line: a townhouse needs an HO-6 when the association's master policy covers the building and an HO-3 when it does not. Get the master policy certificate and the declaration before you shop, set the dwelling limit to match what the master policy leaves to you, and add loss assessment coverage if you belong to any association at all.