Important Updates for Property Insurance for Vacation Rental Condos in Hawaii

With rampant inflation omnipresent — 2022 has seen its fair share of increases in home prices, auto prices, manufacturing, and yes, even insurance. For the purpose of this blog post, it is important to note that I am licensed Real Estate Broker who owns, manages, and sells many vacation rental properties. I am not an insurance agent and all of this information should serve as the basis for questions/considerations for you to ask of your insurance agent. With this post, as I have done with others that are pretty “dry” subject matter, I will drop in some eye candy for our newest vacation rental offerings.

The Insurance industry as a whole is going through some major changes. Insurance companies are increasing rates to keep up with rising costs of building materials and labor as well as trying to recoup claims paid out from natural disasters such as fires, floods and various storms. There is an increased level of scrutiny that insurance underwriters are looking at in order to be properly prepared in the event of catastrophes like the 2021 collapse of the 12-story Champlain Towers South condo tragically ending the lives of 98 people.

Resort style pools at the Hoolei Villas. 

Hawaii is not immune to these changes. During the past year, insurance companies have been tightening their guidelines for what Condo Associations want to insure (and this includes the units inside these Associations). This is creating increased pricing for unit owners when they go to purchase an H06 policy that is required by the Association. An H06 is a homeowners policy specifically designed for a condo unit, to insure the inside of the unit for the items that are not covered by the Association’s Master Policy.

Most of Hawaii’s Condo Associations are also older and the lack of updates to the electrical, plumbing, roof and lots of water damage claims has also caused the insurance companies to increase the deductible on the master policy for the Association. This means, for unit owners, they now need to increase their H06 policies to whatever the new Association deductible is so that in the event there is a claim and the Association charges the high deductible to the unit owner, the unit owners H06 policy has the appropriate amount of coverage to cover the assessment.

Condo Insurance Required for All Financed Transactions and 1031 Tax Deferred Exchange Transactions

Even though All Cash Transactions don’t require the Buyer to obtain an additional H06 Policy, it is something that I always recommend to my clients. For Buyers securing conventional Financing, it is a requirement of the Lender and I also just recently learned that All Cash 1031 Exchange Transactions also require the buyer to obtain an H06 policy because the accommodator is actually taking title to the property for a short time period.

Additional Important Considerations for Vacation Rental Condo Insurance

• Hurricane Insurance – this is a separate policy written from the HO6 and is very inexpensive, so it is something to ask your insurance person about.
• Dwelling or Tenants Improvements or Additions and Alterations – if you or a prior owner has made substantial improvements to the structure such as new kitchens, baths, etc., you may want to increase this limit. Please remember, the AOAO Master Property policy covers the unit’s interior as it was originally built only. The condo for walls in the building does have a higher standard provided if something catastrophic happens.
• Personal Property – if you tip the unit upside down and shake it, everything that moves is personal property. What amount of coverage are you comfortable with here? You will have replacement costs of personal property for up-keeping your property properly, and thus you should have coverage for this. Think about things like this: Key Amenities for a Successful Hawaii Vacation Rental Property.
• Loss of Rents – This limit is an annual limit divided into monthly installments. Sometimes, lenders can require this when the buyer is on the verge of qualifying for the mortgage and especially if said qualification is based on a documented rent schedule provided by the appraiser to the lender. I do represent clients who were able to get sizable sums of income from their insurance companies due to Hawaii being shut down for almost 2 years due to Covid 19.
• Naming Your Management Company as Additionally Insured – all professional management companies that I am aware of require that the owner (client) name their management company as additionally insured even though said management companies carry their own policies.
• Loss Assessment Coverage – This coverage applies when the AOAO has a judgment against them, and there is insufficient capital or not enough insurance coverage to satisfy the judgment. The AOAO must assess all owners to meet their obligations. Coverage is afforded for covered claims. Additionally, if your unit caused structural damage to the Building through a covered claim, and the AOAO repairs the damage, they may seek their deductible from you, and you would have coverage through loss assessment.