Final answer:
Individual unit owners should purchase their own hazard and liability insurance to protect against personal property damage, personal liability risks, and to fill gaps not covered by the owners’ association policy. This ensures full financial protection and coverage tailored to the individual's specific needs, similar to the way government-imposed insurance requirements aim to avoid underinsurance.
Step-by-step explanation:
The owners’ association may carry a hazard and liability insurance policy that covers the common areas and building structure, but this does not typically extend into the individual units. Each unit owner is advised to purchase their own hazard and liability insurance policy to cover personal property, liability within their unit, and any potential improvements made to their unit. While the owners’ association's policy provides a base level of protection, the individual owner's policy is crucial for filling in coverage gaps and providing protection against personal liability risks, such as a guest getting injured within the unit.
Additionally, some risks are unique to the individual, such as theft or damage to personal belongings, and the association’s policy is unlikely to cover these. Insurance is a mechanism against unexpected expenses, and carrying your own policy ensures personal financial protection. This layering of policies is similar to government-imposed insurance requirements - it guards against underinsurance and helps maintain financial stability for all parties involved.
Despite some attempts to mitigate moral hazard through measures like requiring security and fire sprinkler systems, it remains important for individual owners to be proactive in seeking insurance coverage tailored to their specific needs. Insurance companies need to ensure that the average person’s payments cover the cost of claims, the running of the company, and profits, which can result in mandating insurance. But individual policies provide additional security to address your personal risk.