FINDING CONDO INSURANCE IS CHALLENGING - AFFORDING IT CAN BE DIFFICULT TOO
Insurance has always ranked high on the list of challenges for condominium association boards. But inflation, federal regulations and risks related to climate change are making it more difficult for boards to fulfill their obligation to maintain adequate insurance for their communities. The two biggest challenges: Finding coverage and affording it. Some insurance companies are no longer offering residential policies in some markets, most are becoming more selective about the properties they are willing to cover, and virtually all have boosted their premiums. Some insurers are declining to renew coverage – even for “good” clients, and associations shopping for insurance are finding that they have fewer options and little if any room to negotiate premium rates.
We don’t have any magic potions that will soften a hard insurance market, but we do have some suggestions that may help association boards manage the challenges this difficult market is creating. If the association’s insurance premium soars, you may want to:
TRY TO FIND A DIFFERENT INSURER.
If the association’s existing insurer declines to renew its policy, the board will have no choice but to look elsewhere. But associations facing undesirable, or unaffordable, premium increases may want to shop for alternatives as well. Most insurers are increasing their premiums, so finding a better deal won’t be easy, but it is worth the effort. Associations shopping for insurance should:.
Work with an experienced insurance agent. This is good advice in any market, but an experienced agent with good connections should be able to identify the best and most cost-effective policies available to you.
Improve your insurance profile. The goal here is to persuade insurers that you are a desirable client and the best way to do this is by demonstrating that your association is as risk averse as they are. Look at your community from the perspective of prospective insurers and address the risks they are likely to identify. For example:
Create a rigorous preventive maintenance plan and follow it. Proactive maintenance will reduce your property damage risks.
Require owners to install automatic shut-off valves on water heaters to prevent leaks and to install devices that trigger an alarm if the heat in an owner’s unit falls below a specified temperature in the winter.
Make sure smoke and fire alarms and sprinkler systems are working. In common areas and in owners’ units.
Keep walkways and parking lots clear of snow and ice in winter to reduce the risk of slip-and-fall accidents.
Itemize the association’s risk management strategies in an addendum attached to the insurance application.
EXPLORE OPTIONS FOR PAYING THE HIGHER INSURANCE BILL,
These may include:
Levying an assessment on owners- never popular but sometimes necessary.
Increasing common area fees – equally unpopular but (like assessments), sometimes necessary.
Obtaining a bank loan. This option isn’t widely available, but a few specialty lenders in other areas of the country are offering “insurance premium financing,” allowing associations to spread the cost of their insurance over several months instead of paying the entire bill up front. The collateral for the loan is the insurance policy, which the lender can cancel if the association defaults. As with any loan, boards should consult with the association’s accountant or financial adviser to review the benefits and risks.
INCREASE THE MASTER POLICY DEDUCTIBLE.
This is the strategy we have long recommended to clients seeking to reduce their premiums and it still tops our list, but secondary mortgage market requirements may limit its appeal.
Fannie Mae and Freddie Mac, the two major purchasers of residential mortgages, say the association’s master policy deductible can’t exceed 5 percent of the coverage total. For a community with a $10 million policy, the maximum master policy deductible would be $500,000. If there are 100 units, the maximum per-unit deductible would be $5,000. If either deductible exceeds those limits, Fannie and Freddie may not purchase mortgages on units in the community, which means owners may have trouble selling their units or refinancing their existing mortgages. Prospective buyers or owners could seek financing from lenders that do not sell their loans, but the interest rates will likely be higher. Boards may decide that the cost savings for the community outweigh the disadvantages for some owners, but they should anticipate that these owners will disagree.
CHANGE THE TYPE OR AMOUNT OF INSURANCE COVERAGE
This is not an option we typically recommend and we’re not recommending it now, but associations unable to obtain insurance or afford the insurance available to them may have to consider it. There are three possibilities, all with significant disadvantages.
Reduce the amount of coverage. The obvious problem – the policy may not cover an outsized claim. The association would have to cover the difference.
Accept cash-value rather than full replacement cost coverage. A full replacement policy – the industry standard - will pay the current cost of repairing or replacing damaged components; cash value will pay the depreciated cost. Full replacement will cover the full cost of a new roof, regardless of its age. Cash value will give you less, and possibly a lot less, than you will have to pay for it. The older the roof, the less the insurer will pay to replace it. Another problem: The governing documents for most associations require full replacement coverage. Switching to cash value will require an amendment permitting that alternative. Also, be aware that secondary mortgage regulations require replacement value coverage, so financing options may be limited if the insurance does not provide it.
Select a ‘bare walls’ rather than an ‘all-in’ policy. Both policies cover common areas. But all-in policies (the industry standard) also cover the interior of individual units, including everything attached to them – light fixtures, flooring, plumbing, cabinets and the like. Bare-walls policies cover only the structural portions of individual units (wall studs, subflooring) leaving it to owners to insure sheet rock, finished flooring, cabinets and countertops, etc., in their units. Most condominium documents provide for ‘all-in’ coverage so changing to bare walls may require an amendment. It also creates the risk that two different insurers (the association’s and the owners’) will fight over which one is responsible for a claim. All-in coverage provided by the master policy eliminates that risk.
I’m discussing these options not because they are desirable – they aren’t. They are, at best, last resorts that should be considered only by associations that have no other options for insuring their communities.
REQUIRE OWNERS TO OBTAIN AN INDIVIDUAL HO-6 POLICY INSURING THEIR UNITS.
This is not a strategy for reducing the association’s insurance costs – at least not directly. But it is an essential means of managing the collective insurance risks faced by associations and the individual risks faced by owners.
The owner’s policy provides coverage for their personal belongings and their personal liability coverage the master policy doesn’t offer. The HO-6 also provides coverage for the owner’s share of the master policy deductible – a critical feature given the dramatic increases in both association premiums and deductibles. If an association has a per unit deductible of $15,000 and a unit sustains damage, an owner who does not have an HO-6 policy will have to pay out of pocket for damage to their unit below the master deductible amount. Boards should make sure owners understand that if they don’t have an HO-6 policy, they are essentially self-insuring both for the deductible and for damage to their personal property. This is a concern – and a potential expense – for associations, because if owners can’t repair their units, the damage – from water and mold, for example ꟷ could spread to common areas and other units.
We advise our clients to either adopt a board resolution making an HO-6 policy mandatory for owners or to seek owner approval of an amendment to the governing documents imposing that requirement. The resolution or amendment should also state clearly that owners will be responsible for paying their share of the master policy deductible on claims involving their units. You can’t repeat that message too often. Despite decades of educational efforts and kilos of ink devoted to the subject, many owners (some estimates say more than half) still fail to obtain the coverage they need.
AMEND THE INSURANCE PROVISION(S) OF THE GOVERNING DOCUMENTS TO ALLOW BOARDS TO CIRCUMVENT THE COVERAGE REQUIREMENTS, IF NECESSARY, TO OBTAIN INSURANCE FOR THE COMMUNITY.
This amendment will give boards the authority and flexibility they need to address current insurance challenges as well as those associations will face in the future.
One final bit of advice: Boards should explore all reasonable options for managing rising insurance costs. But they should also recognize that the biggest insurance risk associations face is the risk of being uninsured. A premium that seems “unaffordable” will look like a bargain compared to the cost of a major damage claim the association’s insurance doesn’t cover.
If you have any questions regarding your association’s insurance, please contact Attorney Mark Einhorn at meinhorn@meeb.com.