Securing the appropriate insurance for their community has always been challenging for condominium board members. But climate change and inflation are making that task exponentially more difficult.

These problems have become acute in Florida and California, where soaring disaster claims (hurricanes and the collapse of a condominium tower in Florida and wildfires in California) have led many large insurers to cease issuing new policies in those states while doubling and tripling premium costs for existing policy holders. Some major carriers have withdrawn from these markets entirely.

The headlines have been filled with reports of insurance nightmares for owners of single-family homes and condominium owners alike. One recent example: Unable to find insurance in the primary market, a 240-unit California condominium went to the more expensive secondary or surplus lines market. As a result, the premium for its master insurance policy increased from $47,000 for $50 million in coverage to $600,000 for a $10 million policy.

We haven’t seen comparable problems in New England….yet. But we’ve seen glimmers of them. There is no question that the headlines we’ve seen elsewhere are heading our way. The only question when they will arrive. What will your board do if your association’s premium doubles, triples or more from one year to the next?

Before you do anything, you (and your attorney) should review state law and your association’s governing documents to see what they require. You want to be sure that any alternatives you consider meet those requirements.

**There are four ways to cope with rising premium costs:**

Find another carrier offering a better deal for the coverage you have. Unlikely, but possible.
Increase the master policy deductible. Definitely worth considering.
Explore financing alternatives. There aren’t many and they aren’t ideal, but they may be necessary.
Reduce the master policy coverage. This is never a first choice, but may be a last resort for associations unable to find other feasible options.

Starting with the least desirable solution (reducing coverage), some associations might consider replacing the “all-in” master policy overage that is standard in New England, with “bare walls” coverage that we don’t see much around here anymore.

All-in policies cover both the common areas and the interior of individual units, including everything attached to them – light fixtures, flooring, plumbing, cabinets and the like. A bare-walls policy also covers common areas but only the interior shell of individual units – walls, floors and ceilings─ leaving it to owners to insure the structural components of their units. (Neither all-in nor bare-walls policies will insure an owner’s personal belongings.)

There are some obvious problems with bare walls policies, primary among them: The governing documents of most communities and some state laws require associations to insure 100 percent of the replacement value of the community – coverage a bare walls policy would not provide. Failure to comply with the insurance requirements of the governing documents would potentially put homeowners in default of their mortgages. It would additionally run afoul of secondary mortgage market rules, which also require 100 percent coverage, making it difficult for owners to sell their units or refinance an existing loan.

Associations can deal with this issue by requiring owners to obtain unit owner policies that fill the coverage gap. Boards can adopt a resolution requiring owners’ insurance, but it would be better to have owners amend the governing documents to establish that requirement instead. Associations that want to obtain a bare bones master policy would also have to amend their documents to eliminate the 100 percent insurance requirement.

The amendment process will trigger notice to mortgagees, who may object to the change. Amendments also require the approval of a super majority of unit owners. Boards considering a bare-walls policy should plan to spend a lot of time explaining the move to owners, and should be prepared for the possibility that they won’t approve the change.

**Increase the Master Policy Deductible**

This is the most straightforward and probably the most desirable way for most associations to reduce their premium costs. Increasing the deductible will lower the premium both directly (the higher the deductible, the lower the premium) and indirectly – by reducing the number of small claims the association files. Increasing the deductible will also increase the insurance liability of owners, and boards should make sure owners understand that risk.

We suggest that boards amend their documents to specify that owners are responsible for paying their share of the deductible on master policy claims involving their units, and to explicitly require owners to obtain unit owners’ policies that provide the coverage they need.

If one insurer is hiking rates it is likely that others are, as well. But looking around is never a bad idea. Insurance brokers or insurance advisers who specialize in condominium insurance can help boards assess their coverage needs and explore insurance alternatives. As part of this shopping process, boards should consider what they can do to become more desirable to insurance carriers. How can you improve the association’s insurance profile? How can you reduce its insurance risks? Here are a few ideas.

Create a rigorous preventive maintenance plan and follow it. Anything that can bend, warp, chip, buckle, sag, break, short circuit or leak should be on that maintenance list, targeted for regular inspections and immediate attention when repair or replacement is warranted
Proactively replace rubber hoses on washing machines and dishwashers.
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.
Keep walkways and parking lots clear of snow and ice in winter to reduce the risk of slip-and-fall accident.

These are just a few suggestions. You want to look at your community through the eyes of prospective insurers. Soaring claims and settlement costs are making risk-averse insurers even more risk averse; many will respond favorably if you demonstrate that your association is, too.

The first reaction to an exorbitant premium increase is likely to be: “We can’t afford this!” The second reaction, after the blood pressure falls, should be: “How can we pay this bill?” There are a few options to consider:

Levy an assessment on owners- never popular but sometimes necessary.
Increase common area fees – equally unpopular but (like assessments), sometimes necessary.
Obtain 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.

As boards assess their insurance coverage needs and costs in an increasingly challenging insurance market, they should consider that the biggest risk community associations face is the risk of not having the insurance they need to pay for damages they suffer. Against that backdrop, a premium that seems unaffordable is likely to be far more affordable than the cost of paying for an inadequately insured catastrophic damage claim.

Contact Janet Aronson with questions or concerns regarding rising insurance premiums.

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