INSURANCE TRAPS FOR THE UNWARY CONDOMINIUM

Condominium insurance is a complicated topic that is a consistent source of headaches and worry for property managers and board members. If I could give only one piece of advice it would be to work with a reputable agent who specializes in condo insurance.  In this area of insurance, it is simply not enough to have some familiarity with condo insurance.  You need an expert who knows all of the ins and outs, all of the pitfalls, and all of the ways you can be underinsured in the event a major calamity happens.  Beyond that important advice, the purpose of this article is to highlight a few key issues when it comes to condo insurance. Co-Insurance Penalties: This term would make more sense if it were called the “Under-Insurance” penalty. An example is the best way to understand this concept:  Let’s say your building would cost $1,000,000 to fully rebuild after a catastrophic casualty.  However, based upon some poor advice from an inexperienced agent, the limit on your master insurance policy is only $500,000.  Now let’s assume a roof leak results in $50,000 in damage to the building.  Since this building is under-insured by 50%, the insurance company is going to pay out only $25,000 of the $50,000 claim (less the deductible). The critical point here is that even though the $50,000 claim is well under the $500,000 policy limit, the insurance company is going to hit you with the co-insurance penalty which, in this example, is 50%. In the event of a huge loss, the co-insurance penalty would cause tremendous financial problems for the condo trust and all owners, and would almost certainly result in the board, management and agent being sued for the failure to adequately insure.  Very few owners have the financial wherewithal to payout tens of thousands of dollars out of pocket to cover insufficient insurance coverage and that inability to bridge the gap could leave the Trust unable to rebuild. How much to insure for: The issue noted above of being underinsured is why it is absolutely critical to insure for the correct amount. While insurance professionals are very good at estimating the proper amount of insurance needed, they are not appraisers and they are not builders.  Likewise, board members typically do not have the type of expertise necessary to accurately calculate the amount of money it would cost to rebuild the condominium.  Very few folks do. For this reason, it is advisable for larger associations to obtain an insurance appraisal from an experienced professional. A real estate appraiser is best suited to inform your board of how much insurance is needed so that your association is fully protected.  With the insurance appraisal in hand, you can work with your agent to obtain the proper amount of coverage.  Spending some money now will allow you to rest easy later. Guaranteed Replacement Cost:Let’s say a hurricane sweeps in and destroys communities all over the south shore, much like what happened in Texas after Hurricane Harvey. If your association falls victim, not only are you facing the costs of a potential rebuild to all or some of the buildings in your community, but you are also up against innumerable other communities and home owners who are also seeking qualified contractors to perform work at the same time. What costs $100,000 in labor and materials today may cost $300,000 when demand surges after a catastrophe. For the community that is properly insured at 100% of the replacement cost of a rebuild during normal times may be left with a large insurance deficit due to increased costs.  However, with a Guaranteed Replacement Cost endorsement on your master policy, the insurance company will pay for the necessary costs of a rebuild regardless of a surge in prices.  The endorsement can be seen as an extra layer of protection for your association. Conclusions: In closing, my advice to all managers and board members is that it is always advisable to periodically review your insurance coverage with your agent. Perhaps every 2-3 years.  It is far better to put too much time into insurance coverage than not enough.  If disaster strikes, you will be thankful everything is covered. It is also advisable to have the association’s legal counsel review your governing documents to see if the insurance provisions contained therein could use a more modern update. For example, older documents typically do not expressly deal with the issue of who pays the master policy deductible.  Those owners receiving insurance proceeds should be responsible for covering the deductible given that owners can inexpensively insure for this amount through their own homeowner’s policy.  An insurance resolution can make the handling of the deductible much more definitive and easier to handle. For any questions regarding this article, please contact Dean Lennon at dlennon@meeb.com.