Shopping for Insurance Can Be Challenging — Managing Claims Can Be Even Harder

If you ask condo association board members to list their most challenging tasks, maintaining appropriate insurance coverage for their community would probably rank at or near the top. Managing insurance claims - almost as complicated and often more difficult ─ wouldn’t be far behind.The first question many boards ask about an insurance claim is whether they should file it at all. That question arises most often on smaller claims that are close to the deductible and may fall short of it. Because excessive claims can increase an association’s premium and may lead an insurer to cancel coverage entirely, many boards are doing all they can to minimize the claims they file.So what do you do if you haven’t yet obtained damage estimates and don’t know what the repair cost will be? If the cost is under the deductible, you don’t want to report the loss; but if the repair cost exceeds the deductible by a significant amount, you certainly do. Waiting until you receive the repair estimates isn’t always an option, because delayed reporting of a claim may threaten the coverage available for it in some cases. That is particularly true when you’re dealing with water damage, which has to be addressed quickly to prevent mold. (Most property policies set a $15,000 cap on coverage for mold damage and exclude coverage entirely for Directors’ and Officers’ and liability claims related to it.)The best strategy, in most cases, is to go ahead and file the claim (and if you’re dealing with water, take immediate steps to mitigate the damage); if the claim falls below the deductible, you can withdraw it, usually without penalty, any time before the insurer cuts you a check.“I can’t tell you categorically that a withdrawn claim won’t be considered [when your policy is up for renewal],” Robert Masse, an agent at W.T. Phelan & Co. Insurance, told me when I posed that question to him. “But depending on the cause of the claim and the association’s claim history, a withdrawn claim typically won’t be held against you.”Unless your association has a particularly bad claims history, the risk that reporting a claim will boost your insurance premium is almost always outweighed by the risk that not reporting, or reporting late, will leave you with inadequate insurance – or none at all – to pay for the damage.The advice for property damage (err on the side of reporting) applies to liability claims, as well, where timely reporting is always essential. Boards should be proactive in this area. If a resident slips on the ice or threatens to sue the board for any reason, don’t wait for a suit to be filed; alert your carrier that a claim is possible. A ‘heads up’ notice to the insurer will protect your coverage if you ultimately file a claim, but shouldn’t affect your premium if you don’t.Deductible DisputesMost of the questions we get from association clients involve how to manage claims rather than whether to report them. And many of those questions involve deductibles — a perennial source of confusion for condo owners and the cause of considerable friction between them and their boards. These disputes occur when the master policy covers damage to an owner’s unit , as it would if a common area component – a broken water pipe, for example, or a leaking roof – causes the problem.Our position is, if the documents are silent, as they usually are, the owner entitled to the coverage must pay the master policy deductible. If multiple units are involved, the deductible obligation should be apportioned among the owners, based on the percentage of their claims. An owner who receives $70,000 of a $100,000 claim should pay 70 percent of the deductible; the owner receiving $30,000 would pay 30 percent.The only exception to the ‘owner pays the deductible’ rule would be if the association were somehow negligent. Owners often assume that if a roof leaks or a pipe breaks, the association is negligent, by definition. But that’s not the case. If a roof has leaked 10 times and the board hasn’t repaired it, that would constitute negligence, to be sure. But if the roof has never leaked before, the board hasn’t been negligent and the owner whose unit is damaged by the leak should pay the deductible.We suggest that boards adopt an insurance resolution clarifying that obligation. The resolution should also note that owners are responsible for insuring their personal property and that the HO-6 policy providing that coverage also typically provides coverage for the master policy deductible, as well.Disputes over deductibles don’t usually result in litigation, but they are often heated, time consuming and frustrating for owners and boards. They are also unnecessary. These disputes would disappear tomorrow if owners purchased the HO-6 policies they need. But despite the best efforts of boards, managers and insurance agents to explain why this coverage is essential, only 50 percent of owners, at most, have it, leaving 50 percent with the risk that they will have to pay a deductible out-of-pocket.That might not have been a major concern 10 years ago when deductibles were $1,000 at most. But as more associations increase their deductibles to hold premium costs down, an owner’s out-of-pocket cost will be at least $5,000 and could be $25,000 or more, creating a financial burden for many owners and what could be a financial disaster for some.Settling UpThe insurance settlement can also become a source of conflict between boards and owners, if owners dispute the insurer’s estimate of the repair costs. Actually, this is a dispute between the owner and the insurer, complicated because it’s the association that purchases the master policy and is the insurance company’s client.Insurers typically require the association to acknowledge acceptance in writing of the damage estimate. Associations, in turn, should insist that owners receiving the insurance proceeds sign off on the estimate as well, so they can’t argue later that the settlement was inadequate and insist that the association make up the difference.Most carriers will deal only with their client (the association); they won’t deal with individual owners or their attorneys. When owners reject the insurance settlement, we advise associations to name the owner’s attorney as special counsel to the association for the sole purpose of dealing with the owner’s claim. This keeps the association out of the dispute and (equally important) off the hook for paying the owner’s legal expenses.Holding BackWhen the insurer pays a claim under the master policy to cover damage to individual units, the association is responsible for distributing the proceeds. The board can turn over the entire amount to the owners ― reasonable if the claim is small ─ or release the funds in phases as the repairs are completed, which is the option we recommend when dealing with a sizable claim. Boards have an interest in insuring that owners repair their units because their failure to do so could affect common areas or other units. A mold outbreak, for example, could easily spread beyond the infected unit. Releasing funds in stages allows the board to verify that the repairs are being made. And holding back a percentage of the proceeds until the repairs have been completed, which we also recommend, will help to ensure that the contractor completes the work.Insurance policies typically pay “full replacement cost” - 100 percent of the cost of restoring property to its pre-damaged condition. But insurers will typically pay only the depreciated value of the repairs up front, retaining what is known as a “supplemental roll-out” (the difference between the depreciated value and the actual repair costs) until the repairs have been completed. That gives owners another incentive to repair their units, beyond the obvious desire to mitigate the damage to them: They can’t collect the full amount of the insurance claim until the repairs have been completed.Mortgage lenders also have an interest in ensuring that the property securing their loan is repaired if it is damaged, so they typically require that borrowers (and their insurance companies) notify them if a property suffers a sizable loss. Community associations have no such obligation to notify lenders if a unit is damaged, but erring on the side of caution, they may want to provide notice anyway. However, because mortgages are sold and resold frequently, identifying the current holder of the loan could be difficult, and may not be possible. Tracking this down may well be worth a try, but it probably isn’t worth excessive effort by the manager or the board.