Published on: November 16, 2017
On November 2, our own Stephen Marcus and representatives of Rogers & Gray Insurance held an insurance seminar for board members and managers. If Cher could help us turn back time, I would urge everyone in the industry to attend as the presentation was incredibly helpful to understanding the tricky world of condominium insurance. What follows are some important takeaways from the seminar.
I think 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, you’re only insured for $500,000 upon the advice of your cousin’s old roommate who is now an insurance broker. 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 bottom line is that even though the $50,000 claim is well under the $500,000 policy, 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.
How much to insure for:
The issue 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. Few folks do. For this reason, it is advisable for associations to obtain an insurance appraisal from an experienced professional. The appraiser is best suited to inform your board of how much insurance is needed so that your association is protected. With the insurance appraisal in hand, you can work with your agent to obtain the proper amount of coverage. Spending some money now results in piece of mind now and headaches 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 the work.
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.
There was much more discussed but the purpose here was to discuss some of the big takeaways that I personally had. It is always advisable to periodically review your insurance coverage with an agent who has both knowledge and experience of condo insurance. Not all agents have familiarity with condo insurance. It is also advisable to have your condo attorney review your governing documents to see if the insurance provisions could use a more modern update.