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 Some major carriers have withdrawn from these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.
Going Bare
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.
Shop the Policy
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 accidents
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.
Consider
Funding Options
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.
A
partner in the Braintree firm for Marcus, Errico Emmer & Brooks, P.C., Janet Aronson concentrates her practice in the
representation of condominium and homeowner associations in Massachusetts,
Rhode Island and New Hampshire. Her
practice includes all facets of community association representation, ranging
from document review and interpretations, administration and facilitation of
association meetings, enforcement of covenants and restrictions and lien
enforcement matters. She can be
contacted at jaronson@meeb.com.
