One year after co-op and condo boards were rocked by news that they had to seek additional insurance riders on terrorism and mold insurance or risk being in breach of their underlying mortgage requirements, co-op and condo boards are swimming around a new wave of financial obstacles: the news that three household name insurance companies have been downgraded or gone out of business, making the pool of insurers writing residential insurance even smaller.
According to A.M. Best, one of the nation's leading insurance company rating firms, the three affected companies are Atlantic Mutual, Royal & Sun Alliance, and Kemper. Kemper is in liquidation, and Atlantic and RSA have both been downgraded: the former from an A rating to B++ and the latter from a B+ to B. The result, say attorneys and insurance brokers, is that co-op boards are finding themselves facing a 10 to 30 percent increase in insurance costs, as they switch to new carriers from their old. And the costs in turn are being passed onto owners.
Geoffrey Mazel, a partner with the law firm Hankin, Handwerker & Mazel, says his clients are in "sticker shock" over the cost of switching insurance carriers, but have few options except to dig deeper into their pockets or risk being "in breach of their mortgage with their lender."
Mitch Unger, the controller with John B. Lovett & Associates, says three of the co-ops his company manages were in the middle of a mortgage refinancing when they discovered they had to switch insurers because their primary carrier had been downgraded.
And the results weren't cheap. An 86-unit co-op on Fifth Avenue, which carried $37,000 worth of insurance and was looking to refinance a $4.4 million mortgage, had to switch carriers, paying $10,000 more this year. In Queens, a 70-unit co-op, which went through a $1.9 million refinancing, had to switch insurance carriers. Its coverage costs rose from $36,000 to $43,200, a 20 percent increase. In a third instance, says Unger, the bank handling the refinancing was willing to let the co-op keep its downgraded insurance company during the refinancing, but mandated that the property switch carriers at the time of insurance renewal or risk being in breach of the terms of the refinancing.
"This has been going on for the past year," says the agent. "You are in the middle of their offer - in the middle of refinancing with the bank - and there really is not much play" in negotiating terms.
It is a shrinking market, agrees Warren Heck, chairman and CEO of Greater New York, which still writes co-op insurance, along with American International Group, and Fireman's Fund Insurance Company. While Heck maintains that the steep increases in insurance over the past three years are poised to level out this year - as the insurance companies have found their stride after struggling with low reserves and mandates from Congress to provide terrorism insurance - that does not offer much solace at the moment. Many boards are currently receiving letters from their mortgage companies warning them that their insurance company has been downgraded and they need to find a new carrier.
"We're scrambling. Every broker dealing with any type of co-op and condo is dealing with it," says Robert Mackoul, president and CEO of the insurance brokerage Mackoul & Associates. Where once there were probably nearly two dozen companies writing habitational insurance in New York, today there is only a handful. The lack of carriers has put tremendous pressure on boards to meet their underlying mortgage requirements. "We have to change insurance carriers regularly, because the bank will not close on a refi[nancing] unless the insurance company meets with their approval. And that can have dramatic implications for the co-op."
So, what can boards do to protect themselves from potentially staggering increases? First, seek competitive bids, using different brokers. "We've done it for a number of co-ops and condos. In the end, it provides dramatic savings," maintains Herb Feldman, president and CEO of Alpha Risk Management. At the same time, boards should be planning now for the eventuality that their insurance rates will go up.
While some banks may still be willing to be flexible, boards need to accept that switching carriers is going to become standard practice, particularly if the market continues to shrink. "You have to look at what type of insurance you currently have, what loans the banks are offering, and what they will accept," explains Unger. "It's just part of the equation at this point. You may have to switch insurers. And if you have to change, your annual costs are going to rise."