It is a seemingly minor incident. An elderly shareholder in a 12-unit Manhattan co-op slips and falls in the basement. He thinks it is no big deal, but his wife mentions it in passing to another shareholder, who also happens to be on the board of directors. Some weeks later, the man begins complaining to his wife of headaches, so they go to the hospital. Once there, an examination reveals internal hemorrhaging.
Six months later, the elderly couple is selling their apartment. At the closing, the building's attorney, James Samson, a partner in Bangser, Klein, Rocca & Blum, asks the pair to sign a standard affidavit acknowledging that they had not been involved in any accidents on the property. "We can't sign that," says the wife, who happens to be a lawyer herself. "We had a slip-and-fall a few months ago and we may be suing."
Surprised, Samson contacts the board. No they knew nothing about it, says the president. Fine, responds the attorney, but notify your insurance carrier immediately. The carrier is contacted, it investigates and coverage for any future claim on this matter is denied because of late notice. One of the board members knew about the case, yet the board had failed to inform the carrier in a timely fashion.
The real problem was one of communication. Although the board member knew about the case she had failed to tell the rest of the board because she didn't realize the event's significance. "It was that simple comment [that her husband had slipped] that the wife had made to the shareholder," explains Samson. "The shareholder happened to be a board member, so the insurance carrier took that as knowledge by the board, even though it was [reported in] a non-notification context and the board member [had] never informed the rest of the board."
You are now entering "The Insurance Zone," where a seemingly small incident can become a big problem and a supposed no-brainer of a decision can become a Byzantine puzzle. "In general, I don't think people understand what their rights are under an insurance policy," observes Lynn Whiting, director of management at Argo. "What is the proper protocol from A to Z? Who is responsible for what?"
Such questions are being raised at a particularly difficult time for homeowners, when insurance rates are rising and requirements are getting more stringent. "I have found that a lot of insurance companies over the last couple of years have gotten very tough on their claims and that a lot of people get denied," Samson reports.
Indeed, many say that with more and more exclusions in the wake of 9/11, mold contamination, and asbestos, making a claim on your policy, once a relatively simple task, has become more complex and that boards that don't prepare for it are in for trouble. "People really have to scrutinize the policies and understand the process," Whiting says, "because things have changed."
Essentially, there are two types of claims that boards should be interested in: property damage and liability. Although there are similarities between the two, there are also some significant differences in how you report a claim.
Property damage can range from the relatively minor incident - a pipe bursting in the walls causing leaks in one or more apartments - to the major - a fire that destroys much of the building. In the case of such damage, the question usually arises: what is the co-op responsible for? The simple answer is everything in the walls (pipes), outside the walls (the facade, the roof), and the common areas.
But it can get tricky. "Betterments" - improvements put in by a past or present owner - are not the building's responsibility. That was proven in a case involving a Manhattan co-op in which a pipe burst within the walls. As a result of the rupture and the ensuing water, one shareholder sustained water damage to the parquet floor in his apartment. He had changed his floor by having the original finished brown wood refinished white. As a result of the water damage, his floor needed to be replaced. In a lawsuit, the owner sought $4,871.25 from the cooperative for the cost of replacement. The co-op conceded that it had the responsibility to replace the floors; but it was only willing to repair, replace, or restore them to the original, unimproved condition. The court agreed.
"If the damage results from something out of the building's control - like the bathtub above that overflowed and wrecked the cabinets, then you'd go to the unit-owner and say, 'Go under your own insurance.' The biggest thing is to make sure everyone in the building has their own insurance policies," says Michael Spain, president of the Spain Agency, an insurance brokerage.
Some warn that when making claims, boards must understand their policies thoroughly and not rely on the interpretation of the carrier because, says Samson, "the insurance company is looking to pay as little as possible."
With that in mind, when filing claims, you should always keep your professionals informed. Samson recalls a co-op he represented which filed a claim and was rejected - only to learn a year later that it probably could have won if its attorney had been involved. There had been a gas leak in the building so the gas had been turned off. When the utility fixed the leak and turned the gas back on, there were now 100 leaks. The co-op filed a claim. The carrier denied coverage, because it said the leak was the result not of a catastrophic accident but of a natural and slow deterioration of the gas lines that the board should have anticipated.
"Remember, the insurance company reads their policies in the way most favorable to their interests," Samson notes. "In this case, because they were making the determination in their own favor they didn't point out that there's another section of the policy that might apply. The first gas leak resulted from deterioration, the second gas leak resulted from [a utility error]. So, on the first leak they were correct but on the subsequent leaks they were absolutely wrong."
Once the damage is done, your first step is to protect what's left from further harm. "If there's a hole in the roof due to a fire, you need to make sure that the roof is covered up quickly," explains Edward J. Mackoul, vice president at Mackoul & Associates, an insurance brokerage, "because if rain comes the next day and starts causing more damage, the insurance company can technically exclude any of the damage that happens after the fire because your responsibility is to take reasonable steps that there's no further harm." In addition, says Mary Lesnewski, senior vice president at The Whitmore Group, a brokerage, the boards should obtain an immediate photographic record of any destruction before the cleanup/restoration crew begins work.
Simultaneously, you should contact your broker or the insurance company. The carrier will send out an adjuster.
ADJUSTING THE SITUATION
After reporting the claim, the next step is to meet with an adjuster. This is the representative of the carrier who evaluates the extent of the damage and the amount of the claim. The adjuster will bring in his experts - contractors, engineers, and other building professionals - who help him size up the situation.
"You may have a contractor you want to use to make the repairs, and the insurance company may have their own ideas," Spain says. "They may bring in their own specialist. You usually end up using your own guy, but his price may have been chiseled down a bit. You look at something and say it's $50,000 [to fix], the insurance company says it's $35,000, and you end up settling at $41,000."
One issue you may be arguing about is repair versus replacement costs. The carrier may be insisting that an item can be repaired, and your experts are saying that it has to be replaced. Spain recalls a Riverdale cooperative where the disagreement got out of hand. The property had a central air conditioning unit that died in the middle of a heat wave. Although the board hadn't received approval to replace the AC unit from the carrier, the air conditioning specialist said it could not be repaired. So the board ordered it replaced with a newer model. The carrier balked.
"We ended up with a problem," admits Spain. "We sat down with the building's contractor and the insurance company's independent engineer, but the contractor really didn't make a good case for why [the unit] couldn't be fixed. So, the point is, you always want the insurance company signing off on that process. That building went ahead and did it, but it may have been a miscommunication - and it was hot."
Generally, experts agree that a building should have a good set of reliable professionals to offer advice in negotiating a claim - electricians, plumbers, engineers - and that a board needs to have a point person - lawyer, manager, or broker - to negotiate big claims. For that role, the property could also turn to a public adjuster. But public adjusters are only really necessary on large claims that involve extensive property damage. It doesn't pay for anyone on a claim that is less than $50,000. "Public adjusters make sense on larger claims," observes James Fenniman, executive vice president at Bollinger New York, a brokerage.
Scorned by some, praised by others, the public adjuster can be very helpful if you get the right one. Charging anywhere from three to ten percent of whatever settlement is made, he, too, will bring in his team of experts, evaluating the damage and negotiating with the carrier's adjuster.
"Public adjusters exist because insurance companies want to pay the least amount that they can on a claim," says Fred Yutkowitz, a public adjuster with Fairview-Licht. "On most claims, it's not scientifically possible to say exactly what the damage is. If you have a fire, you can tell what's directly damaged by what's charred, but as you get further and further away from the damage it gets grayer and grayer as to extent of what the damage is."
For instance, in evaluating construction costs, a wood floor can cost anywhere from $7 to $11 a square foot for the same material. The insurance company will argue for the $7 price, while the insured will say it is $11. "Basically, public adjusters exist to make sure that the insured get the benefit of every doubt, that every aspect of coverage is explored, and that the scope of the loss is fully addressed in the settlement process," says Yutkowitz.
"I hire a contractor who writes an estimate on the loss, as does the insurance company," he adds. "Then we negotiate the differences between estimates. And since my contractor is there at the same time as the insurance company's contractors, at least we will agree on items of scope. They start at the same place and they end at the same place, so it makes the process far more comprehensible. You send two contractors to a building at different times, they may address different issues, it's much harder to compare the two estimates."
"They may add value," says Fenniman. "They do a lot of the work that the building would have to be doing: preparation, writing up the claim, negotiating with the insurer directly. There are some very good ones out there - and some with a not very good reputation."
Liability claims can often be challenging. Unlike property damage, personal injuries - like slip-and-fall cases - are not always immediately apparent. And, therein, lies the rub. If the board doesn't know about a case, it is not responsible - but defining what the board knows and when it knows it can be the stuff of lawsuits. The insurance company can take a "late notice" position, saying, in effect, "Look you didn't notify us in the time period we agreed upon, so we're not covering you."
This usually becomes a significant problem when, for various reasons, boards are slow in reporting incidents that could lead to claims. "In most states, it's no harm, no foul," explains Samson. "If the insurance company has not been prejudiced by the delay, then the insurance company has to stand up and take the case and pay the claim. But in New York, it's an absolute: you waive your right if there isn't quick notice, even if there is no harm to the insurance carrier by the delay."
Often, such negligence occurs through ignorance of the consequences. Someone may slip and fall, says Lesnewski, and he didn't think he was injured, so the board doesn't bother to report it. "But it's really important to put the carrier on notice that there was an incident," she says.
Sometimes, late reporting occurs because of a lapse in communication: an incident report may have been filed with the wrong person, or the super, staff, or board member may not have reported it at all. "Say this letter [alerting the board to a slip-and-fall accident] is sitting in somebody's inbox for a month," says Maryann Iannuzzo, first vice president at Kaye Insurance Associates, "then you find it and you give it to your secretary, and it takes another two or three days for him to send it to the insurance company. They can receive it, yet deny the loss for late notice."
It is crucially important, therefore, that everyone who represents the building - from the board members and the manager to the superintendent, doormen, and porters - understand the necessity of reporting accidents of any sort to the full board and that they notify the broker or insurance company. Many buildings even have formal incident reports, which must be filed even if the event seems minor.
Sometimes, boards do not notify their carrier because they are afraid that frequent notifications will lead to an increase in premiums. Generally, that is not so, say experts. It is acceptable to report an incident for informational purposes only.
It is more important that you have a report on file that reserves your future right to make a claim. "You can put the insurance company on notice so that if something comes down the road, it's on file that this was reported," Mackoul notes. From the carrier's point of view, knowing there's a potential problem can help it better prepare. In a slip-and-fall case, that could mean investigating the location of the accident soon after the incident has happened and not months later.
But, adds Iannuzzo, "You have to be very cognizant of what the insurance company is doing with those notices. If they're being reported for record purposes only, there is language you can use to protect your rights: 'We are reporting this situation that may give rise to a claim, for your records only,' so that the carrier knows that that's the intent of the notice, so they don't start knocking on doors and saying, 'We understand you may have a claim against our client and we want to settle it right away.' The insurance company should not give you a premium increase based on frequency of reporting, only for frequency of claims."
TRUST BUT VERIFY
Unlike property damage situations, in liability cases the board does not usually deal with an adjuster. But it could be dealing with an insurance company's lawyer. There is good news and bad news about that. The good news is that the insurance company supplies a lawyer. The bad news is that the insurance company supplies a lawyer. Co-op and condo attorneys offer warnings about complex liability cases - involving discrimination, for instance - which insurance carriers will defend for free. The situation is a potential conflict of interest.
"You've got to be very careful. The lawyers assigned to these cases are paid for by the insurance company," says Samson. "You have to be aware that even though, technically, they are the attorneys for the co-op in the lawsuit, they're not really. Whose lawyer are you, anyway, when you're being paid by the insurance company? Lawyers and dogs are very loyal to the hand that feeds them."
"Some carriers will provide a defense but not indemnification," observes attorney Robert Tierman, a partner in Litwin & Tierman. "The carrier is providing a defense but they don't really care about it because they are only responsible for their own legal fees. If they don't care that much, then, they're not going to fight that hard. Insurance defense firms are known, in general, for putting very inexperienced people on the handling of litigations, at least in the very early stages, and they're frequently pushing the board to compromise and settle."
If you are going to use an insurance company's attorney in a lawsuit arising out of a claim, it is a good idea to have your own lawyer supervising - or at least monitoring - the steps being taken.
Tierman, not surprisingly, believes a property is better off utilizing its own co-op/condo attorney. "They'd have a better chance of winning because they understand co-op issues and the implications of co-op law better, generally, than some random defense counsel. But the co-op unwittingly gets itself trapped in that situation because of the lure of having free defense for this lawsuit. Some have the attitude that 'a lawyer's a lawyer, cases are cases, and if the insurance lawyer couldn't win this neither could have our co-op counsel. So why should we spend the money?' And I think that's very naive. It does matter significantly in the success of the litigation who the counsel is and how they fight for you."
In the final analysis, the savvy board is the one that follows the old dictum: trust but verify. When making or defending a claim that could cost you thousands - or even millions - of dollars, you can do no less.