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What happens when insurance coverage is nonexistent or insufficient.
Getting your insurance company to pony up can be a complex affair. Here’s how one co-op did it, helping shareholders collect after catastrophe struck.
This is the complex insurance story – whose ending remains to be written – of Castle Village and its 500-plus shareholders. For those of you who haven’t recently traveled north on the Henry Hudson Parkway, and haven’t used the Riverside Drive ramp at 181st Street, and who haven’t read the newspaper or seen the TV news in the last year or so, take note: a portion of the 70-foot high wall owned by Castle Village fell onto Riverside Drive and the Henry Hudson Parkway on May 12, 2005. Therein lies this tale (for more details of the incident and its aftermath, see “The Wall Came Tumbling Down,” Habitat, October 2006).
Is Castle Village’s story relevant to you and your co-op or condo? You bet.
It is a tale of certain types of insurance and coverage limits typically available to co-op and condo shareholders. No less important, it is the story of what happens when the coverage is nonexistent, insufficient, or disputed by carriers.
The total cost to Castle Village to satisfy the demands of New York City and rebuild the wall is fast approaching $30 million. Of that amount, shareholders have been assessed $11 million, all of which must be paid in calendar year 2006; other sources are being looked to for the remainder.
If your co-op or condominium faced a similar catastrophe, and you and your fellow shareholders were assessed $11 million, what would you expect to collect from your co-op/condo/homeowners’ insurance policy? What coverage does your association have? Better to ask now than to be sorry later. (Because of ongoing litigation initiated by Castle Village Owners Corp. against its former insurance carriers and others, the focus of this article is limited to the insurance issues of its shareholders and not that of Castle Village itself.)
Not a Second Time
“Too little, too late” can be a financial disaster for co-op and condo shareholders once a crisis has occurred. Some co-ops require shareholders to carry homeowners’ insurance. Some specify minimum coverage requirements. For condominium owners, the lending institution typically dictates minimum insurance requirements before closing. Co-ops that require certain minimums may unintentionally be misleading shareholders into thinking these minimums are all the coverage they need. The operative words are “some” and “minimum.”
In fact, many co-ops have no mandatory requirements at all. What happens when a crisis occurs? What type and how much coverage is appropriate, and at what cost?
Homeowners’ coverage typically includes both property or first-party coverage, and liability or third-party coverage. In addition to the basic policy, riders are available that either modify levels of coverage already specified in the policy or add additional coverage. One such rider is appropriately named a “Loss Assessment Rider,” which typically appears in both the property and liability sections of the policy. Loss assessment riders are designed to cover shareholders for certain types of losses incurred by their associations, which are then invoiced to shareholders in the form of a “loss assessment.”
Generally speaking, insurance coverage under this type of rider is based on whether or not the loss, had it been incurred directly by the shareholder, would have been covered under the policy. If the answer is yes, you may have coverage. If the answer is no, you’re probably out of luck.
Beyond the basic question of whether you have the right type of coverage, there is an equally important question: how much coverage should you carry? In the case of Castle Village, over 30 different carriers insured its 500-plus shareholders. Some policies were purchased directly from insurers, others through brokers. Logically, these professionals should have offered advice as to the types of coverage and riders available and the premium cost. All too often, that was apparently not done.
Insurance coverage decisions are typically made in good times. Don’t wait! Don’t procrastinate! Upon making a detailed analysis of the 500-plus policies, I found that there were significant coverage differences among different carriers and even within policies issued by the same carrier. The most significant difference, as it relates to the case of Castle Village, was the existence of a loss assessment rider and its limits and exclusions. Coverage limits ran the gamut from none at all to more than 100 percent of individual shareholders’ loss assessments.
The characterization of the loss can determine the ultimate coverage decision by the carrier. To establish whether or not you have coverage, the first question to be asked is: was it a property loss or a liability loss? The second question to be asked is: what are the exclusions under your policy? Typically, first-party claims – those for damage to your property – are subject to far more exclusions than third-party claims – those for damage to the property of others.
How are such determinations made and by whom? The decision as to the type of claim or claims filed will probably be made by your association and will therefore affect both the shareholders’ and the entities’ ability to collect on their respective policies. The rationale behind the association making such a determination is simple; it will seek to recover its costs from the association’s insurers and other possible defendants. In doing so, it may establish the criteria that will usually apply to shareholders in dealing with their homeowners’ insurance claims.
Money (That’s What I Want)
Establishing coverage for Castle Village’s shareholders was an excruciatingly long and complex process that had to be repeated as many times as there were carriers. All carriers initially denied shareholders’ claims, saying that the nature of the loss was “property” and that the loss was excluded under one or more exclusions which the carriers had no ability to prove, but which would have required shareholders to go to court to obtain the coverage they rightfully thought they had purchased. Not exactly an attractive position to be put in if you’re required to fight the battle alone.
It was only when shareholders were advised to refile their loss assessment claims under the liability sections of their policies and, further, to properly characterize them as third-party losses that insurers showed a willingness to revisit coverage and ultimately to start paying – and then only after considerable effort.
The decision to re-characterize the loss as something other than a property loss was made in consultation with Castle Village’s special litigation counsel. In our case this re-characterization was possible because the wall fell onto Riverside Drive and the Henry Hudson Parkway, causing damage to both. In less than two days, the city removed over 3,000 truckloads of rock and soil from the Parkway and our property. As part of its effort, the city demolished an additional several hundred feet of our wall that it deemed necessary to allow a partial reopening of the Parkway (as of October 2006, one lane remained closed, as did all of Riverside Drive from 181st Street to the Parkway).
Whether or not this was necessary was not a question Castle Village had the opportunity to answer. Before we knew it, the city acted and the damage had been done. The result of the city’s efforts was to leave Castle Village with an illegal slope, roughly 250 feet wide and angling 70 feet down onto Riverside Drive. The city and its agencies then immediately demanded that Castle Village not only repair all city-owned property but also do whatever was necessary on our property to allow the roadways to reopen safely.
The city’s attorneys repeatedly advised Castle Village that if we didn’t do so immediately, the city would and then charge us 100 percent of the costs. The characterization of the cost to Castle Village to comply with the city’s directive was exhaustively researched. Counsel concluded that all such costs were properly characterized as necessary to satisfy “third-party claims.”
It Don’t Come Easy
After considerable effort, one carrier finally agreed to pay. Agonizingly, and after much discussion, a few others followed. The effort to get carriers to pay was two-pronged. First, by corporate counsel advising me that as corporate treasurer, I had the authority to interface with some 35 insurance carriers representing the shareholders, and, thus, Castle Village was able to speak with one voice. Second, by getting agreement from the New York State Department of Insurance to permit my collective filing of complaints on behalf of all Castle Village shareholders as an alternative to asking each shareholder to file individually, we were able to coordinate our efforts.
These consolidated efforts proved to be the key to success. One by one, carriers agreed to pay, some willingly, others most reluctantly. As of October, we have achieved 95 percent compliance. Shareholders have received millions of dollars in insurance settlements. (Insurance company adjusters and claims processors sought information directly from Castle Village when initially processing claims, thus opening the door for Castle Village to speak on behalf of its shareholders.)
There remain a few holdouts with whom we are dealing. A request demanding a legal brief from one carrier that requires it to state its position in writing has already been instituted by the New York State Department of Insurance. Other such requests will probably follow unless these few remaining carriers follow the lead of those who, upon researching their policies and the law, agreed to make payment up to their policy limits.
At this point, a number of questions arise:
What role does your insurance broker play?
Will your broker assist you?
How to pick an insurer?
What questions to ask of a broker?
What coverage options are available and at what cost?
Do property owners receive the advice they need to make informed decisions?
Our experience is that many shareholders were ill-served by their insurance brokers and/or carriers. An exhaustive study of shareholders’ individual homeowners’ polices reveals that many if not most shareholders were not advised of the existence of loss assessment riders or of their modest cost ($50,000 loss assessment riders typically carry annual premiums of $10 to $15). No less significant is the fact that brokers were mostly ineffectual in prosecuting claims on behalf of their insureds.
From Me to You
To some extent, the quality of a policy can be measured in the same manner one measures food products: the greater the number of ingredients, the lower the product’s quality. The clearest policy is the one that covers everything that is not specifically excluded and, of course, the fewer the exclusions, the broader the coverage. How reliable is your carrier? What is its reputation for honoring claims? Caveat emptor – let the buyer beware.
How to best assure that you have adequate coverage? In order to make an informed decision, attach the same level of research into buying insurance that was spent buying your apartment. Here are a few suggestions:
Interview brokers and inquire about the services they offer.
Ask how proactive the broker is in prosecuting claims on behalf of insureds.
Ask about coverage limits and optional riders.
Talk to neighbors and discuss coverage types and limits with your board and managing agent.
Use the internet.
Research articles in co-op publications (such as Habitat).
Our experience is a clear example of “let the buyer beware.” While convincing many of the “name-brand” carriers to pay valid claims proved difficult, more than 30 carriers have paid. Only two refused to provide coverage to Castle Village policyholders. They are Merrimack Mutual Fire Insurance Company and New York Central Mutual.
Complaints can be filed online with the New York State Department of Insurance. They are then forwarded to the carrier, with a request for an explanation of its coverage decision. Generally, the carrier’s response is forwarded to the complainant and the file is closed. The insurance department is not empowered to act as your attorney. The most they can demand of an insurer is a legal brief defending its position. This brief may prove useful to a complainant in the event of litigation.
In the case of Castle Village, the interface between the board and the state increased the leverage of both exponentially. Information gleaned from insurers who recognized coverage was then often used to “motivate” less willing insurers. Information so gathered was communicated to reluctant insurers almost on a daily basis.
Knowing how and when to use resources serves to increase the likelihood of their effectiveness. Our approach to working with the state, combined with its willingness to assist, added considerably to our collective effectiveness. I shared my notes with the New York State Department of Insurance. An extract of its reply follows:
“The Consumer Services Bureau of the Department will take a formal complaint against a licensee and will investigate that licensee’s actions in light of Insurance Law and Regulation. The Department does not have the authority to make binding determinations involving questions of fact, interpretation, or liability. An Examiner will review the company’s position in a disputed claim to see that the company’s position is not arbitrary or capricious, that it has a reasonable basis, but matters that remain in dispute will be referred to the court system, where such matters can be addressed...We have inquiries out to all five carriers for the open files on various points. While it is not our intent to hound a carrier until they pay a disputed claim, they do have to fully explain and support their position. We will advise you as we conclude each investigation.”
What role can or should your association/board play in assisting you? Some associations require homeowners’ coverage, others do not. Those that specify minimum levels of liability and property coverage often omit other categories altogether, such as loss assessment riders and improvements and betterments. The same can be said for lending-institution requirements.
I have emphasized the risks associated with either not having a loss assessment rider or not carrying sufficient homeowners’ insurance coverage. Improvements and betterments insurance levels are no less confusing as most co-op shareholders do not understand the distinction between the levels of coverage afforded them under their homeowners’ policies and coverage limits under the co-op corporation’s policy. Simply stated, improvements made to your apartment are not covered by the co-op’s policy. This is true regardless of whether you or a former owner were responsible for the improvement(s).
The ability of boards to impose insurance coverage and limits is governed by your association’s governing documents. Should coverage be required, do not make the mistake of assuming such required coverage is adequate. Often that is not the case. It is your responsibility, along with that of your insurance broker not your board’s, to discuss available coverage and applicable limits and to determine what your homeowner’s insurance package should cover.
Finally, remember, in the event of a major loss requiring the filing of claims by all or a majority of shareholders, when you speak with one voice, you dramatically increase your chances of success. And, in the case of Castle Village, our mantra was “leave the hounding of carriers to us.” Regrettably necessary, but it works.
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