David Berkey is a partner in the law firm of Gallet Dreyer & Berkey.
Cooperative and condominium directors and managers must be aware of the risks their buildings can face. As the people charged with the responsibility of protecting the value and finances of the buildings they operate, they should become familiar with the various types of insurance that they may (or, in some cases, must) obtain to offset the risks inherent in running a real estate business.
Those risks include property damage caused by natural or man-made catastrophes (e.g., fire, wind, rain, flood, hurricane, earthquake, burst pipes, boiler explosion). Property damage can also be caused by slower-acting phenomena, such as water seepage into the foundations or environmental hazards such as lead paint or mold growth; however, such damage is often not covered by a traditional property insurance policy and special endorsements must be obtained. Unfortunately, board members must also consider the possibility of damage caused by vandalism or even acts of terrorism.
Securing adequate property damage coverage is important. The board members should evaluate the building and insure for at least 80 percent of its replacement value to avoid potential co-insurance issues. The exclusions and fine print of policies should be read carefully. An “all-risk” policy may still exclude coverage for terrorism, environmental hazards, and other items. Special endorsements are often purchased to assure the owners that they have adequate coverage.
Mortgage lenders require certain coverage amounts and seek to be named as additional “insureds” on cooperative or condominium policies. In condominiums, the bylaws often require that the board purchase certain types of coverage. The organizing documents and mortgages should be reviewed to make sure that all such obligations are met.
Protecting your assets against catastrophe is only the first step. Directors and managers must also protect their shareholders and unit-owners against potential judgments arising from personal injury or other litigation brought by third parties against the cooperative and its board of directors or the condominium and its board of managers.
There are three types of liability policies that all real estate organizations should have. The first is a general liability policy. That will protect against claims made by third parties for personal injury or property damage alleged to have been caused by the negligence of the cooperative or condominium, its management, or its employees.
The most common protection for this is against the “slip-and-fall” claim, where a person falls on a slippery or defective surface and suffers injury. Whether there was spilled water on a floor, too much wax used for polish, a crack in the sidewalk, or an uneven curb, or any of a million-and-one other potential causes, people do have accidents and do get injured. The owner of the property where such an event occurs is almost always brought to court and asked to pay for medical costs, pain, suffering, and other claims.
The benefit of having general liability coverage is twofold. First, the insurance company will pay for the cost of defense. Second, if the cooperative or condominium is found liable, the insurer will pay the judgment (or settlement, if that’s the case). The obligation to defend is broader than the obligation to indemnify, so even if the claim is extremely far-fetched and may not fall within the coverage granted by the insurance policy, the carrier will usually defend it – at no cost to the building.
In addition to protecting against “slip-and-fall” cases, the general liability policy will also protect against claims based upon alleged negligent building maintenance. Water, smoke, or mold- growth damage in individual apartments, whether caused by a rainstorm, fire, or leaking toilet will often lead to claims by a tenant-shareholder or unit-owner against a cooperative or condominium that the damage would not have occurred had the roof, building envelope, or pipes been properly maintained. Having an insurance carrier defend and indemnify you is very important.
Many buildings, in an effort to reduce the number of such claims, are now requiring tenant-shareholders and unit-owners to carry their own property insurance. Even if they do have such coverage, some individuals will bring a claim against the building rather than file against their policy to avoid a potential increase in their premiums. Also, if they file against their own policy, their insurer may seek to collect any sums paid to the individual from the cooperative or condominium. To avoid this problem, boards should require their tenant-shareholders or unit-owners to obtain policies that contain a waiver of subrogation claims against the cooperative or condominium.
When to Go for D&O
The second type of liability coverage that all board members should have is directors’ and officers’ liability insurance (commonly called “D&O” coverage). This type protects the cooperative and condominium and specifically its directors (or managers) and officers against claims of negligence or other improper conduct.
Most cooperatives and condominiums are obligated by their bylaws (and cooperatives by the New York’s Business Corporation Law) to indemnify their officers and directors for expenses incurred in defending suits brought against them for conduct arising out of their actions as directors or officers.
Examples of claims include the improper rejection of an application to purchase an apartment in a building, the failure to create a reasonable accommodation for a handicapped occupant, injury or damage because of negligent maintenance, the failure to control the conduct of an offensive neighbor, claims of libel or slander, or claimed waste of corporate assets.
Again, in the D&O policy the obligation to defend is broader than the obligation to indemnify. So, an insurance carrier may pay to defend a claim of improper discrimination but may not indemnify a board member or officer who has been found to have improperly discriminated. Insurance firms are not permitted to indemnify against punitive damage awards in New York State and may not pay to indemnify an officer or director who is found to have engaged in improper conduct. Still, the ability to have defense costs covered is a very important financial consideration.
Many cooperatives and condominiums will seek to have their own counsel appointed by the carrier to represent them. In some cases, the amount of attorneys’ fees that the carrier will reimburse is less than the rates that the cooperative or condominium’s regular counsel charges. In that situation, the board must decide if it is willing to pay the difference to have counsel of its choice defend the claim, or if it will use counsel assigned by the carrier.
Covering Comp and Other Items
New York State requires all employers to carry worker’s compensation insurance. This type of insurance protects employees who are injured while performing their jobs. It also protects owners, because employees who have worker’s compensation are barred by statute from bringing negligence claims against their employers. The cost of such coverage is relatively inexpensive while the benefits obtained by having it can be substantial.
The amount of liability insurance that a cooperative or condominium purchases should be related to the size of the building and the potential risks that it faces. A large project with multiple buildings and a history of claims should purchase a significant amount of coverage, while a small building with relatively few claims may not need as much.
Typical coverage for buildings of less than 100 units is $1 million in primary liability coverage and an “excess” or “umbrella” coverage of $5 million, $10 million, or more. If the potential amount of a claim made against the insured does not exceed the amount of primary insurance, then the excess carrier will not be called upon to defend or indemnify. That is why it is less expensive to layer insurance coverage with both primary and excess policies.
Make sure that your building is covered independently from other buildings that may be in a real estate pool for which management is purchasing insurance. You do not want your policy limits to be exhausted by claims made on behalf of other properties.
Some cooperatives and condominiums self-insure against claims up to a certain dollar amount. They obtain insurance to cover claims that will exceed the self-insurance amount. For example, a cooperative that has a self-insurance amount of $25,000 will purchase an insurance policy that only will defend and indemnify against claims that exceed $25,000. The cooperative will often hire a claims administrator to examine and try to settle all minor claims. Only when it appears that the size of a claim exceeds the self-insurance limit will the carrier be notified of the claim.
The benefit of adopting such a program is that the cost of the primary insurance is lower. The carrier is not called upon to defend all claims and its own costs for investigation and counsel fees are less, allowing it to lower premium charges.
Co-ops and condos should also consider purchasing fidelity insurance. This covers theft by employees or management entrusted with the building’s funds. The amount of coverage should cover the potential loss. So, a property with a significant reserve fund may wish to consider purchasing insurance in an amount equal to the reserve fund and at least two months of maintenance or common charges. Often, contracts will provide that the manager must purchase fidelity coverage, but the expense is charged to the property.
Directors and managers who know what insurance is available, and who review coverage limits, exclusions, the coverage available by special endorsement, and the cost of insurance on a regular basis will be properly performing their role as guardians of their building’s assets and finances.