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I’ve been a member of my co-op’s board for nearly 10 years now, and treasurer for the past two years. Our building is on Manhattan’s Upper East Side and we have more than 400 units. One of my responsibilities is overseeing our building’s insurance program, mainly because I’ve been in the insurance industry for more than 25 years.
Our insurance program has seen some changes over the past decade. In 2002, immediately after 9/11, property/casualty premiums increased by more than 50 percent. The federal government had not yet passed the Terrorism Risk Insurance Act (TRIA), so terrorism was the main driver for the increases at the time, experienced by all residential buildings in New York City. In 2003-5, premiums remained high, although with the government’s implementation of TRIA most buildings began to see premium reductions. By 2009, we were putting our building’s insurance program out to bid and ultimately awarded it to a new insurer, taking advantage of the soft pricing environment. From 2011 to the present, a “hard market” has begun to emerge, with insurers seeking increases of five percent or more.
During all this, my experience negotiating premiums on behalf of clients has been particularly useful. Through my work in insurance and as a board member, I’ve learned enough to offer some helpful advice to boards regarding their insurance.
One of the more important duties of any building’s board is placing and maintaining appropriate property and casualty insurance for the building, as all the residents of the building can be affected when a loss happens. The building’s insurance is a completely different animal from the homeowners’ insurance coverage arranged by individual residents. Insured values, premiums, and financial impact are much greater, not only to the building but to residents to whom the insurance cost is ultimately passed on. In my building, the main driver has been increased city tax costs. These, coupled with inspection costs, and the normal wear and tear of items such as boilers and hallway upgrades, have forced us to increase maintenance fees and to also apply assessments.
The main financial objective of any co-op’s board is to maintain a healthy reserve fund. This becomes more difficult as static costs go up and residents grumble about maintenance increases. A potential solution being explored by my building is implementation of a transfer fee (or “flip tax”), where the buyer or seller of a unit pays the building a percentage of the purchase price (typically two percent). The majority of co-ops in New York have some version of a transfer fee in place, and while not a complete solution, this can provide financial relief and help support a healthy reserve fund for a building.
Lines of Coverage
Typically, the boards of co-op and condo buildings handle their insurance in one of two ways: they do it themselves and handle all aspects of negotiation with their agent or broker, or they rely on their management company to do so. In my building’s case, we rely on a management company to do most of the dealing with our broker. There is a distinct advantage to doing this – usually they manage numerous buildings (and presumably handle all their insurance), and they are able to use this leverage when negotiating premiums, as well as in negotiating coverage terms favorable to the building and its board. These are key advantages a board will not enjoy if placing its own insurance.
Without getting into the minutiae, there are several lines of insurance that comprise a typical co-op/condo building’s property/casualty insurance program:
Directors & Officers Liability (D&O insurance). This is the line of coverage many board members care most about, as it protects them and their assets against shareholder suits. One key component of D&O insurance is employment practices liability, or EPL, coverage, which should cover discrimination, a key exposure for a board that oversees the resident application process. Some D&O providers offer human resources web training to policyholders. This line of coverage is usually not expensive (typically, less than $5,000 annually for a $1 million limit). It is extremely important that this policy be scheduled as an “underlying” policy on the building’s umbrella liability policy (see below). This allows the D&O policy to be subject to the full limit of the umbrella policy, often $25 million or more, depending on the limit purchased, thereby affording maximum protection to board members.
Property Insurance. This “first party” policy covers the building itself for perils such as fire, lightning, earthquake, and flood. In addition to the physical structure, property insurance also includes “business interruption” coverage, which insures income generated by the building, such as rental income and maintenance fees. Limits for both property and business interruption need to be precisely calculated and reviewed for accuracy regularly, as they may be subject to scrutiny by banks making loans to the building. If a building is not insured adequately, in the event of a loss, the board could be held accountable.
General Liability. This is known as “third party” insurance and covers the building for liability claims brought by third parties – typically slips, falls, and water damage types of claims. Coverage for co-ops and condo buildings is usually written on a first-dollar basis (i.e., no deductible), and standard primary limits are $1 million occurrence/ $2 million general aggregate (the most the policy will pay during the annual term). Key coverages that should be included are lead paint liability and mold/fungus.
Umbrella Liability. This third-party coverage sits excess of the primary general liability limits and terms, thereby increasing the overall liability limit. This coverage can be arranged by a standard policy issued by one carrier for an annual premium. It is also available through several Risk Purchasing Groups, or RPGs. With the RPG approach, many insurance buyers in the same business segment (such as real estate) are grouped together and issued one “master” policy that provides separate limits to individual members. Policyholders do not receive actual insurance policies, but rather certificates that act as evidence of their membership in the RPG. Limits available through RPGs can be $100 million or higher and can usually schedule D&O as an underlying policy. The ability of RPGs to offer umbrella coverage to real estate clients is something that has been around only since 1986, when RPGs were introduced.
For property and general liability coverage, policies can be written separately for each coverage line by separate insurance companies, or they can be combined on a “package” policy. There are advantages to each approach. If the policy is written by the same insurer on a package policy, in theory the combined premium should be lower because of economies of scale and because the insurer can apply a “package credit.” This approach also has the advantage of one-stop shopping and eases the claim-reporting process. There are a limited number of insurance companies that will provide a package policy for New York area co-ops and condos, and each has its own specific underwriting guidelines.
If property and general liability coverages are written on separate policies, the field is open to more insurers, as some property insurers may not want to insure the general liability, and vice versa. For example, if one property insurer insures high property limits at competitive premiums, this then opens the door for other insurers to insure the general liability competitively.
Admitted vs. Non-Admitted
When pursuing quotations, your agent or broker may present quotes that are “non-admitted” in the state of New York. This means your broker probably went to a third-party intermediary, or wholesale broker, on your behalf, and it is the wholesale broker who actually negotiated with insurers.
That insurer, if a surplus lines or non-admitted insurer, would not be subject to state guarantee funds in the event of insolvency. There are also surplus lines taxes and fees added to the policies, which increase the ultimate cost to the buyer. Therefore, unless there is a compelling reason not to do so, it is generally recommended that coverage be placed with admitted insurers.
In 2002, in the wake of the terrorist attacks, the federal government implemented TRIA to serve as a financial backstop for insurers offering terrorism insurance coverage as part of their policy. Under TRIA, the insurance buyer has the option of purchasing coverage under TRIA for an additional premium or of rejecting it and not paying the premium. The additional premium applicable to TRIA is always spelled out in insurers’ proposals before coverage is issued. TRIA coverage should always be purchased, as the risk of not doing so is too great and not worth the premium savings.
Most co-ops and condos saw their insurance premiums increase dramatically in the wake of 9/11, but since then, the property/casualty insurance industry has been in a soft market, with typical premiums either remaining flat or decreasing slightly year to year. Board treasurers involved in their board’s budget processes have seen this when budgeting little or no increases in insurance costs over the past few years. However, many think the hard market is returning in 2012 as insurers seek increases on renewals. Boards should therefore budget for slight premium increases in 2012.
The way for a board to control its insurance price increases is to introduce competition, and to request a competing bid for the renewal program. Nonetheless, the board should be careful not to do this every year. Insurance negotiation is still a people business. If an insurance company underwriter receives a submission to quote every year, or receives separate submissions from more than one broker on behalf of the same client, that underwriter may feel that it doesn’t have a chance to actually write the business, or that it is being “shopped” every year. Consequently, the submission might go to the bottom of the pile with little effort or attention devoted to it. If the board wants to put its insurance program out to bid, a good recommendation to achieve the most effective results is to do so every three years, unless other circumstances dictate doing so sooner.
Insurance is not the most exciting topic for co-op and condo boards to address, but in the event of a large claim, it is the most critical.