In February, a 105-unit condominium near Ocean Parkway in Brooklyn saw its insurance premium spike by 30 percent to $44,000. A 148-unit condo on the Upper East Side of Manhattan watched its bill jump 10 percent, to nearly $72,000. And a doorman co-op in Prospect Heights, Brooklyn, recently swallowed a 9 percent premium increase.
As floodwaters rise, so do insurance rates. And condos and co-ops across New York City are bracing for an expensive insurance market, as insurers are starting to raise rates for the first time in years. No building seems immune from the uptick. Even properties that are fully insured and haven’t filed claims are watching their rates jump by as much as 9 percent and their deductible limits rising. Other buildings are seeing premiums skyrocket by 30 percent or discovering that their carrier simply won’t cover them anymore.
“It’s not fun right now, unfortunately,” says Barbara Strauss, an executive vice president at York International, an insurance broker.
For the last several years, the insurance industry has been in a soft market, where rates have fallen as insurance companies underbid one another in a race to get clients. Companies were willing to insure buildings at a very low rate just to secure their business. Sometimes they forgave claims and offered favorable policies to buildings that would have been considered risky at other times.
“In a soft market, carriers are willing to look the other way. You have carriers who are willing to cut each other’s throats to get the premium,” says Ed Mackoul, president of Mackoul & Associates, an insurance broker.
Insurance companies invest the money from premiums and generate income through those investments. But if returns on investments slow down, then having cheap premiums no longer pays off. On top of that, so-called “re-insurance” companies – the operations that insure the insurers – have raised their own rates. Additionally, insurance companies have been draining their coffers by paying out enormous claims in the wake of Hurricane Sandy. The result? Insurance companies are reconsidering previously low premiums.
After the terrorist attacks of September 11, 2001, New York condos and co-ops faced a tough market: rates spiked as carriers required buildings to add riders for terrorism (and also for mold, which was becoming a concern). Rates jumped again in 2004 when three major carriers folded. But since then, they have been falling – so much, in fact, that many buildings pay less today for their premiums than they did a decade ago. In some cases, a nine percent spike might feel like a huge increase, but, says Mackoul, it is actually just bringing the policy back in line with what it cost several years ago.
There are other factors contributing to the rise in rates. The cost of goods is simply higher. As insurance companies take a closer look at policies, many follow replacement value guidelines set by companies like Marshall & Swift, which provides software that can calculate replacement values. With the cost of building materials rising as fuel costs go up, the replacement values increase, too.
The Spain Agency, an insurance broker, recently hired an engineer to evaluate its clients’ properties to make sure that the policies provided adequate coverage. “We found that a lot of our buildings were underinsured,” says Michael Spain, president of the firm.
Buildings that have filed multiple claims are especially vulnerable to rising rates. The Ocean Parkway condo faced a 30 percent increase partly because the building had submitted multiple claims for incidents, including falls and a burst pipe. Some insurance companies wouldn’t cover the property at all.
The damage wreaked by Sandy has also had an impact on insurance rates, as companies are paying out huge claims for damaged properties. Added to that, the federal government released revised flood insurance maps in January, doubling the number of properties in New York City that must buy federally backed flood insurance. For a building now in a flood zone, private insurance companies will not cover flood damage and may also cut coverage for wind damage. In addition to paying higher rates rates for regular insurance coverage, these buildings must buy flood policies through the National Flood Insurance Program (NFIP). As of late February, the New York City flood zone maps were still unfinished.
“Sandy is devastating everybody. Rates were going up and Sandy just put the topper on it,” says Strauss.
One piece of the insurance puzzle that hit many buildings hard in the aftermath of Sandy was business interruption coverage. Some residents balked at the idea of paying maintenance fees while their building was rendered uninhabitable. In some cases, insurance policies covered maintenance fees for the displaced residents. In other cases, the policies provided no such relief.
Why one building may be able to tap its insurance policy for this cost and another may not is really down to each individual situation and policy. Although many policies cover unpaid maintenance fees, which is considered business income, the terms can be tricky. If residents are displaced because of a fire, for instance, the loss of income would be covered if the policy covered fire. But if the residents were displaced because of flooding and the policy does not cover flooding, then the building would not be able to recoup the lost income. This is especially problematic for buildings located in the flood insurance zone, since they are required to have NFIP insurance, which does not offer business interruption coverage in its policies.
In the case of Sandy, many residents were displaced because of power outages. However, a power outage would be covered only if the building itself suffered covered damage. If the power went out because of a citywide problem – say, a Con Edison transformer blew out – the loss would not be covered.
In the end, it’s good to remember that insurance rates rise and fall in cycles. Properties should prepare for the coming rate increases by setting aside additional funds in their budgets. However, just as rates are rising now, they are likely to fall again in the coming years. What goes up inevitably comes down. How you cope in the interim is the question of the hour.
Runaway Rates: What You Can Do
Rising rates might be unavoidable, but there are steps buildings can take to keep control of runaway rates and prepare for the unavoidable increases:
Fix What’s Broken
Many buildings have an Achilles’ heel that results in repeated claims. Perhaps it’s aging pipes that are prone to burst, or the slippery marble atrium that is a fall risk on rainy days. If a building has had several claims, it is a red flag for insurers and virtually guarantees a rate increase. In some cases, a property can lose coverage altogether if it is deemed too risky.
“If you’re not doing anything to mitigate the problems or stem the tide, then you’re going to get hit with rate increases,” says Michael Spain, president of the Spain Agency, an insurance broker.
Show the insurance company that you are serious about repairing your building’s problems. Update the electric fuses with circuit breakers. Install video cameras in the lobby to monitor slips and falls. Replace the aging pipes. Show that the risks are being addressed.
Raise the Limit
If the price tag on the premium is more than the building can absorb, consider increasing the deductible. This will lower the annual premium and, in the event that there are no major incidents, the building will have to pay less up front. However, make sure the building’s reserves are properly funded to cover the higher deductible if damage is incurred.
A higher deductible has a secondary benefit as well: it may reduce the overall number of claims a building files in a year. If the deductible is now $5,000, a building may resolve smaller problems through its reserve funds and thereby reduce its overall claims.
Prepare for Business Interruption Losses
Loss of maintenance income can be devastating to a building, especially when a property has suffered damage as well. Prepare for the possibility of loss of income by setting aside enough money in the reserves to cover 12 months of maintenance fees in the event that the damage is not covered by the policy.
Power outages were the main reason many buildings failed during Sandy. Properties could also consider investing in generators. If they had, many city properties would have functioned during Sandy and the residents would not have been displaced. –R.K.