The Solara co-op in the Bronx didn’t know it at the time, but its insurance nightmare was just beginning when a leaky washing machine in an apartment caused water damage from the third floor down to the street-level gym. Soon after, major leaks started springing up throughout the two-building, 160-unit complex — the result of overflowing toilets, burst wall pipes and a steam-pipe break in 2021 that flooded eight apartments. Over a six-year span, the Solara, an affordable-housing co-op, has incurred deep losses and filed a total of $750,000 in water damage claims. And in today’s hard insurance market, where a single claim can trigger an increase in premiums and deductibles at renewal time, the co-op has been hit hard: its premiums have more than doubled, from $89,000 to $200,000, and its deductible has skyrocketed from $5,000 to a staggering $100,000.
While the Solara is an extreme case, co-ops and condos across the city are feeling the pain from rising insurance rates. “This is the worst hard market I’ve seen in 28 years of insuring co-ops and condos, thanks to a perfect storm of factors,” says Ed Mackoul, the president of the insurance brokerage Mackoul Risk Solutions.
Record personal-injury claims have driven up the cost of liability insurance. Umbrella policies for excess liability protection are shrinking, with fewer carriers offering less coverage at higher prices. Property insurance premiums are soaring due to increased labor and material costs. Making matters worse, reinsurance carriers, the companies that insure the insurers, are also raising their rates.
“All things combined, the hard market means co-op and condo budgets are taking a beating way beyond regular inflationary increases,” says Thomas Thibodeaux, a co-owner of New Bedford Management, which manages the Solara. Fortunately, there are steps boards can take to get a handle on soaring costs and soften the blow.
Get Up to Code
The first and most important step is clearing up any violations with the Department of Buildings (DOB), whether the problems are building-related or confined to individual apartments. “The more violations you have — especially those that insurers perceive as posing a risk for a future liability claim — the less likely they will renew a policy or grant a new one,” Thibodeaux says.
To make sure they have a clean slate, boards and managing agents can check their buildings’ complete violation history using the DOB’s Building Information Search at https://a810-bisweb.nyc.gov/bisweb/bispi00.jsp or the Housing Preservation and Development’s HPD Online at www.nyc.gov/site/hpd/about/hpd-online.page Poring over the records is crucial for co-ops that had sponsors, because boards may be unaware of old violations that were never cured and linger on in city systems.
That was the case at Ithaca Arms, a 65-unit co-op in Elmhurst, Queens, that had trouble renewing its insurance due to lead-paint violations dating back to 2012 in two apartments that were formerly sponsor-owned. “The board was caught by surprise when multiple carriers denied coverage,” says Jared Bower, a vice president at Hub International, the co-op’s insurance broker. “Our only option was a carrier that offered a quote with a significantly higher premium, had a higher deductible, and included an exclusion for any losses caused by lead paint. Once test results or documents from a professional showing proof of abatement were submitted, this exclusion could be eliminated.”
The 81st 82nd Street co-op in Jackson Heights, Queens, another New Bedford client, found itself in similar straits over something that technically isn’t even a violation of DOB code — old circuit breakers. The five-building, 270-unit complex is one of millions of residential properties built between 1950 and 1990 with Federal Pacific Electric circuit breakers, which have been linked to some 2,800 fires each year. The co-op was able to get a new carrier, but it required that all the breaker boxes be replaced by the next year’s renewal. “That cost more than $200,000,” Thibodeaux says, “and of course the new premium is higher.”
Both co-ops managed to find new carriers that were willing to offer a solution or even make an accommodation. But boards can’t expect those types of exceptions to continue. “In this market, it is common for a carrier to pre-inspect a building before offering a policy to make sure that it meets all underwriting criteria and code,” Bower says.
As for renewal policies, carriers are requiring that any and all recommendations, including those that used to be considered noncritical, be complied with before offering terms. “In the past, carriers were willing to work with insureds and allow some time to comply with recommendations,” Bower says. “This is not the case any longer. There’s no flexibility or forgiveness. Problems have to be fixed, period.”
Study Your History
It’s a simple fact: Claims are the single biggest culprit behind rising insurance rates. And carriers are all-knowing when it comes to the facts about your building’s claim history. Your current insurer will look back at your building’s five-year loss history before renewing your policy. And if you’re looking for a new insurance company, that carrier will contact your current one.
“Insurers are looking at these reports, also known as loss runs, and looking for patterns and trends that could mean trouble,” says Mackoul, the insurance broker. “It could be anything from repeated slip-and-falls, where insurers might think there’s a tripping hazard on the sidewalk or the building is being negligent about shoveling or salting after it snows, to multiple D&O claims, which might suggest an ongoing problem with the board members.”
And it isn’t just big payouts that can raise red flags, Mackoul adds, since claim frequency counts as much as severity. “If you have five small water-damage claims and one big fire-damage claim,” he says, “the water claims could be a bigger strike against you because it looks like there’s a systemic problem in the building.”
It’s a good idea for boards and managing agents to review their loss history every year — you can request a free copy from your insurance broker — to help them get a better grasp of their buildings’ track record and how that might affect future costs.
While some claims are unavoidable, seeing the big picture can be a real eye-opener and help boards make smarter decisions going forward. “Let’s say a building had $500 remaining on its deductible and put in a $750 claim,” Thibodeaux says. “If the premiums went up as a result, the board will see that recouping that $250 didn’t make sense, and it won’t make the same mistake again.”
Mackoul recommends one more homework assignment: boning up on your building’s bid history. “Whenever insurance brokers go to market for you, they should be giving you a list of the results — why this company declined, why that company raised rates,” he says. “If it’s because of violations or your loss run, you’ll know what course corrections you need to make. And you’ll know where you stand when it comes time to renew, which will help avoid sticker shock.”
Shift the Risk
As rising rates continue to take a bigger bite out of operating budgets, some co-op boards are trying to cut costs by getting shareholders to shoulder some of the burden. Most bylaws provide that the co-op is responsible for paying the deductible on its master policy, “but we’re starting to see a shift where boards are apportioning the cost when an issue in one apartment causes damage to the building structure or common elements,” says David Dockery, a senior attorney at the law firm Becker & Poliakoff. “In that case, the shareholder may be responsible for some, if not all, of the deductible, depending on their percentage of the loss and whether negligence was involved. If the damage extended to another apartment, each would pay in accordance with their loss percentage. And if it also affected a common element, the two shareholders and the co-op would pay accordingly.”
Getting a supermajority of shareholders to approve such a bylaw change, however, isn’t easy. A more palatable option “would be requiring shareholders to add a loss assessment provision to their homeowner’s policy that would cover paying the building’s deductible, which isn’t much more expensive,” Dockery says. “That also requires a bylaw change, but at least it’s an easier sell.”
Asking condominium unit-owners to foot the bill for their association’s insurance deductible isn’t doable in New York, where the Condominium Act dictates that the cost is shared by everyone as part of their common charges.
With no signs that the hard insurance market will soften anytime soon, boards clearly need to use every available tool to rein in costs. “The more you know, the better your chances of keeping increases down,” Thibodeaux says. “And if you can’t, at least you’ll be as prepared as possible for what’s to come.”