Bill Morris in Legal/Financial on July 29, 2021
Many co-op and condo boards are becoming aware of the need for air-tight liability insurance to protect them from the blizzard of personal-injury lawsuits generated by the state’s Scaffold Law. But a case now wending its way through the courts illustrates the equal importance of adequate insurance coverage for the building itself.
The case springs from a fire that devastated a 54-unit condominium in the Sunset Park neighborhood in Brooklyn in 2019. More than three-quarters of the prewar building was destroyed, and more than 75% of the unit-owners voted not to repair or restore it. That cleared the way for the building to be sold and for unit-owners to split the proceeds of the sale and any payouts from the condo’s insurance policies. The condo board had $8.2 million in building coverage, plus a $5 million policy that would cover increased costs of construction to comply with current building codes, sometimes called code-compliance insurance.
When an architect’s report stated that the total cost of restoring the structure would be about $24 million – including the completion of apartment interiors and ancillary soft costs – several unit-owners sued the condo board for breach of contract “for failing to purchase sufficient insurance.” The condo board is countering that its $8.2 million policy met the demand in the bylaws that the building be insured for at least 80% of the cost of the original 1931 structure. The board also contends that its insurance purchases were made in good faith and therefore are protected by the Business Judgment Rule.
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While the case wends its way through the courts, vital lessons are already emerging for co-op and condo boards.
“Most boards think only about the cost of insurance premiums,” says Theresa Racht, an attorney who is representing the Brooklyn condo board. “This is not the place to try to save money. The size of an insurance policy should be based on an expert appraisal.”
Ed Mackoul, president of the insurance brokerage Mackoul Risk Solutions, agrees. “When an insurance carrier first writes a policy, it inspects the building,” he says. “Every year they should re-evaluate that coverage. If the insurance company isn’t doing that, then the board should talk to its broker. The ideal solution is to hire an appraisal company to inspect the building from top to bottom to advise the board how much insurance to buy. Remember, the cost of building materials and everything else is constantly going up.”
Most lawyers advise their board clients to keep meeting minutes short and sweet – as a protection against airing delicate discussions that could lead to legal liability. But Racht believes insurance is one area where boards should have open discussions – and record them in the minutes. “The minutes need to document what the discussion covered, including the actual amount of coverage, the premium, the recommendations of the broker,” she says. “The minutes should reflect that the board bought x amount of building insurance at such and such a premium, based on the broker’s or managing agent’s recommendations. Make sure copies of their spreadsheets or other documents are in the minutes. The goal is to show that things were done in a proper fashion.”
Mackoul adds that documenting such decisions is relatively easy, and he agrees that it’s the wise thing to do. “We submit our proposals in writing,” he says. “I would document the discussion, especially if the broker or insurance carrier or managing agent says you’re under-insured.”
That won’t necessarily protect a board from getting sued. But it will improve the chances of success if a devastating calamity like the Brooklyn fire lands a co-op or condo board in court.
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