Ken Jacobs, Smith Buss & Jacobs
The day to day challenges that face co-op and condo boards haven't vanished during the pandemic. Catastrophic events like fires, floods, and leaks still happen, unfortunately, and they demand preparation before the event and the right moves afterwards.
You've had some recent experience with some pretty serious fires. Tell me about what you've learned from the experience.
Sure. I can divide that into what I've learned to do before the fire and what we should do after the fire. Before the fire, it's really important to strongly urge, or even require, your shareholders or unit-owners to carry their own insurance. You would be amazed how many shareholders and owners turn out not to have renter's insurance or homeowners insurance when the fire hits. Requiring this avoids huge problems, because if an owner is wondering how they're going to be compensated for the loss of their personal property, or for restoring improvements that they've made to the unit, it's going to affect the way the restoration progresses.
It's a clerical job, isn't it, for the board to know that the insurance is up to date? The property manager has to get involved. How does the board know if the insurance is up to date?
They have to ask the shareholders to provide certificates from their own homeowners insurance companies verifying that they're carrying insurance. I think this could be done by regulation. In other words, you can do it either by regulation or house rule to require insurance to be carried by individual shareholders. It does put another burden on the managing agent to verify, but annually, the managing agent can ask for proof of this insurance. In some buildings where shareholders haven't been diligent in responding, fines and letters have accomplished that purpose, and then people get used to the idea of keeping their insurance up.
Is that the main thing before the event – having that insurance in place?
That's a really important thing to do, not just for a major casualty, but even if there's a leak from your own apartment into somebody else's apartment, you're covered.
The second thing is to review your own building insurance documents to make sure that you're properly covered. It always takes longer to restore a building; just like it always takes longer for a shareholder or a unit-owner to do a renovation to their apartment, it always takes longer than the building anticipates to actually complete a restoration. We found in several cases that the 12 month business interruption policy is not sufficient to cover the actual cost, especially in a major catastrophe. I would consider lengthening those time periods.
The third thing I would do is review your proprietary lease and your condo bylaws, to make sure that your restoration clause and your insurance clause match, and so you don't run into a problem where an owner's insurance company says, oh no, we're not obligated to restore that. You, the condo, are obligated to restore that based on what it says in your bylaws, and there's a gap. Do your due diligence and look at that. These are things that you can do generally without any casually having occurred.
Let's move along to when the casualty hits: the fire hits, the roof leaks, the basement floods. Now what?
Everybody has a job, and it's chaotic in the beginning. So let's take the first 24 or 48 hours. The managing agent should make sure that you get an emergency restoration company like Maxon to come in and do what needs to be done to minimize the water damage. Maybe to start, keep mold infestation from coming in. In a fire, the fire department comes in, spraying water everywhere, and the water damage can frequently be as bad as the fire damage. In addition, if it's on the roof, you have to get a temporary roof up because it could rain the next day. Basically, you need to take these emergency measures. The managing agent needs to do that.
Somebody has to get in touch with the city, to make sure there are emergency services. If people are displaced overnight, where are they going to go? The city has policies in place to deal with that. The board has a responsibility to keep the owners calm. Particularly in the initial stages, the board should collect information and try to answer shareholder questions, address their concerns and maybe direct shareholders or unit-owners to the right place.
You’ll notice I haven't mentioned the lawyer in this.
Where's the lawyer?
It turns out the lawyer functions as the liaison between all the separate parties. When you're restoring the building, you're probably going to have an engineer who's going to have to look at the work proposed; the lawyer would represent the interests of the co-op or condo in dealing with the contractor. For a larger casualty, I absolutely recommend you get a professional adjuster, because the insurance company is going to be sending down their adjuster as soon as possible. And although we like to wear a big red S on our chest, most of us lawyers are not contractors and can't evaluate how much a piece of something is worth or how much it's going to cost to restore.
The adjuster is going to knock heads with the insurance company's adjuster to try to get a better claim for the co-op or condo owner, right?
Yes, and that is a much longer process or a much more detailed process than you may think. Just like the insurance company sends somebody who goes down and makes a room by room list of what things cost, or what was damaged and what it's going to cost, your adjuster is asked to do the same thing. Your adjuster argues with the insurance company about whether or not they're paying enough or offering enough. And I can guarantee you that the insurance company's first offer is not going to be enough to pay the cost of restoration. The adjuster also can frequently tailor the payment arrangements to deal with the needs of the co-op or condo.
Business interruption insurance has gotten a lot of attention during the pandemic, because a lot of people who had commercial enterprises lost their income from the rental. They thought that they were entitled to that business interruption insurance, but the insurance company said, no, a virus is not a physical damage to a building like a fire or a flood. What does the board need to make sure they've got coverage?
Basically, there are several different types of business interruption insurance you can get. Some boards have a dollar figure, say, $500,000 of business interruption insurance. Some boards change that to actual loss sustained, and they think they're enhancing their coverage. Then they think “this is great, I'm not limited to $500,000. I'm going to be protected.” But then you have to look at all the fine print in the policy, because some well known package liability insurers in New York city and around our area have limitations on coverage. They may say sure, actual loss during the first 12 months.
So it puts a time limit on restoration that is going to take two years or three years, right?
Right. All of a sudden you think you're covered for everything, but you're actually only covered for everything during the first 12 months. And then this particular insurer might say, "Wait, why don't you add this 180 day extension?" And you go, "Fine." That's now at 18 months. And it turns out no, the 180 day extension only covers you once the vacate orders are lifted, once people are allowed to go back into their units, and it only covers the difference between the money you would get from full occupancy and the money you would be getting as occupancy is restored. It's a detail-oriented subject. You should talk with your insurance broker about it.
The legal lesson here seems to be, you've got to be prepared for these disasters ahead of time. And one way to do that is to understand who's insured, how much they're insured for and how long they're insured for. Is that correct?
I couldn't have said it better myself – that's right. Nobody anticipates a casualty. And everybody says, "Why are we wasting time dealing with something that may never happen?" But when it does happen, you are really going to need your ducks in a row, or you may end up spending hundreds of thousands of dollars in extra funds, assessing your shareholders and coming up short in the restoration.
And the time to get those ducks in a row is before the disaster strikes.