New York's Cooperative and Condominium Community

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Pass the Buck

Bill Morris: Welcome to Legal Talk, a conversation about governance issues that New York co-op and condo boards are tackling as we speak. I'm Bill Morris with Habitat, the magazine for New York co-op and condo directors. And joining me today is Ken Jacobs, a partner at the law firm of Smith Buss and Jacobs. Thanks for joining us, Ken.
Ken Jacobs: It was my pleasure, Bill.
Bill Morris: Now let's talk about insurance. That's on a lot of co-op and condo boards' minds these days. We're in what's called a hard insurance market. The industry's suffering, and so therefore, boards can expect to pay higher premiums. They can expect to reduce coverage and exclusions, and so insurance has become a big issue for boards.
Quickly give us a rundown of what boards can do to protect themselves in this sort of fraught time.
Ken Jacobs: First of all, Bill I get, we get this question at every annual meeting. The accountant gets hammered, the board gets hammered. Unit owners see premiums going up to 20, 30, 40%, and they blame the board for not doing enough research.
So it's just simply not true. We're in a, we're in a tough market right now and insurers have had billion dollar losses, and they're trying to protect themselves by raising premiums and reducing coverages.
Bill Morris: Boards are not entirely at the mercy of the market. They do have some things that they can do to protect themselves.
Tell us about that.
Ken Jacobs: Okay, sure. Unfortunately, the things that boards can do involve shifting the liability to the homeowners. And what I mean by that is the association can control increases in premiums by shifting to homeowners some of the coverages that traditionally the boards and the associations have covered.
For example, water damage. The typical association policy makes the co-op or the condo responsible for repairing damage to units coming from casualties. So if there's a windstorm, and a rainstorm, and as a result of that, there's an active leak through a roof or a facade, and it damages a unit. The homeowner expects the board to come in and repair that unit, repair the unit.
The problem is that this could be a 10, 12, $15,000 claim, and if the association makes four or 5, 10, 12, $15,000 claims to the insurance company, the insurance, the loss run for the association, that is the frequency of claims that the insurance company looks at. It looks terrible. It's almost better to have one big claim.
Than it is to have five tiny claims.
Bill Morris: Like a big fire, for example, is considered a freak. And it could happen to anybody. Whereas a pattern, a history of smaller claims is anathema for the board. Correct?
Ken Jacobs: Exactly. Exactly. And so if you have two or three claims of $12,000 three times a year, the insurance company is going to react to that.
What are they going to do? They're going to either say, we'll be happy to renew your policy, but we're excluding water damage from the scope of coverage, which makes the entire obligation a board obligation. Now, if you have a $5,000 deductible on your policy for a board, and you have nine or 10 claims, that's $50,000 right there of additional liability that you have to cover in your budget. The other thing that the, or what the insurance company can do is they can say, we'll be happy to cover you, but we're going to increase your coverage by 30, 40%. Excuse me, we're gonna increase your premium by 30 or 40%. And that has the same impact on the association as denying coverage entirely as a practical matter.
So what can boards do about this? What a board need would do is they would pass an amendment to the proprietary lease, or an amendment to their condominium bylaws, and the amendment would say that in the event of a casualty, the association has to make repairs, except for repairs due to, and here's some of the standard exceptions already come in, like alterations or improvements that were made by the owner or personal property of the owner, and they would add to that water damage.
So any damage, any water damage would be the owner's responsibility to repair. What does that do for the owner as a practical matter? That, that means that the owner should carry their own homeowner's insurance, and the homeowner's insurance would now be responsible for the cost of repairing water damage to the unit or to the personal property of the homeowner.
Bill Morris: Now, do boards have any leverage to one, require shareholders or unit owners to carry homeowners insurance and two, to make sure that it's active and up to date?
Ken Jacobs: Okay. As I said before, in order to shift the liability you would need to amend your proprietary lease or bylaws, which requires a vote of the unit owners.
And we have ways of persuading the owners that it's not them, it's everybody else who doesn't care who's going to be, so we're protecting you. And frequently we'll get it through on that basis. But as far as carrying the insurance at all, we favor owner, that owners that the board should require the owners to carry their own homeowner's insurance.
And this applies not just for water damage, but in the case of a fire. This avoids the litigation or the owner coming in and saying, I didn't have, I didn't carry any insurance and my whole unit burned down. What am I going to do? And they're throwing themselves on the mercy of the board. In my opinion, I think the board can, can require this by either passing a house rule or by passing a condominium regulation.
I consider this a quality of life issue. You're trying to prevent additional litigation, you're trying to protect the homeowners against suing each other, or unexpected losses. So it's like the carpeting rule where it may cost you two or 3000-- if the board requires 80% carpeting, that could cost you two or $3,000.
But it protects against noise complaints in the association. Similarly, if the association requires the owners to carry their own insurance. That may cost them seven or $800, but it protects against sub, significant controversy and cost to the association in the future.
Bill Morris: So in a sense the co-op board or the condo board is looking out for the welfare of the whole building rather than putting that ahead of the personal interests of individuals inside the building.
Ken Jacobs: Exactly. Now the issues that come up here, enforcement, managing agents say, oh my gosh, it's just one more task that you're going to put on our shoulders to enforce. I, yes, they're right, but it's an important one. And I think the way you do this is when you send out your annual window guard notices or some other annual mailing, include a demand that an owner furnish a certificate showing that they're covered by homeowner's insurance. What I found in practice again, is that as long as the association pushes this, initially, imposes fines on owners, doesn't let this slip, that the word will get around, that the association is serious about this and you really have to do this and it works.
Bill Morris: Now to sum up Ken in this hard insurance market, what do boards, what's the lesson here for a co-op or a condo board member in dealing with this unfortunate and unpleasant hard insurance market?
Ken Jacobs: First of all, get information because you're going to be asked about this at the owner's meetings, and you either tell them in advance, insurance costs have gone up 30%, or just warn them that it's part of the budget.
So it looks like you've looked into it, you investigated it, you just didn't let it happen. Second of all, absolutely require owners to carry their own insurance coverage as that will reduce the amount of controversy between the owners in the event of a casualty. And it's a good thing anyway.
And third, I think you should consider shifting some of the liability for repairs in the event of a casualty to the owners. You could make it, you could even make it, you could say, we're shifting water damage. We're shifting the responsibility for repairing floors. We're clarifying that it, that the owner is responsible for alterations and improvements.
Check your condo documents and your co-op documents and see whether they've left something out and then make it clear, and I think the majority of owners will agree to that. Finally, there, there are some just basic due diligence issues here, all right. Make sure your sidewalks aren't cracking. Just take care of the the make sure you're ADA compliant.
You miss, you don't have a a lawsuit there. Basic due diligence. Make sure that your contractors, that all the contractors carry the appropriate insurance coverage. 'Cause if they don't, the liability is gonna fall on the association. It's another item in your loss run. And I'm not gonna get into the Scaffold Law here.
Alright. It's just, it's brutal. New York has the only law, which says that if you have an elevation related injury, that the association could be strictly liable. Meaning liable no matter what. And that you have to find ways around it.
Bill Morris: A law only a personal injury lawyer could love, right?
Ken Jacobs: They're the people who keep it on there.
Every year, the association say, please change the Scaffold Law. Please change this and they don't do it.
Bill Morris: Ha. Hasn't happened. Thank you Ken. Ken Jacobs from Smith Bus and Jacobs, thanks for the lesson on insurance, a very important issue facing co-op and condo boards today. Thank you, Ken.
Ken Jacobs: You're welcome.

Ken Jacobs, Partner, Smith Buss & Jacobs

Blunt talk. Insurers have had lots of losses and are trying to protect themselves by raising premiums and reducing coverage. Every co-op and condo is dealing with this, and one way to try and cap these premiums is to shift some of the coverage to homeowners. 

Start with water damage. In a typical association policy, the co-op or condo is responsible for repairing damage to units coming from casualties. So if there's a wind storm or a rainstorm that causes a leak through a roof or a facade and it damages a unit, the board pays for the repair. The problem is that this could be a small $15,000 claim, and if the association makes four or five $15,000 claims to the insurance company, the loss run for the association looks terrible. So what is the carrier going to do when it comes time to renew the policy? They’ll exclude water damage from the scope of coverage, or they’ll increase the premium by 30% or 40%.

Share the load. What boards can do is to get shareholders or unit-owners to approve an amendment to the proprietary lease or bylaws specifying that in the event of a casualty, the co-op or condo has to make repairs, except for those due to water damage. Shareholders and unit-owners should be required to carry homeowners insurance, and that individual policy would now be responsible for the cost of repairing water damage to the unit or to the personal property of the owner. 

Do your homework. Boards have to stay informed about the insurance market changes and communicate them to owners. If you explain that insurance costs have gone up by 30% and that’s why you’re shifting some of the liability for repairs in the event of a casualty. I think the majority of people will understand.

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