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Written on the wind Recent catastrophes move insurance industry to reconsider condo and co-op coverage needs and availability By Phil Zinkewicz The cooperative and condominium insurance marketplace in the United States today is as yet undefined in terms of what coverages are needed by the building owners who operate these habitational risks versus what unit or apartment owners need and, ultimately, what coverages are available for each. The situation is particularly problematic in coastal areas of the country, where volatile weather conditions have caused the traditional insurance market to view condominiums and cooperatives with caution. According to the National Association of Housing Cooperatives (NAHC), the simple difference between a cooperative and a condominium is that a cooperative consists of members who each own a share in a corporation that in turn owns or controls the building or buildings and/or property in which the members live. In contrast, residents of a condominium purchase individual units, which they personally own. In both instances, residents share in the expenses of operating the complex via maintenance payments. In both cases, exposures to loss are similar. Entities that own or operate cooperatives or condominiums are called “associations.” One problem is that many states have not yet clarified the insurance exposures that pertain to residents of cooperatives or condominiums and the exposures that pertain to associations. Florida addressed this problem in its 2003 legislative session and could lead the way for other states to follow. W. Douglas Berry, managing partner in the Florida law firm of Butler Pappas, says that, for obvious reasons, Florida is “far ahead” of other states in dealing with condominium insurance issues. Offering an historical perspective, Berry says that, since the inception of condominiums and insurance covering them, there has been ongoing confusion as to what items were covered under the association’s policy and what items were covered under a unitowners policy. Issues of concern include partition walls, floor coverings and wall coverings, built-in cabinets, water heaters and air conditioners, among other items. Clarifying coverage Berry says it has taken Florida two decades to hone its laws regarding insurance coverages for condominiums. In the past, he says, those efforts have fallen short. In the 2003 session, however, he says attempts to clarify lines of responsibility between the association and the unit owner were closer to the mark. According to the law, “Anything to the contrary notwithstanding, the terms ‘condominium property,’ ‘building,’ ‘improvements,’ ‘insurable improvements,’ ‘common elements,’ ‘association property,’ or any other term found in the declaration of condominium which defines the scope of property or casualty insurance that a condominium association must obtain, “shall exclude all floor, wall and ceiling coverings, electrical fixtures, appliances, air-conditioning or heating equipment, water heaters, water filters, built-in cabinets and countertops, and window treatments, including curtains, drapes, blinds, hardware and other window treatment components, or replacements of any of the foregoing which are located within the boundaries of a unit and serve only one unit, and all air-conditioning compressors that service only an individual unit, whether or not the compressors are located within the unit boundaries.” “The bottom line is, those items listed in the statute specifically state they are not to be association property for insurance purposes and should be covered under the unitowners policy,” Berry says. “Other changes to the statute include: (a) the unit owner is no longer required to be considered as an additional insured under the association policy; (b) all real or personal property located within the boundaries of the unit owner’s unit, which is excluded from the association’s policy, is to be insured by the unit owner; (c) the association is specifically permitted to include reasonable deductibles in its coverage; (d) the statute retains a provision that insurance provided to a unit owner is excess over any other insurance covering the same property and the unit owner has no rights of subrogation against the condominium association.” Berry notes that other states have their own ways of dealing with condominium insurance coverages and that associations and unit owners should consider those differences when purchasing coverage. Coverage gaps Confusion as to who is covered for what can often lead to gaps in insurance coverage, according to Jim Fiske, vice president and U.S. marketing manager for Chubb Personal Insurance. Fiske says that, with the exception of Florida, he is not aware of any state that has established specific statutes addressing insurance coverages for associations and unit owners. Often it is a case, Fiske says, of the association’s master policy “covering everything or covering nothing.” Says Fiske: “While many condo and co-op owners tend to focus on insuring their furnishings and other personal belongings, they should also be concerned about their responsibility under a master deed to pay for repairing damage to interior portions of their units. This often includes kitchen cabinetry and appliances, bathroom fixtures, flooring, interior walls, ceilings, electrical, plumbing and HVAC systems, windows and exterior doors. Unit owners should also realize that their association may assess them for uninsured or underinsured property or liability losses that occur elsewhere in the building,” Fiske adds. “Appraisers at the Chubb Group conducted an analysis of more than 250 condo and co-op units and concluded that, as of the last six months, these apartments are underinsured by nearly $175,000.” Chubb Personal Insurance, whose customer base consists primarily of upscale risks, has been targeting the condominium market to provide products that fill these gaps. The company introduced a condo and co-op insurance product in the mid-1980s. It is called Masterpiece Deluxe Condo and Masterpiece Deluxe Co-op and has brought Chubb to the forefront of insurers active in the condo and co-op insurance marketplace. Two years ago, Chubb expanded this product into its present Masterpiece Condo and Co-op Preference coverage. “We can provide high limits of property and liability coverage, including $100,000 in coverage for assessments resulting from a portion of a loss not covered under a building association’s master insurance policy,” Fiske says. “Separate $10,000 limits apply for assessments resulting from deductibles under the association’s policy. Many people, including scores of affluent empty nesters, are moving back to the cities to enjoy the convenience of walking to stores, entertainment and work. This represents a great opportunity for Chubb to expand our business, especially in the luxury sector of the marketplace in Chicago, New York and other cities.” Coastal challenge As noted earlier, a major problem for condos and co-ops today is finding insurance at all in coastal areas where weather conditions and threats of hurricanes have frightened traditional insurers from those marketplaces. This is true for both association master policies and policies for individual units. Laura Deeley Bren, president of the Willards, Maryland-based Atlantic/Smith, Cropper & Deeley, and Stephanie James, commercial lines marketing manager for the broker, say that the biggest challenge facing the condo and co-op insurance markets is finding the capacity for covering wind damage. Flood damage is already excluded under the traditional policies, but wind is not. After Hurricane Katrina and her sinister siblings hit the Gulf Coast in 2005, the wind issue came to the forefront. In many cases, it was difficult to determine whether damage was caused by wind or by flood. “Insurers are re-examining their catastrophe models,” explain Bren and James, “to mitigate potential losses. They are considering wind exclusions similar to the flood exclusion. Historically, Florida and the Gulf Coast have been the trouble spots, but now insurers are looking at the entire eastern seaboard. In our area, some carriers are willing to write wind coverage on a stand-alone basis. Some states are establishing pools to cover wind, but in our area there is still enough capacity in the excess and surplus lines arena. How long that excess capacity will last is anybody’s guess.” Understandably, it’s difficult for a broker to explain to clients why insurance companies are endeavoring to provide less coverage while the cost of insurance is rising. “We try to explain to our clients that insurers have less confidence than before in their catastrophe models, particularly when they listen to the dire predictions of meteorologists,” Bren and James say. “In order to provide a stable insurance environment, insurers have to consider the long-term interests of the company so that they’ll be there to pay claims down the line.” Mike Riordan, executive vice president of wholesale broker Hull & Co. in Florida, speaks to the seriousness of the problem in his state. “Traditionally, those condos and co-ops on the beach were considered the most volatile exposures by the insurance industry and they were labeled Tier 1 risks. Inland exposures were considered more favorable. Today, the entire state is considered Tier 1.” But that doesn’t mean that condos and co-ops don’t have any alternatives. “The standard insurance market is not writing new business because insurers there are restricted by state regulations as to the rates they can charge and the exclusions and deductibles they can apply,” Riordan explains. “However, the excess market has no such restrictions. E&S insurers can charge the rates they deem appropriate and institute higher wind deductibles. So the E&S market is filling some of the gaps left by the standard market. Then, too, in Florida, we have Citizens Property Insurance, the state-run pool, which provides coverages for condos, including wind insurance.” Florida is not the only state that has a wind pool. Texas and North Carolina have established such residual market facilities. But Riordan says that Florida’s pool is able to address the higher values of condos and co-ops in the state. “In Florida, an owner can approach the pool and purchase all coverages, or he or she can purchase wind cover as a stand-alone and then go to the standard market for the traditional, less volatile coverages, such as fire, theft, general liability, etc.” Riordan says that the reinsurance market is playing a role in coastal property difficulties. “Reinsurers say that they have not been profitable for many years, and many of them are now asking for steep price increases with restricted coverages to recoup some of their losses. That, of course, means that primary insurers have to raise their rates as well. How long will this scenario last? No one knows.” * |
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