Making a home in the condo and co-op association insurance market
Tightening market requires agents to sharpen their skills & work with knowledgeable partners
By Dave Willis
Although conditions are starting to turn around, condo and co-op associations continue to deal with issues brought on by the recent economic downturn and housing crisis. "Associations operate on dues they collect from each and every unit owner," explains Jamie Schraff, CIRMS, vice president and Community Association Program manager at Distinguished Programs. "When folks don't have money, dues or assessments are among the first things they stop paying."
According to Ed Mackoul, CIC, president of Mackoul & Associates, "Reduced income affects the associations' ability to pay immediate bills—like tax bills and electric and water bills—but also their ability to maintain and keep up common areas and systems."
When owners stop paying, associations sometimes need to take legal action. "They need to put fees and liens on the home, which may be new territory for associations and their volunteer board members," explains Schraff. In addition, they need to deal with the fallout from necessary operational budget cuts. "Such cuts may impact owners who did pay their assessments, and this can lead to angry board meetings and community meetings, and possible lawsuits," she adds. "It's a lose-lose situation."
Mark McLallen, president of Condominium Insurance Specialists of America, notes that, in a tough housing market, some owners opt to rent out their units. "This helps protect association revenues but leads to other issues," he explains. "Renters may not be as invested in the community as owners would be, and this can lead to distractions that associations must spend time on." Also, he says, if owners abandon their properties, associations sometimes assume the role of rental agent and landlord, which also is time-consuming.
As the housing market improves, associations find themselves dealing with a stricter lending environment. "One of the main issues associations deal with is Fannie Mae and its requirements," explains Mackoul. "Fannie Mae backs lenders and, for example, won't allow a unit owner to close on or refinance a unit unless the association has a certain amount of fidelity bond coverage." With co-ops, he adds, Fannie Mae dictates carrier financial strength ratings.
"There also are issues developing with flood," he adds. "Fannie Mae is requiring a certain amount of flood coverage, where they didn't before."
Schraff points out that Superstorm Sandy, among other events, has led associations into new territory. "Many never had to go through storm recovery or natural disaster recovery," she explains. "They're dealing with everything from working with FEMA to cleanup procedures to rebuilding. These often are volunteers engaged in some very complex issues."
"One of the most surprising changes in the last two years is the increase in construction costs," explains McLallen, "Demand is up, but the supply of contractors remains fixed, so labor costs are rising. So are material costs, especially for petroleum-based materials." In the last 18 months, he says he's seen a 12% to 20% jump in building values.
Housing market shifts have led to other challenges. "Before 2008, many apartment buildings converted to condos," explains Schraff. "Converting is a big process that requires all new documents. They were just wrapping that up when the recession hit, so they started converting condos back to rentals because they couldn't get buyers. Now things are leveling out, and they're starting to return to condos. That's a very laborious process."
Finally, some associations are encountering challenges they never before contemplated, namely, therapy animals. "Many condos have restrictions," explains Schraff. "They're age-restricted, smoke-restricted, and pet-restricted. People are getting around the pet restriction with a doctor's note that might say, 'Mrs. Jones needs seven poodles in her New York City co-op so she doesn't have a nervous breakdown.'
"Now you have these animals, which can be noisy, smelly and dirty," she adds. "Other residents are upset; it's not what they signed on for. But associations need to manage the situation. There is no easy answer." It's not just poodles, though. "Somebody had a therapy pony in their unit," she says.
Insuring the associations
According to Mackoul, the insurance market for condo and co-op associations is getting a more restrictive. "We're seeing a hardening market," he explains. "Once that happens, insurers institute new guidelines or are more diligent about enforcing existing ones. This could result from underwriting losses or it could be that their reinsurance carriers require it."
Mackoul says that as carriers become stricter, associations are encountering loss control or life safety recommendations they didn't face before. "You may have a high-rise building without emergency lights or exit signs that must now install them," he explains. "You might need a second means of egress or the building might need hard-wired smoke detectors where they didn't before."
Some properties have a harder time than others. "It's especially tough for associations with maintenance issues to get insurance," explains McLallen. "When they do, deductibles and pricing are generally higher." He says some associations use insurance policies like maintenance contracts. "They have an $8,000 loss and a $5,000 deductible and figure $3,000 is better than nothing, so they turn in the claim," he says. "Some do this repeatedly. As the market hardens, insurance companies look at frequency issues and these accounts are being hit hard."
Even before renewal, this practice causes problems. "When roof or plumbing failures cause leaks, for example, insurance pays a portion of the repair costs, but having to pay frequent deductibles has an immediate negative impact on association cash flow, further exacerbating the cycle," McLallen notes.
He says carriers are paying extra attention to maintenance issues these days. "They want to be sure it's a client they want," he explains. "A number of our clients have been required to address significant items when preparing for their renewal. Some have had to start projects they had planned to do later, and if they didn't have the money, they needed to obtain financing to begin the project prior to renewal."
Following Sandy, flood insurance is a major issue. "A lot of people didn't realize how much insurance they needed," explains Mackoul. "Many associations lacked proper coverage. Now, FEMA is starting to remap flood-prone areas, and associations that weren't in a high-risk flood zone before now are, so associations that didn't need flood insurance will need it."
Retail agents and brokers can help condo and co-op associations with these issues. "One thing we do is physically inspect any community before we quote it," Mackoul says. "That way, we know their life safety issues and can educate them on what they need."
For example, he says, "Emergency lights in a six-story building will make an association attractive to ten different companies; if they don't [have them], it might be attractive to only three." Agents who conduct on-site inspections have a leg up on those who don't, he notes.
"By going to the property, we get information," Mackoul explains. "Insurance brokers need to know what they're insuring, and they need to be able to share that with underwriters. How many buildings are there? What about life safety? What kind of lights do they have? Are there hard-wired smoke detectors? Are the buildings sprinklered?
"You need to know about the amenities, too," he adds. "Are there swimming pools or a tennis court? Some associations have their own transports for people. We need to know the exposures and, of course, how much property they have and how much insurance they need."
Site visits can help agents make sure they protect clients adequately. "I can't tell you how many times we look at a prospective client and find them underinsured," McLallen explains. "Most often, the agent never became familiar enough with the complex to make sure it's valued correctly."
He says agents should have intimate knowledge of all the details of the association and make sure they use proper cost-estimating software. "No agent wants to be talking to an association the day after a loss and having a conversation about whether the value is adequate to cover the loss," he says.
McLallen encourages agents to think of condo associations as small communities. "Sometimes you get the plain-Jane townhome associations, where everyone retreats into their townhome at night and little else goes on," he explains. "But many communities host social events and parties, so liquor liability comes into play. Some have swim teams or woodshops or other facilities and services, and these all have exposures associated with them. And, of course, with the numerous maintenance-related projects going on, certificates of insurance can be a big concern."
According to Schraff, agents without condo association expertise should find a program or carrier that has it. "Find a carrier or a program that does this, not a carrier or a program that simply will do it," she explains. "Not only will coverage be better, but you'll also have someone on the other end of the phone to help you write it properly."
She says specialists may help agents better understand things like higher-value landscaping or other amenities that set certain properties apart. "A program manager or specialty carrier asking you the right questions can help you serve associations better," she explains. "These specialists also can remind you about things like fidelity practices—requiring counter-signatures, for instance—that can be important to associations.
"If you are just writing a policy based on square footage and applying a per-square-foot rate, you're probably not thinking about the risk as a whole," she adds. "Do your due diligence and find good carriers."
Once you've found them, tap their expertise. "Ask them for help when you are completing the app," Schraff suggests. "If there's a question you don't think you have the answer to, don't fake it, and don't leave it blank. For instance, one of our applications asks what percentage of dues is in arrears. Some people don't even know what that means, so they'll write '0' or '100,' which completely changes the underwriting."
She also warns agents to make sure clients sign off on everything—including completed apps. "A lot of carriers and programs let brokers and agents sign and complete applications, especially now that much is done online," she explains. "A box at the bottom says, 'By clicking this box, I certify this information is correct.' That's your signature. If anything is wrong, it's on you, the agent or broker."
Her advice is simple: "Get the board or community manager or whoever is authorized to sign the app, if possible. If your carrier is exclusively online, ask them for an alternative. Don't be the last one to draw on the application. It could be deadly for you and your E&O."
Schraff offers a number of other tips, too. "Understand flood zones," she notes. "It's very tricky, but it's important to know zones, insurance requirements, and how to work with FEMA." She also says agents should encourage associations to have a reserve study. "It eliminates guesswork on valuations, helps advise how much should be in the reserve fund, and helps the underwriter know how to properly insure the association," she says.
In addition, she stresses the importance of annual audits. "It's very simple for any business," she notes, "but some associations don't consider themselves to be businesses, and they fail to have annual audits done." She says audits are especially important at second-home and vacation communities, where residents are less likely to be actively involved.
She also encourages agents and brokers to attend at least one board meeting. "Association managers may say that's unnecessary, but agents should insist on getting in front of the board," she explains. "Make sure they are hearing you about the things that they need to hear, like directors and officers coverage."
McLallen says agents and brokers would do well to offer their services and those of their specialist partner on upcoming projects. "We have our agents tell clients to use us as an advocate," he explains. "We can help research the insurance policies that vendors or potential vendors use, to make sure limits are accurate, endorsements are correct, that the association is listed as an additional insured, and that an indemnification agreement exists." He says this can bolster the agent-association relationship. "You become part of the association's executive team," McLallen notes. "It may not pay in the short term, but it can pay volumes down the road."
Mackoul believes in the value of ongoing relationships and works hard to keep them strong. "We offer seminars that teach boards and property managers about different insurance-related and non-insurance-related topics," he explains. "We cover everything from terms that should be in contracts with outside contractors to how the association's insurance and the unit-owner's insurance work together in the event of a claim. This goes a long way in helping associations manage their risks, and it helps us retain customers, as well."