Boards and associations, just like individuals, carry insurance coverage to protect them from liability, loss and other financial and legal problems, although the issues may be a little different than the typical auto or single-family homeowners’ insurance. But deciding when, and if, to file a claim versus paying out of pocket can be conundrum.
Whether it’s for property damage or an injury on the premises, paying a claim can be very expensive for insurers. So it’s not surprising that a history of claims, frivolous or serious, can cause a building or association to pay higher premiums and, in extreme cases, to be dropped from its insurance policy entirely,
What are the main criteria that a co-op, condo or HOA development should consider when deciding whether or not to submit an insurance claim?
Chris Snow, an agency principal with Bernier & Snow Insurance Agency in Rochester, New Hampshire, says that with property claims, the association should consider the cause of the loss, the property that is damaged, and the amount of the master policy deductible. “The cause of the loss must be due to a covered cause of loss, such as fire, collapse, ice dams etc.,” Snow says. “For example, if the damage is caused by an earthquake but the policy does not include this peril, then there’s no coverage and no claim.”
Of course, he says, a claim also has to involve covered property. “If the damage is to an ornamental area rug, that is not covered under the master policy—and again, there's no coverage and no claim.”
Then there’s the issue of deductibles—and that’s where the tough decisions sometimes have to be made.
A Matter of Experience
“Unless they’re tiny, like 10 units, associations likely have a $5,000 deductible,” explains Bernie Gitlin, executive vice president of Risk Strategies Company in Randolph, Massachusetts. “So if a claim is $6,000, I might counsel them not to put it in, because I just don’t want it on their loss experience. In today’s world, experience is a big deal.” Keeping a low profile, filing claims only when really necessary, can reap rewards in the premium arena.
“Insurance companies,” notes Ed Mackoul, president of Mackoul & Associates, a New York brokerage, “are in business to make money. When they start losing money on an account, their options are generally to cancel the insurance or raise the premium.”
There are typically two coverages that come into consideration in filing a claim. What is referred to as first-party coverage, or property damage, encompasses direct physical damage or loss to the insured premises. Alternatively, third-party coverage, or liability coverage, takes into consideration damages or injuries claimed by someone other than the named insured.
A good rule of thumb is to report an incident or alleged incident as soon as the condo, co-op or HOA administrator becomes aware of it, Snow says, although, again, there are upsides and downsides to even that decision. “The pros (of filing a claim), of course, would be to repair any damage caused by a covered cause of loss thus making the association whole again. The cons would be that the company could increase the association's premium at renewal—or even non-renew the policy due to adverse loss history,” he says. “Claims are not a good thing for an association.”
At the same time, he cautions, not filing a claim right away can have its own dangers. “A small claim could escalate into something much larger and the company could deny the claim due to late reporting. It’s a slippery slope for sure, and should be looked at on a case-by-case basis.”
And that brings the discussion back to the issue of deductibles. “If it is the intention that the association doesn’t want to get involved with smaller claims, then they should increase the master policy deductible to $5,000 or higher,” Snow says.
Gitlin concurs. “If you’ve got a large condominium—50, 60, 100 units—and you’re talking about a couple grand, how much is it per unit? Peanuts! It’s a good policy to protect the association’s (loss) experience as much as you can. I’ve always been an advocate of relatively large deductibles, not only per occurrence, but also per-unit deductibles.”
For example, Gitlin says, the past winter will be remembered for its avalanche of ice dams across New England. “We hadn’t had a plethora of ice dams like that since 1994 and ’96. What happened last winter with those ice dams was that in those associations that had per-unit deductibles, typically the damage was not huge amounts in each unit. And if you had a $5,000 per-unit deductible, it stopped being an association problem and became a unit-owner problem. I would recommend a higher deductible—we’ve got some associations with $25,000 deductibles—and letting unit owners buy coverage through their HO6 and eliminate the small claims.
“It’s a good tactical risk,” Gitlin says, to let the unit owner deal with the small claim—and not just because it helps keep the association’s premiums in line. “The association’s insurer likes it, and the unit owner usually likes it. A small claim on a unit owner’s HO6 gets handled much better, much easier and much quicker than if the unit owner collects the money under the association’s policy.”
In addition to filing a claim or not filing a claim and filing for the damages, is there a third option that could be considered?
In some cases, the board may be able to assess the owners, since a typical homeowner’s policy for an owner in a co-op, condo or homeowner’s association has a coverage called “loss assessment’ that provides coverage for reimbursement of an assessment that resulted from a covered cause of loss.
“There are generally limitations for a reimbursement of an assessment resulting from a deductible,” says Mackoul, “but if the association has 50 units and each owner is able to be reimbursed $500 under their homeowner’s policy for the assessment, there could conceivably be $25,000 available.”
Pros and Cons
Let’s talk a little more about the pros and cons of filing an insurance claim. The pros are, of course, knowing that the board or association will be reimbursed for unexpected damages and putting your condo unit owners or co-op shareholders at ease. Also, the insurance adjuster will usually provide a detailed estimate of the damage, and the building can use this amount when looking to hire a contractor to fix the problem.
The cons are that the association might be building up too much of a record of filing claims with the insurance company. “Frequency is more damaging than one large loss,” Snow explains, “especially if the claims are all caused by a similar situation. If you have an older association and in the past year there were three hot-water heaters that let go, that’s not a good trend. The board would have to institute a hot water replacement program to make sure those ticking time-bombs are replaced before they fail. It’s always better to be proactive than reactive.”
“What insurance companies don’t want,” Gitlin agrees, “is to see a policy used as a maintenance policy instead of as a real catastrophe policy.” An unsophisticated board, he says, after experiencing a $6,500 incident, may look at the $5,000 deductible, and say “we want that $1,500” from the insurance company. “That might be fine if you haven’t had a claim for three years,” Gitlin says, “but not if you’ve had a number of those claims. Insurance companies don’t care if you have a claim now and then; that’s what they’re in business for.” But they don’t want to see a constant stream of them.
Too Many Claims
There’s no getting around it: There are consequences when a building or HOA has a lengthy history of insurance claims. Just a few of these consequences might be getting dropped by the insurer, having a tough time getting insured, and paying higher premiums.
If an association loses its insurance and goes shopping for a new policy, that building’s track record follows it into the insurance marketplace. If a company sees a pattern of small payments for claims, Gitlin says, they’re going to have questions—and they may insist that the policy has a much higher, perhaps a $10,000, deductible.
“Typically,” says Mackoul, “insurance companies want to see history for the past five years. If the current company cancels the insurance for loss history, it’s a major red flag for other companies. Often, most carriers will decline to provide a quote until the association has a few good years of loss history, and those that will quote will do so at a premium high enough that the account will be profitable based on past history.” And that can mean a major difference in cost.
It should be noted, Gitlin adds, that the condo insurance world is a fairly small one. “It’s not like there’s a thousand companies writing condominium insurance policies. There’s really only a handful of companies that do it really well and do it competitively.
“So you could easily find yourself in a position where this first-line group of companies won’t write you (a policy) at all,” he cautions. “Now you have to go to the surplus lines, the Lloyd’s of London type of companies, and it’s not a question of charging you double—it could be five times what the good companies are charging.
“That’s argues for restraint, it argues for larger deductibles, it argues for not dealing with a pattern (of claims). I’m not one to say if you have a real, legitimate loss, don’t file a claim; but there are consequences.”
Raanan Geberer is a freelance writer and a frequent contributor to New England Condominium. Associate Editor Pat Gale also contributed to this article.