It’s an all-too-common pattern: nationwide, condo, HOA and co-op communities are experiencing steep increases in their insurance premiums while coverage is being reduced. Some are seeing their policies dropped altogether. It’s an alarming situation leaving boards scrambling to find a way to protect their communities from loss and liability without breaking the bank.  

What’s Going on Here?

Insurance theory is based on assessment of risk, and the management of that assessed risk. Proof of coverage is often required by law for property owners—particularly for shared interest communities, as the loss that could result from a natural man-made disaster could easily devastate the financial health of a community. Insurance and the costs associated with it are a long-standing line item in any and every annual budget. The question is, why are insurance costs increasing so quickly and so steeply?

Some increases can be traced to circumstances within an association, says Janet Aronson, a partner at the law firm of Marcus, Errico, Emmer & Brooks (MEEB), located in Braintree, Massachusetts. “It could be the claims history or the condition of the building that results in a cancellation. It could be anything from circuit breakers to construction that just isn’t satisfactory in their eyes. It might even be something as simple as the proximity of your building to your neighbor. If you’re too close, that can be construed as a threat to your property; the insurer might consider it as increasing fire risk. These factors are now a bigger issue than doing a risk assessment and might bounce you out. Insurers’ senses are a little heightened these days.”

Douglas Weinstein, senior vice president for operations for AKAM, a property management firm with offices in New York City and southeast Florida, concurs; “There are two main reasons carriers are choosing to decline to renew or otherwise severely alter existing policies,” he says. Those reasons are “failure to maintain the property, and excessive loss history. For the first example, say your roof is old. It has to be replaced, but the association says no, we don’t have the money. Insurance carriers can cancel your coverage for failure to maintain that roof. An example of the second reason is where you may have an excessive loss history. Losses fall into two categories: loss by a storm or weather event, and loss to a different type of event, like a pipe leak or a fire.” Rack up too many of these events in succession, says Weinstein, and “the carrier will say it’s not feasible to insure your building anymore. Or they might elect to offer a very high deductible.”

External factors are playing a role in driving up premiums as well, says Len Theran, president of Professional Loss Adjusters, a public insurance claims adjuster based in Newton, Massachusetts. “As a result of climate change, the number of catastrophic storms we experience has increased, with the resulting claims increasing significantly as well. The result is that remaining companies are continuingly reducing coverage while increasing premiums. Deductibles are increasing at the same time.”

A Fine Line 

“This is a difficult market,” says attorney William McCracken, a partner with Moritt Hock & Hamroff, located in Manhattan. “Everyone is having trouble getting sufficient insurance.  Everyone is walking a fine line.”

Insurers are particularly sensitive to loss runs at a given property. A loss run is essentially just a report detailing how many losses or claims a property has had over a given period of time. The more losses and claims, the more uncomfortable an insurance carrier will become, and hence, the higher probability you may lose your coverage.

“A loss run is a document that outlines claims put in by an insured, in the case of condominiums, the association, or a corporation in the case of a co-op,” explains Weinstein. “That could be any claim, from a leak to a ‘trip-and-fall,’ to a natural disaster. That’s what a potential carrier looks at when underwriting a new association. It’s also what your existing carrier is looking at to determine if they want to continue with your coverage, and at what premium.”

“Under the best of circumstances, insurance companies are still for-profit businesses,” says McCracken. “They don’t make any money on co-op and condo buildings as it is, so they look at a loss run and see they’re taking in, say, $50,000 in premiums but paying out $1 million. They won’t keep you. If you have a substantial loss, whether your fault or not, you are at risk of being dropped. You can’t control that. 

“The other part is that carriers are on high alert if they get a sense that a building isn’t managed well,” he continues. “Or if management hasn’t checked contractor insurances for [NY] Local Law 97, for instance. If the contractor isn’t insured [and there’s a claim related to that contractor’s work], the loss goes to the building. Even if there hasn’t been a loss, if the insurance company sees that an uninsured contractor has been hired, they can and will drop you.”

Protecting Yourself

While there may be little we can do about the increases in insurance costs in general, the good news is that there are ways to avert losing coverage. That approach starts with—and pretty much depends on—staying ahead of the two factors cited above by being vigilant about maintaining our properties and tracking our potential loss points.

“First of all,” says Weinstein, “work with your managing agent to maintain your building inside and out. Stay up to date with all state, county, and city recertifications. Be certain that you are up to date with your milestone reports. If your milestone report indicates corrective work or maintenance is necessary, have a plan to get it done. As far as other types of losses, make sure you are up to code with items such as fire alarms and retardant systems. Carriers also look at all code required certifications, and will usually require an inspection. Make sure your building is always in top condition, that you’re adhering to current codes, and that current detection systems are maintained. Alarms don’t do any good if they don’t work or are outdated.”

McCracken agrees. “Risk can be reduced, both for your building and your insurance carrier by managing your building well,” he says. “It’s critical to have a top-notch super to manage your maintenance program well. You can reduce your risk that way. Buildings that are poorly maintained are more likely to suffer a casualty than those that are well maintained. You may pay more to a manager, super, or staff to help reduce risk, but it’s worth it. Another important factor to keep in mind is to make sure any and all vendors who work at your building have proper insurance coverage in place. Ask your building’s attorney to review everything and make sure your carrier has approved the contractor and their insurance, and made any necessary line item changes. In order for your carrier to get comfortable, they have to be sure they aren’t at greater risk. If you haven’t seen that happen regarding a big project, as a board you should be on high alert.”  

The Ramifications of Rejection

If your insurer increases your premiums and deductibles so sharply that it becomes unaffordable, or if they reject you or drop your policy altogether, how does that affect your ability to find coverage elsewhere? The answer is not encouraging, say the pros. 

“Being rejected by your current insurer makes it harder to find a new one,” says Aronson. “There is an adverse risk, and now you fall into this abyss of who will insure you? Condominium governing documents require a certain insurance rating for your insurance carrier, and there may also be legal issues. In Massachusetts, if something happens to your building and the insurance company is not rated by the state, you may have a problem [recouping damages].” 

Aronson notes that the Massachusetts Property Insurance Underwriting Association (MPIUA), known as the FAIR Plan, does offer commercial policies that can cover a condo association’s master policy if they are unable to find coverage in the voluntary market, but these are often strictly capped and may be insufficient for large complexes, making them a last resort. 

“We’ve also seen associations go to more expensive, less good coverage when they are out of the standard market, like Lloyds,” Aronson continues. “If you don’t have the appropriate coverage,” it can impact your property’s Comprehensive Loss Underwriting Exchange (CLUE) report, which Aronson says “can make it difficult to sell your unit and to finance through FNMA and Freddie Mac. It’s a very bad situation to be in, and takes at least three years to get off the ‘list.’” 

McCracken concurs, cautioning that “if you go out on the market for insurance, it’s difficult to get the same coverage you had at the same price you got in the past. The big problem is if you had a policy for a long time, you likely had legacy pricing, which usually provides a better deal. But if that goes away, you start from zero with a new carrier, and coverage will be more expensive. You’re better off if you can avoid going out to the market. What you are offered by your old carrier is probably better than what a new carrier would offer.”

Recommendations

To pump the breaks on their premiums, “Some boards are choosing to take a higher deductible,” says Theran. “I think that’s a wise choice. It puts pressure on the individual unit owners to buy more of their own insurance for their specific unit while controlling costs to the association. In one respect it’s kind of like ‘robbing Peter to pay Paul,’ though. The increase gets passed along to the unit owner directly, instead of through increases in common monthly charges.”

“My best advice,” says Aronson, “is to be prepared. “Prepared looks to me like making sure that your condo documents do not limit the deductible in the policy, and also that they require that the unit owners must maintain an individual insurance policy for their unit. What is happening to counteract increased premiums is an increase in deductibles. Many associations are going to per/unit deductibles, meaning that in the event of a loss, if the homeowner doesn’t have appropriate coverage, there will be a gap in payout.”

If your policy has been cancelled outright, the pros have a few pieces of advice on next moves. 

“Start as early as possible to find new coverage,” advises Weinstein. “Begin by speaking with brokers and looking for alternatives. Some carriers have come back to troubled markets, but it’s still a problem. They want the best properties, with no loss histories. It’s kind of like auto insurance; one accident, and you’ll pay a higher premium.”

If you are concerned that you may lose your coverage, Aronson says, “We have seen this coming—so don’t wait until you’re faced with it. Address it now. Maybe things will improve, but I recommend being proactive while you’re still covered. Make changes now so you’re not in jeopardy of losing your coverage.”

A.J. Sidransky is a staff writer/reporter for New England Condominium, and a published novelist. He may be reached at alan@yrinc.com.