Recent developments, both legislative and environmental, have led to considerable changes in the New England insurance marketplace. And such changes, as managers know, often lead to added paperwork, confusing requirements, and tricky legal questions for condo boards. While many new insurance products—such as the heavily-hyped “terrorism coverage”—have failed to catch on for the condo market, modifications in traditional coverage have altered the insurance picture in ways previously unseen.
Many insurance insiders now see condos as liabilities in the wake of the Great Recession. And that, in turn, presents problems for management. Although unit owners pay reserve fees on an ongoing basis, insurers fear some managers may defer maintenance in a bad economy. When that happens, say experts, condo properties become a bad risk, producing losses that are passed on to condo associations. “We’re starting to see some of the companies’ loss ratios become unprofitable, and when that happens you usually start seeing the big premiums,” says Luke Sevigney, Elite Condominium Program manager at Sevigney-Lyons Insurance with offices in New Hampshire and Maine. “They’re being a lot stricter on claims. When you’re marketing a condo association, they’re really scrutinizing the loss runs and they’re doing a lot of engineering on sprinkler systems and stuff to make sure everything’s up to par.”
Insurance professionals say the recent housing bubble has led to confusion for managers and agents alike. “I think the concern for insurance companies is that often times condo associations may feel that the value of those condominiums have come down in price,” says Loretta Worters of the Insurance Information Institute (I.I.I.). “So a lot of associations tend to think they can reduce their amount of insurance because it’s based on the value, when, in fact, the cost of insurance is based on rebuilding costs.” And the confusion doesn’t end there, explains Sevigney, whose Wells, Maine-based firm has guided many associations through additional costs and increased scrutiny in the wake of the housing crisis. “It’s made it a nightmare, to be quite honest. In the past we would get requests for certificates and a normal certificate would do it. Now they’re really scrutinizing everything—especially in terms of the employee dishonesty coverage. That was a coverage they were never concerned about up until about a year ago. Now we’re getting requests from some of these companies to have fidelity bonds or employee dishonesty coverage in amounts in excess of $500,000. It’s an additional cost to these condo associations.”
More Flood Woes on Tap
Flood insurance is another area receiving increased scrutiny in recent months. “They used to be a little bit lenient on that,” Sevigney says. “They’re now asking for huge amounts of flood insurance coverage for these associations—in many cases, in excess of what the actual replacement cost is on the structure.” In fact, the current marketplace has led some lenders to demand flood insurance coverage totaling $250,000 per unit. “If you have a small, four unit complex—each unit is 500 square feet—they can request up to a million dollars in coverage…and hold up closings.”
Adding to flood-related insurance woes, recent FEMA rezoning throughout much of the Northeast has forced many condo properties to deal with flood insurance issues for the very first time. “[Some] units have mortgages on them, and when FEMA comes in and changes these flood zones…the mortgage companies call up and say they need to have a flood insurance policy. Now, from a reconstruction standpoint, these individuals buying flood insurance policies usually doesn’t make a lot of sense…if you have only one unit [covered] in a ten unit building,” Sevigney notes. “So, in a lot of cases, the whole association will have to buy a policy. And flood insurance is expensive. From a standpoint of cost, in a lot of cases, the flood insurance is four times as expensive as all of the other things combined.”