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.”  

 “Disaster losses along the coast are likely to escalate in the coming years,” says Worters, “in part because of huge increases in development. One catastrophe modeling  company predicts…losses will double every decade or so due to growing…density and more expensive buildings.” In fact, recent Census Bureau statistics indicate that nearly 35,000,000 people  were seriously threatened by Atlantic hurricanes in 2006, up from 10,000,000 in  1950. Such statistics have made many insurers reluctant to cover coastal  properties. And those who do now frequently impose costly wind deductibles.  While some wind-weary states like Florida have legal limits on wind deductible  percentages, most New England states have no such limitations, leaving insurers  free to impose any deductible they like. “In a lot of cases,” explains Sevigney, “we have some of these buildings that are ten or twenty million dollar buildings  that have a two percent wind deductible on it. That’s a huge deductible. That is not a deductible on the loss. It’s a deductible on the structure.”  

 High-Risk Business

 Wind/hail deductibles—deductibles relating to damage by traditional thunderstorms—and the more-specific “hurricane deductibles” are rapidly becoming the most significant cost concerns in the aftermath of a  wind-related disaster. Though the steepest wind deductibles will top out at  five percent, experts say hurricane deductibles can rise even higher in  risk-prone areas. The amount an association will pay depends on the property’s insured value and the "trigger" selected by the insurance company. Though some  remaining insurers do offer traditional deductible-based wind coverage in  exchange for higher premiums, such terms are increasingly rare in New England’s coastal areas.  

 “Many insurers have reduced the number of policyholders they insure in high-risk  areas, says Worters. “Some insurers, who have too much exposure in an area, may decide to not write in  that area. While others, who have less exposure, will take up the slack.” Sevigney fears the market may eventually run dry in terms of its ability to  cover coastal condominiums. “It’s become an issue,” he says. “The ones that are writing these things are writing them at huge premiums. A lot  of companies now refuse to write any thing with in a mile of the coast and that’s increasing rapidly—the distance margin.”  

 The trigger for hurricane deductibles vs. wind deductibles—the point at which the more severe hurricane deductibles will apply to a  wind-damaged property—varies widely by state and company. But regardless of state, experts say most  triggers have common characteristics: they are typically tied to the issuance  of National Weather Service warnings, tend to vary based on the hurricane’s “category,” and often remain in effect after the storm has passed. While wind and hurricane  deductible tolerances tend to be similar throughout New England, there are  noteworthy exceptions. Rhode Island, for example, now expressly prohibits  standard windstorm deductibles, but allows the imposition of hurricane  deductibles not exceeding five percent. Connecticut, long considered a  progressive state in the realm of condo law, has imposed perhaps more  restrictions on condo insurers than any other New England state. Connecticut  insurers are required to offer discounts to properties with storm shutters, but  may not deny coverage to properties that lack them. New coastal-area policies  written since 2008 may not impose hurricane deductibles exceeding two percent,  and requires those deductibles only apply to damage incurred during a hurricane  warning or in the immediate 24 hours that follow.  

 Deductible restrictions are hardly the only insurance-related changes to  Connecticut’s condo law. “There’s so much in the works right now being considered by the Connecticut General  Assembly,” says Certified Insurance Counselor Rich Bouvier of West Hartford-based Bouvier,  Beckwith & Lennox. “I could write a 1,500-word article and barely scratch the surface.” Among the most controversial pending legislation is Connecticut’s HB 6620, “An Act Concerning Condominiums and Common Interest Ownership Communities,” which would limit the authority of condominium boards and clarify existing  insurance-related condo law. The complicated and controversial bill seeks to  address several condo-related issues in one sweeping piece of legislation.  

 Under recently-passed Connecticut law, condo associations consisting of twelve  units or more are required to obtain insurance for all property contained  within common walls, including individual condo units. Coverage on such units  must include improvements made by unit owners after the time of purchase,  unless specific provisions are made to opt out. New provisions within HB 6620  would seek to clarify existing law, expressly excluding stand-alone units. The  bill further stipulates that any community-wide expense, incurred due to the  willful misconduct of a unit owner, may be charged solely to that individual  condo dweller.  

 Regardless of your state, the simplest advice is still the best: be prepared,  and encourage your individual unit owners to be prepared, as well. Management  companies should proactively encourage the purchase of HO-6 coverage for all  unit owners—even those who aren’t required to carry it. “Speak with your agent,” says Worters. “Also look at what your bylaws and rules are. Make sure you have enough coverage.” Good advice in any season.                 

 Matthew Worley is a freelance writer and a frequent contributor to New England  Condominium.