For people with no experience in managing a community, understanding the fine print and the more obvious aspects of a building’s insurance policy often can be a challenge. To the uninitiated, it sometimes may seem like the details of one's coverage were written to be deliberately confusing to anyone except insurance industry insiders.
But figuring out how you’re covered and where you aren’t covered needn’t simply be an exercise in understanding insurance terms and legalese—it can also be a step toward lowering your building’s insurance costs. Having a handle on the various components of a condo building’s umbrella policy allows those in charge of the building’s management to more fully comprehend how their building’s coverage really works. Knowing how insurance companies determine a building’s annual insurance payments enables those in charge of making the payments to keep the top on costs and also to work to limit the building’s overall liability. Getting a grip on the terms of your insurance policy is just a question of taking it off in bites and digesting the information one piece at a time. Once you take a policy and dissect it into its various parts, even an insurance novice will be able to understand the most important parts of their building’s insurance policy. Having that knowledge will enable you to make informed decisions regarding how much coverage and what types of coverage to carry on your building.
A Typical Building Insurance Policy
Generally speaking, most buildings tend to have similar insurance coverage, protecting the property from a variety of obvious potential hazards. The typical condominium building’s insurance policy includes components relating to property, general liability, umbrella, equipment breakdown, directors’ and officers’ liability, environmental liability and fidelity coverage. Property coverage provides for protection in the instance of perils such as fire, earthquake, flood and terrorism, and for replacement or repair of property in the event of physical damage. “Everything inside the unit usually gets included in the association policy. Property insurance includes everything in the unit, the cabinets, bath fixtures, and so on,” said Bernie Gitlin of Global Insurance Network, Inc., in Needham, Massachusetts. “And somewhere in the docs, there is a reporting clause. If you do improvements over a certain amount, you must report it to the association.”
Lawsuits resulting from a slip and fall or other damage to a person or property that happen on the premises are covered by general liability. A form of excess liability coverage, umbrella coverage, provides for you in the event you need the additional coverage because the primary coverage is exhausted by a claim.
While it might appear that umbrella coverage would be a cure-all in the event of a building maintenance catastrophe, a special aspect of the building’s policy should cover some of the more common breakdowns that happen in a residential building. Equipment breakdown covers large pieces of equipment such as boilers, chillers and elevators. It also covers anything not covered in a property policy, such as lightning-related property damage.
Some buildings only carry the coverage that the management feels the residents need, while neglecting to consider other aspects of coverage that aren’t deemed essential. Such a decision could be a wise move, but it also might open a community to potential costs if the building’s systems go awry. Environmental liability protects property owners in the event of damages from mold, seepage and fumes resulting from environmental factors, and most anything airborne that would need to be taken care of by contractors. Fidelity insurance covers forgery, fraud and theft by an employee. This policy should be in place with the management company if the association’s board hires employees to handle its affairs. “In Massachusetts, you have to carry (insurance for) three months’ operating budget,” Gitlin notes, and to comply with Freddie Mac and Fannie Mae requirements, most associations carry coverage for three months’ operating budget and reserves.
The most important part of a building’s policy for a board member to understand is their individual liability through directors’ and officers’ liability coverage, says Glenn Montgomery, owner of Boston-based Brownstone Insurance.
Directors and officers are protected in relation to their duties and acts done as officials of the association by directors’ and officers’ liability. That means that if an officer or director is sued as a result of an action he or she has taken on behalf of the association, that director will be protected by this liability insurance.
“That’s the only thing that protects the board member as an individual; everything else covers the association as a whole,” Montgomery says. “Directors’ and officers’ coverage will protect the individual for wrongful decisions [made by the board]. Without that coverage, you’re sitting there with your wallet hanging out of your pocket.”
Board members also should be most aware of the types of insurance that the association’s bylaws require the board to carry, says Christopher Schenck, of Knapp Schenck & Co. Insurance Agency, in Boston.
“Board members should follow the bylaws,” Schenck says. “Those [insurance policies] that are required usually include property, crime, directors and officers, umbrella, and flood sometimes. They should consider those first, and speak to an insurance professional and review the exposures the building has. They should be comfortable in their coverage, or confident in not insuring a particular area of exposure.”
One type of insurance that some board members might deem unnecessary is an underground boiler policy, which could be deemed too costly to purchase, adds Schenck.
Calculating Premiums Insurers determine what a building’s insurance rates will be by analyzing numerous factors relevant to the structure, including its age, the type of construction that it is, the type of roof and age of the roof, how the building is wired, number of stories it has and the fire protection systems that it includes. Location of the building is important for a variety of reasons, because the closeness or distance of a fire station to the building is one important factor that insurers consider prior to insuring a building. Whether the fire department is full-time or voluntary also is a factor, Allen notes.
The building’s proximity to the ocean or to a lake or river might also have an effect on the cost of the structure’s policy, since buildings next to the beach or river have a higher likelihood of being flooded. Being located in a flood zone will cost you, as will being located in a high-crime area.
“Carriers generally establish a value to replace a building of like and kind,” Allen says, noting that a charge for one protection in one city might be far different than the cost for that protection in another city. “In Boston, the terrorism charge could be a price far different than the same charge in Tyler, Texas. Insurers calculate a probable maximum loss.”
Having a lot of claims will cost a building, because loss history definitely has an effect on how rates are determined, Montgomery says. The occupancy of the building also has a bearing on rates, Schenck says.
Ski condos are higher to insure than normal condos, because vacancy is a higher exposure than occupancy,” Schenck says. “When a condo is vacant, pipes can burst or you might have heating system failures, or vandalism.”
The market is one of the biggest factors in how insurance rates are determined, and awareness of the marketplace could result in savings for board members looking to trim costs. How much insurance you buy also has a bearing on your rate.
“Rates are primarily a function of the marketplace, and how hungry brokers are to write premiums,” Schenck says.
Since supply and demand have obvious and immediate effects on the insurance industry, it’s possible for a building’s board or management to negotiate for a better insurance rate.
“It’s a very competitive marketplace right now,” Montgomery says. “Companies are making money because in this area, we haven’t had many bad winters recently.”
One of the simplest things a building’s management can do to lower insurance costs is to keep claims to a minimum, industry experts say.
“Anytime you submit an incident to a carrier, it’s just like having a ticket on your driving record. Frequency is a big deal,” Allen says.
Many people in charge of managing buildings overuse their insurance policies, Montgomery notes. “Use the policy only for catastrophes, not for maintenance. Carry high deductibles. Have the knowledge of when to put a claim in—the nickel and dime stuff irritates the insurance companies,” he says.
Montgomery advises that managers make sure that they keep their buildings up by doing regular maintenance.
“A roof is a classic example—it often doesn’t get fixed until it’s become a problem. Water heaters also are huge for condos, and no one fixes them before they break,”Montgomery says. “A plumber should check your water heater every year to see if it needs to be replaced or repaired, and you should have your roof checked each year to see if it needs maintenance.”
A condo building’s board also can improve its insurance profile by presenting itself in the best possible way to the insurance company, Schenck says. “You want the insurance company or brokers to know about improvements to the building, such as fire safety improvements or routine capital improvements,” he says.
Many insurance companies ask the management for the building’s annual budget. Not having money in the building’s reserve fund is a bad sign to insurers.
“Condos with good reserve funds are preferable to those with bad reserve funds,” Schenck says.
Jonathan Barnes is a contributor to New England Condominium and other publications.