Covering All the Bases The Ins and Outs of Liability Insurance

Accidents happen. Things go wrong. It's a simple fact of life. And sometimes the only course of action is simply to protect against the consequences. Liability insurance takes the sting out of the unknown, creating a safety net for those worrisome moments.

While liability insurance is not required by law for co-ops and condos, "it might as well be, because you simply couldn't function without it," says Manhattan attorney C. Jaye Berger. "You can't have a mortgage without having insurance, so indirectly, you are required to have it."

What is Liability Insurance?

Liability insurance basically covers your building from damages that occur through negligence or error on the part of your board or building staff. Flooding caused by a hurricane, for example, would not be covered by liability insurance; flooding caused by poorly maintained pipes would be.

There are three basic types of liability insurance available to co-ops and condos; general liability covers the basics of liability insurance. This type of general policy will provide coverage if someone gets hurt as a result of the negligence of the building, according to Tom Kozera of Co-op/Condo Insurance Agency in Hartsdale, New York. "If someone is injured by a fire in the building caused by negligent maintenance, for example, or if bricks collapse off the building's façade." A general policy will also cover property damage - like water damage - or the costs associated with the damage caused by an improperly maintained elevator causing fire and damage in the building next door. This type of policy usually provides around $1 million of coverage, which unfortunately is rarely enough these days.

And that's where an umbrella policy comes into play. These policies offer additional layers of coverage, as their name implies, "and can add tens of millions of dollars of extra protection," says James Fenniman, executive vice president of co-op/condo insurer Bollinger Insurance's R & F of New York Division.

The third type of liability insurance - often called D&O - protects board directors and officers. "Usually it's the company that gets sued, but sometimes it's the board members themselves," Berger says. "While general liability will protect directors and officers from property damage claims, [D&O] is necessary for areas where claimants feel board members have mismanaged."

"They might say, "˜You didn't let me sell my unit, you dragged your feet and I wasn't able to sell. Now it's your fault'," Kozera says. For claims against board members alleging mismanagement, discrimination, or other problems, D&O policies usually offer around $1 million of protection. "It's very important to expand your policy to include this," Fenniman says.

For the most part, the difference between co-op and condo liability insurance is very minimal. "There are differences in some of the technical language," Fenniman says, but both cover the same principles. It is, however, necessary to get the co-op policy for co-ops and the condo policy for condos because they need to mesh with the specific types of homeowner policies held by residents.

The Others

While general D&O and umbrella policies cover the basics of liability insurance, there are two other less obvious areas to consider as well. Environmental liability protection will cover a building in the event of oil leaks into the ground or mold, asbestos or lead paint situations. "Traditional policies don't cover asbestos and might not cover lead," Fenniman says. Buildings that have had problems with either of those things in the past might consider purchasing environmental liability protection. An inspection by an architect or engineer will provide an idea of whether or not coverage is a necessity.

If a building is considering construction or renovation projects, it is imperative for buildings to make sure their contractor has proper liability insurance of their own. "It's important for every contractor to provide a certificate of insurance," Fenniman says. "One million dollars is the bare-bones minimum, and that's for the guy who cuts the grass out front. Riskier work - stuff requiring scaffolding and that sort of thing - should have $5 to $10 million coverage."

The property manager should make sure that the building is added to the contractor's policy as an additional insured party. And it is imperative that all of those papers be checked before work begins. "I can draft a really good contract for my client saying insurance has to be provided, but then someone has to make sure you actually get that stuff," Berger says. "They need to get the proper certificates. Make sure the information is correct and make sure they have a copy of the policy in hand. There was a situation where our worker was actually killed and the building couldn't get their hands on the certificate. In this case, there was a policy, but the worst case scenario would have been that it never got issued in the first place."

How Much Coverage is Enough?

While policy sizes will vary with each building, every co-op and condo should at least have general liability. "That's the bare minimum," Fenniman says. "A lot of five- or six-unit brownstones have that. The larger multiple unit buildings all buy umbrella policies, some with $200 million coverage."

Several issues factor into determining how much is enough when it comes to insurance. In general, it's important for buildings to carry all three types of liability coverage. "Missing any piece of those three liability insurance types leaves the building open to significant gaps," Kozera says.

The size of the policy might depend also on the mindset of the board of directors. A board comprised entirely of attorneys most likely will want more coverage than a board filled with teachers. "It's called a risk-taking propensity," Fenniman says. "You can ask all of the people involved what they perceive a risk to be and they all will give a different answer." With that model in mind, a group of attorneys likely will be more wary of potential lawsuits and risk factors than a group with different litigious experience.

In more concrete terms, policy size and value will depend on the building's profile. "Is it a high-profile building on Fifth Avenue, or is it a smaller co-op in an industrial area?" Fenniman says. Buildings that are more accessible and visible might need greater protection. On average, luxury buildings tend to buy higher amounts of insurance simply to cover additional risk factors. "In larger buildings the risk is higher," Kozera says. "If you have someone on the 80th floor, there's a little more risk getting them out [in case of an emergency] than getting someone out of a second-floor apartment."

The Cost of Being Prepared

Just like every other business, insurance moves with the economic trends. And those trends have changed significantly in the past year. "It had been an extended buyer's market for the last ten to 12 years," Fenniman says. "Now that's reversed." Like the stock market, insurance has bull and bear markets, too, which mean greater rate swings. The turmoil of the stock market has affected insurance rates, too. "Wall Street has affected the surplus of insurance companies, and that's affecting people," Fenniman adds.

Trying to pinpoint exact insurance costs is an involved process. Dozens of variables factor in, all of which require a qualified insurance provider to sort out. "The primary policy is rated according to the number of units," Fenniman says. "Theoretically, the rates would be similar in all buildings, but larger buildings may be getting a bulk discount." Differences also emerge when buildings add umbrella coverage. Whether or not the building has made insurance claims in the past also will factor into the final cost. "If they've had claims in the past, they'll pay more," Kozera says.

Location also could be an issue. "Occasionally, you might have different rates according to the boroughs," Fenniman says. In some areas, the court system might be favorable to the prosecution while in other areas, the defense might have a better go of it - in either instance, rates will be a little different.

Sorting out all the tiny differences can be trying. "It's like buying cars," Fenniman says. "In certain models, everything's extra while some models have everything included and you can't even get rid of the extras." As with everything, buyers should beware when in search of a policy. "Sometimes if a quote looks too good, there's a reason. Some brokers just use very, very vague terms and you may not be getting very much coverage. You might be getting what we call Swiss cheese - a policy that has a lot of holes in it."

Dotted "i"s and Crossed "t"s

With something as important as insurance, it's always a good idea to make sure policies are in good order. "Insurance should be discussed annually," Kozera says. "You need to be paying attention to understanding what your risks are and what you're doing to manage them. If a building's broker is good, he'll regularly assess the marketplace and keep his clients apprised of what's going on with prices."

And with a good policy, everyone can sleep better at night.

Liz Lent is a freelance writer specializing in real estate.

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