Insurance Decisions How Much Coverage is Enough?

Earthquake insurance is very common in California, for obvious reasons—but what about New York City? Tremors may be vanishingly rare here, but nonetheless, Arthur A. Schwartz's Manhattan condominium building has earthquake insurance, and he's glad it does. 

Schwartz lives along the portion of the new Second Avenue subway line that is scheduled to open at the end of 2016. “There are many co-ops and condo buildings in the area, with substantial excavation going on underneath them,” he says. 

Thanks to the underground activity, Schwartz’s building has a big crack in its lobby. Responsible parties include the city's Metropolitan Transportation Authority (MTA), the city itself, the contractor, and a subcontractor—or several. 

“All have insurance and will eventually pay for the damage,” says Schwartz, “but how long will that take? The building has to fix the crack in the meantime.” 

Schwartz knows whereof he speaks—he's senior vice president of Masters Coverage Corp. in its New York City office. Like most insurance agencies writing insurance for common-ownership communities, Masters, a division of Valley National Bank, often is called upon to tailor coverage to the specific needs of a given co-op, condo, or homeowners’ association. 

Begin with Basics

Schwartz says earthquake coverage isn’t an absolute necessity for multifamily communities in the tri-state area, but it certainly falls into the “nice to have” category when it’s needed, as his own building’s board of directors found. 

While earthquake insurance might be a 'nice to have,' other types of coverage are mandatory. A common-ownership community in New York State must carry property and casualty coverage, as well as directors-and-officers (called D&O) liability insurance―but the attorney general imposes these requirements. They aren’t statutory.

“When you’re going to build, you put together an offering plan and send it to the attorney general’s office for approval,” says Mari Ann Cole, president of Long Island Coverage Corp in Hauppauge. “That becomes the bible, where the requirements are stipulated—what’s to be insured and maintained by the community.” 

The offering plan contains the community’s bylaws, declarations, and a description of the community. “The wording with respect to insurance is almost always the same,” says Cole. “The condo or whatever will insure to the extent obtainable property coverage for fire, water, vandalism, etc.; general liability coverage for the association’s commonly held property; and coverage for the directors and officers of the community.” 

Depending on the community’s specific characteristics, the developer or the attorney general’s office also may require crime insurance (to reimburse the community for embezzlement losses from a dishonest board member or management company), and a fiduciary bond (for people handling the association’s funds). 

“New York requires every business to have workers compensation insurance—and a condo is a business,” adds Tom Fontana, area vice president for Arthur J. Gallagher Company in Holmdel, New Jersey. “Also, if the community owns a vehicle, it must have auto insurance.”

Fontana also recommends umbrella liability coverage. “General liability is usually $1 million,” he says. “The umbrella amount chosen varies depending on what the board wants, or what’s in the bylaws. Sometimes it’s $1 million, sometimes $100 million.”

Insecure Data

Not all threats are as obvious as an earthquake or a lawsuit. Forward-looking communities should also explore cyber-liability insurance, recommends Scott McGinness, vice president of commercial sales at Gregory & Appel Insurance, a nationwide insurance agency based in Indianapolis.

“A community association or management company that has personal information of its residents on file is at risk of a security breach,” he says. “This involves forensic work to figure out who the victims are, and buy them credit monitoring for a period of time. In addition to these first-party expenses, there is the possibility of lawsuits.”

McGinness says with growing exposure to data insecurity, the number of companies offering cyber-liability insurance is increasing. “It’s a separate policy in most cases,” he says. “Ask your agent for a quote. It’s not all that expensive, but a lengthy application is involved. It takes some work to answer all the underwriter’s questions—and the insurance company will offer suggestions on how to do things. It’s a good product to look into from an insurance standpoint and a prevention standpoint as well.”

Sandy’s Impact

In a flood zone designated by the Federal Emergency Management Agency (FEMA), flood insurance for common-interest communities is very expensive, but mandatory. Otherwise, residents buying into such a community won't be able to get an individual mortgage, Schwartz says. 

Elsewhere, flood insurance is optional—“and usually very cheap,” Fontana says. “It will cover you in the event of a loss. After Superstorm Sandy, many condos without flood insurance had terrible water damage, and their property policies weren’t paying, saying the damage was flood, not wind-driven rain.”

Sandy was a post-tropical cyclone with hurricane-force winds when it struck the New York City area on October 29, 2012. The East River spilled over its banks, flooding much of Lower Manhattan. At Battery Park, the storm surge rose to 13.88 ft. above sea level. Many co-ops and condos outside the flood zone were inundated.

On Long Island, the storm damaged, destroyed, or severely flooded around 100,000 homes. Especially hard-hit, Cole says, were co-ops and condos in Long Beach and Lido Beach, on the ocean side of Nassau County just outside New York City.  “The majority of Long Island was not zoned flood required,” Cole says. “When we go to a community, we always recommend flood insurance even if it's nowhere near a flood zone. Most decline.” 

With two- to six-story buildings, only the basement and lobby were affected, “but all the mechanical equipment for the building is in the basement, so you have to insure for it,” she says. “In some communities in Long Beach, the boilers and first-floor lobbies got decimated with sand brought in by the surge. Some of those communities are 100 percent gone, still not rebuilt. They didn't have flood insurance because it wasn’t a requirement.”

Shopping Wisely

All interviewees agree that an association’s review of its insurance coverage should begin with its insurance agent. If the association has a managing agent, that individual should organize and participate in the review. In many communities, managing agents conduct annual insurance meetings for board members, and sometimes for owners as well. 

Other sources of information may include consultants and specialists, but Schwartz says they aren’t necessary. “Read the Cooperator,” he advises. “Attend the magazine’s annual Expo, and search the Community Associations Institute (CAI)’s website, www.caionline.org.” CAI, which has chapters in New York City (bigapplecai.com), Long Island (cai-li.org) and the Hudson Valley (cai-hvny.org), offer educational booklets on how to pick an insurance agent, and what to look for in insurance. Other helpful organizations include the Greater New York chapter of the Institute of Real Estate Management (iremnyc.org), the New York Association of Realty Managers (nyarm.com) and the Federation of New York Housing Cooperatives & Condominiums (www.fnyhc.org), all of which can offer advice to board members and managers.

McGinness cautions association boards against buying insurance based solely on price, without reviewing exactly what is covered—and what isn't. “Coverages are very non-standard,” he explains. “Company A’s may be completely different from Company B’s or Company C’s. You need to be diligent and ask questions.” 

If you seek bids from multiple insurance agents, don’t ask more than two or three to bid, and don’t seek multiple bids every year. “There’s a downside to allowing a lot of agents and doing it every year,” McGinness says. “If an account gets submitted to insurance companies every year, they look at you as a price shopper and have little enthusiasm for working on the account. 

“The quoting process involves underwriters, raters, and a loss-control person they send out prior to quoting. They do this every time they quote. They want to gather as much information as possible to help them predict what a claim is going to be.

“If you involve too many agents, now you have one insurance company receiving five different submissions on the same account. Insurance companies hate that.” 

Fontana concurs. “Shop every two or three years,” he says. “If an account is out every year, it gets a pain-in-the-neck reputation. The companies don’t feel like quoting if you’re not going to be loyal, so establish rapport and a track record with an insurance company.”

George Leposky is a freelance writer and is a frequent contributor to The Cooperator. 

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