Insurance is a tricky business. Sure, people usually know the types of incidents that necessitate an insurance claim (fires, floods, leaks, etc.), but when something happens in a co-op or condo and an insurance claim is filed, few really understand the nuances of what happens at each step from incident to resolution.

Whether it’s dealing with structural or cosmetic damage from construction work, a slip-and-fall in the lobby, or water damage from a leaky roof, the normal course of action finds a building’s manager filling out the relevant paperwork, submitting it to the insurance company and awaiting the compensation check.

But that’s not always a smooth process, and not always where the process ends.

“A super, porter, doorman, manager or board member may be the first to see or be notified of an incident. The building must have a procedure in place as to who should prepare the ‘initial written report.’ Once this is prepared, it should be sent to the managing agent to be reported and sent to the insurance broker,” says Barbara Strauss, executive vice president of York International Agency, LLC in Manhattan. “It is a condition of the insurance policy that the insurance company must be notified ‘as soon as practicable’ of an occurrence or an offense which may result in a claim.”

While a managing agent usually sends the insurance broker an incident report which is generated on-site, there are times where people who have suffered a claim contact the building’s broker directly.

“Also, a small percentage of the time a board member may call the broker and ask about a potential D&O claim,” says Todd Ross, president and CEO of TM Ross Insurance Brokerage, LLC in Manhattan, “but generally, it is the management company that reports and advises brokers about potential claims. Usually a claim presents itself to the building via an attorney’s letter or by a summons and complaint. Either way the letter is usually sent to the building or to the registered agent for the building, so the management company is usually the first to know.”

The Carrier’s Role

Once a claim is reported, the carrier may or may not investigate the claim, and a notice of a claim may not trigger any action. A claim that is real (like a fire or a lawsuit), will trigger immediate action by a carrier.

“Once a building files a claim, the next step is an insurance company will require additional information,” says Arthur A. Schwartz, CLU of Manhattan’s Masters Coverage Corp., a division of Valley National Bank. “If it’s a property claim, an adjuster would be sent to ask the super to produce invoices for repairs. For liability claims, the next step would be that an adjuster for the insurance company would want statements from anyone who was a witness or had facts about the case.”

If there is an issue or question of coverage, the insurance company would issue what’s known as a reservation or rights letter saying it is reviewing the claim and reserves the right to deny part of or the entire claim.

For property claims, a carrier sends an adjuster to review the loss to the building. Depending on the size of the claim, it may hire its own adjuster, called a public adjuster.

“Either way, the claim progresses with the building doing work and submitting bills to the carrier for reimbursement. The scope of loss is determined and proof of loss ultimately goes from the carrier to the building,” Ross says. “The proof of loss is in the final invoice that lays out what the carrier is willing to pay for. If all goes smoothly, the carrier and the building agree to the scope of loss and the pricing of the work and the building gets reimbursed from the carrier less any deductible.”

For other types of claims, the carrier investigates and assigns an adjuster and the carrier will then assign counsel to defend the building. Once counsel is assigned to the building, the attorney assembles the documents and items needed to properly defend the building in a lawsuit or in settlement talks.

“It takes many years for a claim to ripen—for all claims other than first party property claims that are between one month old to about two years old are green—they have not really developed,” Ross says. “Even though carriers are required by law to post reserves against all claims, because of the time to bring a lawsuit, do discovery etc., it may take up to two years to really get a true and accurate picture of what the final claim figure may be.”

Property claims will be resolved within the first few months because they are short tailed, meaning they have a short duration from occurrence to final adjudication. Liability claims are long tailed, meaning they may take up to six years or more to get final adjudication of the final claims number.

Types of Claims

There are different types of claims that insurance brokers typically work with. While the same procedure is generally followed for all claims, it is up to building management to determine into which category they fall, which is most likely one of the following:

First party/damage to building common areas: “Management reports the claim to the insurance broker and requests an adjuster to inspect the damages,” Strauss says. “It is the manager’s responsibility to be sure the damages are assessed and mitigated and a repair estimate be submitted to the adjuster. The adjuster will identify the covered portion of the damages and discuss settlement with the manager and/or insurance broker.”

Third party/liability: “For bodily injury, a written report should be sent to the insurance broker to be forwarded to the liability insurance carrier. The carrier will contact the insured/manager, in most cases, to take a statement,” Strauss says. “After reviewing the statement the insurance company will determine their next step.”

When it comes to property damage or damage to residents’ property, residents should always be advised to report their damages to their homeowners’ insurance carrier. The manager must report the incident to the insurance broker to be reported to the insurance carrier. In most cases, the insurance adjuster will contact the manager to discuss the loss and determine the next step.

Any incident that falls under those last two claims are considered third party liability claims and the determination of payment of these claims is contingent upon the negligence of the building owner.

Red Flags

It is not unusual for insurance carriers to pay claims without much fuss. However, when the insurance underwriter reviews a client's file, they will look for patterns of frequency and severity. The long-term ramifications of excessive or very expensive claims could be increased premiums, increased deductibles, or non-renewal of they client's policy.

If a building has many small frequent types of claims, it usually points to a chronic issue. Things such as numerous slips and falls in the same area could mean a sidewalk is raised and needs to be fixed; lots of water damage-related claims could mean there is a leak or the exterior roof of the building needs work.

“One major loss can be explained, it happens; shock losses can be explained away,” Ross says. “Lots of small claims that are similar, or lots of big claims will have an impact on the cost of insurance and on the terms and conditions carriers are willing to offer.”

Getting Notice

It might seem surprising, but board members are usually not made aware of claims unless they are significant.

“It’s the D&O related claims that the board usually know about and care more about, but generally, unless a claim is significant in size, or there is a frequency of the same type of claim, or a claim that will impact the insurance premium, a claim until settled is not a definite sum certain,” Ross says. “When it comes to the shareholders, unless it is a major claim or a large property claim which affects the entire building, they aren’t given notice. For all claims other than property, the most conservative route and what we advise is report all claims to preserve notice provisions under the policy. For small property claims that hovers plus or minus around the property deductible, it may make sense not to report the claim.”

Schwartz says that depending on the scope of a claim, most board members aren’t that interested in the “broken pipe” type of claims that happen all the time. That’s why they pay the managing agent and insurance agent, he says.

“Unless it’s something specifically against the board, they don’t need to be aware of it. Certainly, a board member would want to be made aware immediately of any directors and officers claim or any type of claim against the board,” he says. “Most shareholders are not interested in these sort of claims, unless it’s one shareholder against another and they may be involved in that. Most shareholders would feel they are entitled to know if there is a large claim against the building, specifically if there is an insurance issue that may result in an assessment or additional cost to shareholder.”

Strauss believes it is important for the managing agent to formulate a procedure on how and when to share claim information with board members for all insurance matters.

“It is our opinion that unit owners become aware of large claims when they receive their annual report,” she says.

Money Matters

Determining the amount of compensation and damages is a subjective area. “Both the contractor for the building and the insurance company adjuster will prepare and compare their estimates for damages to arrive at a fair and equitable settlement,” Strauss says.

Actuarial tables have been developed by the industry that calculate the cost of damages for other claims so that is a starting point, coupled with a carriers’ own loss estimates for the type of claims being alleged.

The property check for a claim can be made out to the building, to a public adjuster, or sometimes carriers can pay contractors or vendors directly. It’s considered reimbursement, so it goes back into the buildings’ account.

“The insurance company claim check usually gets deposited into the building’s operating account so payment can be made to the contractors, on a timely basis, for the repairs they made,” Strauss says. “Any deductible applicable on the policy will be the responsibility of the insured.”

Keith Loria is a freelance writer and reporter living in Virginia.