- Earthquakes, hurricanes, floods, fires, and tornados often involve catastrophic damage to property. These occurrences are initially reported by the media, and gain widespread attention as a result of devastating consequences to those in harm’s way. While the leadership of condominium associations and property managers may contemplate these catastrophic events happening, many have not considered all the steps necessary to prepare for and recover from the catastrophe, and how to alleviate the fears and distress owners of condominiums naturally suffer following the event.There are many considerations to address prior to the loss, as well as following the loss, in order to ease the chaos and stress that can arise. The following are some groups or individuals that must be dealt with:
- Association Board Members
- Individual Owners
- Insurance Agents
- Insurance to Value Experts
- Insurance Company Claim Representatives
- Government Officials
- Condominium Staff and Maintenance Personnel
- Banks and Financial Institutions
- Public Adjusters
Property managers and condominium associations need todevelop strategic plans to put in place prior to a catastropheso that they are able to cope with the situation after the loss. Effective communication techniques are of utmost importance and will assist in moving the recovery process along. Large natural disasters causing significant damage to condominium property can threaten the financial livelihood of many individuals if not properly handled. Owners are naturally concerned about whether their financial interests are protected. Proper communication is paramount to reduce this burden and prevent a second catastrophe with the owners from happening.
Obtaining Appropriate Insurance Coverage: Key Considerations
Before a storm begins to approach, it is important to review and assess the insurance coverage available to protect your property. This is true since once the storm is “in the box”, carriers will not write additional coverage.
- What Kind of Coverage Do You Need?
Many condominium unit owners do not maintain adequate coverage for the personal contents of their units. Condominium unit owners may need to consider loss assessment coverage and water seepage coverage. These issues are extremely important if the Association policy is a “bare walls” form policy. The current Florida Statutes essentially require the Association to maintain a “bare walls” policy. The Owners Policy should be extensive and cover all fixtures within the Condominium Unit. Most Owners are underinsured because they do not realize that virtually the entire unit interior has to be insured by the Owner.
- Exteriors and Common Areas
In reviewing coverage under the policy, it is important to ensure that there is adequate coverage for all areas of the condominium property, such as landscaping, tennis courts, swimming pools, gazebos, walkways, etc.
It is also very important to ensure that there is adequate coverage for upgrades, improvements and other betterments to your property. Coverage should be reassessed at regular intervals to make certain the property is fully protected.
- Flood Insurance
70 percent of Americans live on the coast and may be vulnerable to flooding. In fact, homeowners are 26 times more likely to be affected by a flood than a fire, according to the Independent Insurance Agents and Brokers of America. Recent problems in the adequacy of insurance coverage have come to light since Hurricane Katrina. Specifically, it turned out that many individuals and businesses had not obtained flood policies, under the belief that such coverage was unnecessary since the building was not in a flood zone. Flood coverage needs to be purchased as separate National Flood Insurance policies sold either through FEMA or by individual insurance carriers authorized by FEMA. However, excess flood policies are also available through private markets, and condominiums near the water should purchase excess flood coverage.Flood coverage is primarily to cover a property’s foundation, particularly with respect to older properties. The average premium for a flood insurance policy is $400 to $500 a year on $150,0000 to $200,000 worth of insurance. An association can only get up to $250,000 per property, so if you think you’ll want more coverage, you can get extra flooding insurance through private companies like the American International Group where you can insure your house up to $1 million. To assess your risk, check out the National Flood Insurance Program’s Web site atwww.floodsmart.govor call (888) 379-9531. There is a 30-day waiting period before your coverage takes effect.
- E&O Coverage
Boards of Directors of condominium associations typically are responsible under their by-laws for maintaining all forms of property insurance necessary to protect the common property of the association against all hazards to which that property is exposed for either the insurable value (replacement cost) of those common building elements. Boards would be well advised to include their attorneys, as well as their agents, in coverage considerations, because insurance requirements are driven by by-laws and can be affected by state regulations.This responsibility would typically include providing adequate flood insurance protection for all common property located in high flood risk areas. Association document requirements could make the individual members of the boards of directors of associations personally liable for insurance errors or omissions, including those relating to flood insurance. It would be prudent to determine whether the E&O policies provide for such coverage. More and more umbrella insurers are resisting adding any type of errors and omissions (E&O) insurance into their policies. As that happens, more associations are being forced to reevaluate whether they need E&O coverage. If they do, they likely will be forced to buy such coverage on a stand-alone basis.
- What is Covered and What is Not
It is important to note that many policies contain exclusions for loss or damage caused by the enforcement of any ordinance or law that regulates the construction or repair of the property, or that requires the tearing down of property. These types of exclusions are intended to address building codes that can require the use of more expensive building materials or construction methods. Because these types of building code requirements can add tremendous extra costs to the repair and reconstruction of a building after a loss, it is important to consider purchasing ordinance and law coverage to prepare for such contingencies.Other important coverages that may be missed include coverage for business income, ordinance and law, and flood coverage. Business income/business interruption insurance is particularly necessary for owners or managers who are involved with properties that are used for vacation rentals.
It is also essential that deductibles are properly understood, since deductibles for certain perils can be much higher than the typical property insurance deductible. For example, the normal property deductible is often expressed by a dollar value. However, the hurricane deductible is typically expressed as a percentage of the coverage.In the case of a hurricane deductible, or even a large property insurance deductible condominium leadership, will need to prepare for the contingency that a loss will occur and that the deductible must be met from the Condominium’s funds. The Association Board should divide the amount of the hurricane deductible by the number of units and create an assessment to the owners to cover the hurricane deductible each year. An alternative to that type of funding is to include the unit owner’s portion of the deductible in the yearly fees so a reserve can be maintained.
- Periodic Review of Coverage
Insurance coverage must be periodically reviewed to ensure that adequate insurance is maintained on the property especially, in light of the various changes being made in the law concerning condominium insurance coverage in various states. Moreover, with rising property values and repair construction costs, it becomes essential to conduct a periodic review of the values insured. It has become apparent from various catastrophes following the 2004 and 2005 storms, that most properties are undervalued and under insured.For example, Florida’s statute addressing insurance coverage for condominium associations, section 718.111, was broadly revised to impact policies issued on or after January 1, 2004. Those changes were instituted so as to attempt to alleviate the confusion over what items were to be covered by the association policy or by a unit owner’s policy. The statute had previously attempted to divide up coverage responsibilities by the use of a definition of the word “building”, and also required a review of the policy’s declarations to determine coverage responsibilities. The newer version seeks to more clearly use the term “condominium property.”The statute’s intent is to clarify which party is to be responsible for insurance coverage over what item, so that it should no longer be necessary to consult the condominium declarations to determine whether an item is to be covered under the association’s insurance policy or that of the unit owner. Because there have not been much in the way of reported decisions on the revised version of Florida’s statute, it is uncertain how the statute’s revisions will be interpreted by a court. Each state has different statutes and regulations affecting condominium insurance and they have to be periodically reviewed with counsel and qualified insurance agents.
The items mentioned above are not intended to be an exhaustive explanation of the needed areas of insurance coverage to consider. It is often appropriate to consult with an expert to assess risk management needs. We strongly urge condominium associations to prepare checklists of all property that needs to be covered per the Bylaws and have the insurance agent confirm that the policy purchased covers everything required in the Bylaws.
- What Kind of Coverage Do You Need?
Insuring to Value: Understanding and Correcting the Problem
- Property to Value Ratios and Underinsurance
The first five years of the 21st century have been marred by enormous amounts of property damage from natural causes—tornadoes in the Midwest; hurricanes in the Southeast; fires, landslides and earthquake rumblings in the West; and drenching rain and flooding in the Northeast. In the aftermath of these catastrophic events, many victims have found themselves underinsured for significant property losses. In many cases, the victims had little understanding of the insurable value of their property or its related insurance costs. Alternatively, if they did, they made an unfortunate decision not to insure against the full amount of the losses they just experienced, which is likely to cost them many times more than insurance to value would have.In order to understand the problem of underinsurance, it is helpful to understand the interests of the various parties affected by property insurance issues. As explained by FEMA Policy Advisor Joe Coughlin in 2004, following a rash of devastating hurricanes: “All three parties have different interests, all of which must be accounted for. Insurers are interested in pricing their policies based on the value of the building being insured and the risk it faces. Lenders and regulators are interested in making sure that the collateral security for the loan is fully protected. The insured lastly, but most of all, should want to protect their full equity interest in the property, as well as the full outstanding balance of any loans on the property. That way the property owner is fully protected in the event of a loss, as are all other interested parties. This process all starts with accurate property valuation estimates.”Coughlin has attributed underinsurance to two reasons: a lack of understanding of the risk the property owner is exposed to on their property, and an inaccurate estimate of the insurable value of their property. In his view, “[a]ccurate property valuation estimates provide a solid foundation of information for property owners, lenders, regulators and insurers on which responsible decisions can be made regarding levels of insurance protection, and the terms, conditions and pricing of such coverage, to protect the interests of all parties. Without such information, there is no way to guarantee that all such interests are protected.”
The problem of underinsurance is by no means an isolated one. Observers of long-term trends in catastrophe claims in California have noted one major constant that links catastrophes such as the Oakland Fires (1991), Malibu fires (1993), Laguna Beach fires (1993), Northridge earthquake (1994), and Southern California Wildfires (2003) — namely, underinsurance.
Because of the nature of catastrophes in general, a concentrated disaster often exposes flaws in residential and commercial property valuations that had previously gone undetected.
- Repair vs. Replacement Value
One contributing factor to the underinsurance problem is the disparity between insurers’ and property owners’ understandings of the term “replacement value.” Insureds generally understand that term to mean the cost of replacing their lost property. On the other hand, insurers generally utilize a different definition, which contemplates a financial limitation which effectively provides the insureds with as little as 50% of the true cost to replace their property.By limiting their exposure to stated policy limits selected by the insureds themselves, insurers are able to sell an “actual cost” policy, an insurance product that is wholly inconsistent with the true replacement cost of the covered property. This difference in the parties’ respective understandings regarding what constitutes a property’s full insurable value can place property owners and managers in a difficult financial position at the time of a loss. In many situations, the party responsible for the study is simply wrong regarding the estimate for reconstruction. Those errors may occur as a result of scope or pricing miscalculations. The errors may be a result of not considering all insurable portions of a structure. However, in many instances when repair is required, these buildings are rendered underinsured because of the fact that the property is to be repaired rather thenreplaced.Typically, three primary reasons exist for a situation when the repair costs are greater than the “insurance to value” or “policy limits”:
- The repair values/damages are not the same as replacement for new construction.
- Many portions of a condominium are excluded from valuation per the condominium documents.
- Catastrophe losses may cause temporarily high prices in situations where the catastrophe is widespread. The demand for repair construction under such circumstances far exceeds those in an isolated single event. Typically, insurable values are based on “replacement costs” of the building brand new.
“Repair costs” are usually 25 – 50 % higher than replacement cost construction. Further, the “scope” of repair includes items not typically found in replacement or new construction. For instance, water damaged buildings which are repaired require significant dry-out and dehumidifying costs, which are not ever associated with “new replacement/construction costs.”
- Policy Exclusions for Specific Areas of a Property
Further, “insurance to value” excludes portions of structures because of premium cost consideration in bylaws or other condominium documents. A good example is that the foundation costs are typically excluded from insurance values because most condominium bylaws exclude foundations from being insured. The reason is typically to reduce the overall cost of insurance in relation to the very remote chance of damage to that portion of the building.A major insurance estimating firm indicated that its database was approximately 50% off for the repair costs being actually found in the marketplace.
- Quantifying the Problem: Statistics on Underinsurance
- Who is Hurt By Underinsurance?
Underinsurance is a problem that hurts property owners and managers and insurers alike. Specifically,
- Identifying the Sources of the Problem: Why Does It Exist?
One might ask themselves how the same issue could transcend time and location and manage to arise during each successive catastrophe in the United States. Here are some theories from one claims adjuster’s perspective:
- Predicting Outcomes Following a Catastrophe: What is Likely to Happen?
The likely outcome of an underinsurance issue after a catastrophe depends in large part on the factors that went into the original coverage valuation. Errors by the carrier or the captive agent may lead to some reformation of the policy, while errors on the part of a non-captive agent or broker may end up with their errors and omissions carrier. But the claim of an Association specifically requested or insisted on the written limits will most likely result in no payment beyond the coverage limits (or extended limits) as outlined in the policy. The lesson? Get the value estimated right before the loss.
- Co-Insurance Provisions: How Have Insurance Companies Attempted to Address the Underinsurance Problem?
Property insurance companies have long recognized that there is a fundamental relationship between the ratio of insurance to value and the price that should be charged for the insurance protection. This relationship derives from the fact that the great majority of losses in the property insurance area are partial and, indeed, most constitute only a relatively small percentage of the value of the insured property. Therefore, some insureds play the odds and do not insure their property for its full value. This allows them to save on the cost of insurance because they are paying for less coverage. If this phenomenon were not recognized in either the rate making process or the loss adjustment procedures, an individual could obtain full coverage for the most probable loss by carrying insurance to only a fraction of the value of the insured object.To discourage this practice and to seek an equitable distribution of the burden of insured losses, the companies have followed the practice of requiring a specified percentage of insurance to value or adjusting the premium rate for amounts of insurance less than that contemplated in the computation of the basic rate. Such a requirement obligates the insured to keep a specified amount of insurance in force on the insured property, or face penalties in the event of a loss. In this way, the insurer and the insured share, in a specific ratio, the risk of losses covered by the policy, after the deductible is met. Under a coinsurance scenario, if the property is not insured to one hundred percent of its replacement cost value (RCV), then any loss can be prorated to the percentage of the amount purchased vs. the amount that should have been purchased. For example, if only $100,000 worth of insurance was purchased on a $200,000 RCV and there was a loss for $50,000, the insurer would then pay only $25,000, since only 50% of the required amount was purchased.Where a coinsurance provision is in place, the insured continues to receive the benefit of a reduced rate. However, even if no such restrictive language is contained within the policy, the insurer is not going to pay its insured more than the amount of coverage purchased. This can be problematic, especially to those property owners who thought they had insured their building to its full value but used a faulty method to determine how much insurance they needed, likely through no apparent fault of their own. Coinsurance provisions, in the absence of a statute to the contrary, are generally treated as enforceable.
- Statutory Provisions: How Have State Governments Attempted to Address the Underinsurance Problem?
A number of state legislatures have passed laws requiring managers and Boards of condominiums to maintain adequate insurance to value ratios or face legal penalties. For example, Alabama law provides that the association shall maintain, to the extent reasonably available: (1) Property insurance on the common elements insuring against all risks of direct physical loss commonly insured against or, in the case of a conversion building, against fire and extended coverage perils.The total amount of insurance after application of any deductibles shall be not less than the greater of 80 percent of the actual cash value of the insured property at the time the insurance is purchasedor such greater percentage of such actual cash value as may be necessary to prevent the applicability of any co-insurance provision and at each renewal date, exclusive of land, excavations, foundations and other items normally excluded from property policies. Code of Ala. § 35-8A-313 (2006)[emphasis added]. With the exception of Alaska, where the required ratio is 100 percent (see Alaska Stat. § 34.08.440), the states that have statutes on the subject require an insurance to value ratio of at least 80 percent. See, e.g., La. R.S. 9:1123.112 (80 percent rule); § 448.3-113 R.S.Mo. (same); R.R.S. Neb. § 76-871 (same); Nev. Rev. Stat. Ann. § 116.3113 (same); N.M. Stat. Ann. § 47-7C-13 (same); R.I. Gen. Laws § 34-36.1-3.13 (same); Tex. Prop. Code § 82.111 (same); 27A Vt.S.A. § 3-113 (same); Rev. Code Wash. (ARCW) § 64.34.352 (same); W. Va. Code § 36B-3-113 (same).
- Note Regarding the Legal Duties of Insurance Agents and Companies
As a general rule, insurance agents have no legal duty to advise policyholders that they should purchase additional or different coverage. For years, insurers have taken advantage of this rule; for example, in a legal pleading filed in April 2004, Farmers Insurance Company observed that “Plaintiffs face a serious uphill battle on this underinsurance issue, [because] it is well settled California insurance law that the insured – not the insurer – is solely responsible for determining and obtaining the level of coverage desired.” This is problematic, since an insured typically has no idea how much protection will be required in order to effectuate full indemnification in the event of a catastrophic loss. Moreover, insurers not only hold themselves out as experts in this arena, but their policy language and business practice often require that the insured submit to their assessment of the coverage limits required for the risk.In an effort to mitigate this problem, many courts have developed rules that shift liability to the insurer in certain circumstances. Specifically, courts have held that insurance agents assume “special duties” when they (1) misrepresent the nature, extent or scope of coverage being provided, (2) fail to procure coverage specifically requested by an insured, or (3) hold themselves out as having particular expertise in the type of insurance that the insured is purchasing. Fitzpatrick v. Hayes, 57 Cal.App.4th 916, 927, 67 Cal.Rptr.2d 445 (1997).
Note also that, because an insurance agent may be an agent of the insurance company, the agent’s conduct can be imputed to the insurance company and the insurance company can be held liable for the agent’s misrepresentations or failure to obtain requested coverage. Farmers, 47 Cal.App.4th at 1120.The Farmers case highlights the need for a property owner or manager to communicate their coverage needs specifically to their insurance agent. By the same token, to avoid being held liable for damages beyond the face value of a policy, it is important for insurance companies to consistently insure that their policyholders are maintaining an adequate level of coverage.
- Strategies for Procuring Insurance to Value
As shown above, some preparation on the front end can save a property owner a great deal of money and headache post-loss. At a minimum, an insured should do the following to increase the likelihood that his property is insured to value:When First Procuring Coverage:
After Obtaining Coverage:
- Property to Value Ratios and Underinsurance
Preparing the Property for a Hurricane or other Approaching Catastrophe
- Funding the Recovery Process
To ensure that there is going to be enough money available to properly fund repairs after a catastrophic loss, property management and/or the condominium association can establish a line of credit with a local bank or financing institution, as well as obtaining loan capabilities already approved in advance. That way, following the event, the funds can be immediately made available and the board can meet and pass an assessment necessary to repay the loan, giving the owners a period of time, such as 90 days, to pay the assessment.
- Retention of a Recovery Company
Another suggestion is to make accommodations for a hurricane or catastrophe disaster recovery company to work for the condominium in the event of a catastrophe. Arrangements should be made for the company to arrive as soon as possible following the loss, and if appropriate, even before a storm occurs, if evacuation is not mandatory. Sufficient funds must be available to pay these charges once they are incurred. The recovery company should be able to bring in generators, sand machines to scrape sand if the property is on the beach, pump to pump out water, and possibly even a recreational vehicle for use as a temporary office. Having a contract in place before the disaster explaining what the duties of the vendor will be can save critical time after the loss. Having proposals and bills made by these vendors in advance usually saves money because the condominium is not contracting when the vendor’s services are most needed.
- Practical Tips
The following are some practical suggestions to prepare for an impending hurricane, as has been experienced on many occasions in the Gulf Coast states in the past several years:
Post-Disaster Management: Actions to Take Immediately Following the Loss
The following are some practical suggestions for steps to be taken once a hurricane, or other catastrophe, has occurred:
If hurricane shutters have been installed, it is essential that the owner leave a key on site, so that once they are closed they can be re-opened. For condominiums that are primarily owner occupied and seasonal, companies can be hired to come in before the storm and put up the shutters, and come back after the storm and take them down. Following the loss, the community will see the influx of companies and professionals seeking work for construction and/or public adjusting work. Unfortunately, some of these individuals may be seeking to make a quick profit from catastrophe recovery efforts without having the proper qualifications, licenses, or considerations in mind. Again, contacts can be made with emergency restoration vendors before the loss so, references can be verified and quality work assured as best as possible.The importance of documenting all repairs cannot be overemphasized. Associations need to take care to document every action taken to restore the property, including such things as waterproofing and handrail repair. For example, if the sliding glass doors are in good condition and not fogged up, this should be reflected in the Minutes or Maintenance records.
- Funding the Recovery Process
Insurance Claim Presentation Following a Loss
Following the loss, after the insurance company adjusters are contacted, in a complex loss situation, a claim should be presented. This presentation can be made by the property managers and/or condominium associations themselves, with the assistance of a public adjuster, or with the assistance of an attorney. In this regard, the importance of competent, professional legal counsel cannot be overemphasized. Many states prohibited property managers from negotiating the insurance loss because it constitutes the practice of law or public adjusting.
- Tips for Adequate Claim Presentation
Public adjusters are individuals typically licensed by the state, although some states may not necessarily license public adjusters. They often charge a percentage of any recovery, and are available to assist the property owner in making an insurance claim. Although public adjusters are able to estimate and scope the loss, they are usually not able to interpret insurance policy provisions on behalf of the policyholder. Insurance coverage attorneys, such as the Perry & Neblett P.A., are also available to assist with claim presentation to the insurance company, as well as with coverage disputes.Certain concepts should be kept in mind when presenting an insurance claim. For example:
- Do not sign a Release if you feel you are not receiving enough to properly fix the damages. Property insurance policies do not require that a release be signed.
- Do not allow insurance company adjusters to write claims or based on normal repair circumstances, and not take into account the increased costs of materials and labor in a catastrophe climate.
- Do not allow the insurance company adjuster to make the policy a “self-serve” policy by telling you what to do to determine the loss or damage, rather than promptly making a complete inventory and estimate of damages. Showing first field adjuster to fully document the loss is a critical step to the easy flow of insurance benefits because it avoids duplicative requests.
- Do not allow an adjuster to write up to only 45% of the property’s value in order to escape new building code requirements, which are potentially triggered at damages exceeding 50%.
- Obtain your own independent quotes for fixing the damage to the property.
- Call, confirm, and follow-up in writing with everything told to you by the insurance company adjuster.
- Keep receipts for every thing repaired and replaced, as well as all other costs associated with the repair process.
- Proof of Loss Forms
In addition, insurance policies need to be reviewed with respect to the requirements for a “proof of loss” form to be submitted. Typically, windstorm and property insurance policies either require that a proof be proactively submitted by the insured, or that a proof be submitted within a certain number of days after it is requested by the insurer. In some cases, the insured will be granted an extension to file a proof of loss under a windstorm policy. With National Flood Insurance policies, the proof of loss requirement of the policy is sixty (60) days following the loss, unless a formal written waiver is given by FEMA. A verbal waiver or a waiver by an adjuster will not suffice to circumvent the sixty-day proof of loss requirement. The failure to properly and completely fill out a flood proof of loss, or the failure to timely submit the proof of loss, will result in the failure to recover any flood benefits under a Federal Flood Insurance policy.
- Preventing Breach of Contract and Fraud Claims
Insurance policies also contain conditions requiring an insured to submit to an examination under oath, if requested by the insurer, and to allow inspection of books, records and documents in the possession of, or maintained by the insured. These requirements cannot be taken lightly, and must be completely complied with, so that there is no argument that the insured has breached the policy conditions. A breach of policy conditions by the insured can be used as grounds for the insurer to deny coverage for a claim. The unintentional actions of an insured can sometimes be seen as an unlawful attempt to defraud the insurance company. For example, throwing away debris before the insurance company can inspect it may lead an insurance adjuster to suspect that a policyholder was trying to destroy evidence which may indicate that he damage was not as bad as claimed. The property manager may have assumed that getting rid of the damaged property was the safe and efficient thing to do unaware that the policy requires the damaged property to be held for inspection.
- Be Aware of Applicable Statutes of Limitation
If a dispute arises between the insured and the insurer, the particular state’s statute of limitations for filing a lawsuit must be recognized and complied with, with respect to a windstorm or property insurance policy. When it comes to National Flood Insurance, a one-year statute of limitations exists, and any litigation between the insured and the insurer must be filed in Federal Court.
- Tips for Adequate Claim Presentation
The Importance of Communication
Emotional distress and fear naturally follow significant catastrophe situations, so that communicating to the Association before and after the catastrophe reduces the emotional burden following a loss. The Association’s members should be aware of the type of insurance in place at least on a yearly basis. The agent will often prepare a summary of coverages and personally explain the insurance coverages purchased so there are no surprises. The agent typically explains the types of coverages the owners may need and the markets available. Insurance is bought for peace of mind. Owners need to feel secure that they are adequately insured before the unknown disaster ever happens. This information should be widely disseminated.
Widespread catastrophes typically involve outages of power and communication lines. Some may consider purchasing satellite phones for this contingency, so that lines of communication can remain open.