Insurance Decisions How Much Coverage is Enough

From equipment failure and personal injuries to tornadoes and tropical storms, disasters happen. Any condominium association worth its salt knows that it needs to be prepared for a rainy day. A great chunk of that preparation is insurance.

With a vast array of coverage plans available at an equally expansive array of costs, how can a board decide what its community absolutely needs? What could be useful but isn’t a must-have, and what is entirely superfluous? Florida is famous for hurricanes, but earthquakes seem unlikely. California has the opposite problem. New Jersey may not be a regular target for predatory storms, but in the wake of the damage inflicted by 2012’s Superstorm Sandy, how cautious is too cautious? Some decisions are no-brainers, while others can keep a responsible board member up all night. Fortunately, there are experts and a wealth of resources that can help alleviate a board’s insurance woes.

Begin with Basics

Continuing with the category of freak weather and seismological occurrences, Cappy Stults, president of insurance firm Allen & Stults in Hightstown, says that earthquake and flood coverage isn't an absolute necessity for multifamily communities in the tri-state area, but as it's "relatively inexpensive if purchased with high deductibles," it should be strongly considered.

While flood and earthquake insurance might be a smart investment, other types of coverage are mandatory as specified by an association's governing documents. Property and casualty insurance are must-haves, and as Stults notes, "Directors and officers insurance may not always be required in the documents, but it should not be overlooked. Adequate crime limits for employee dishonesty is a necessity, as unfortunately, there are more and more cases of employee or volunteer dishonesty these days."

Also, if a condo or a co-op is a high-rise with a valet parking garage, garagekeepers liability insurance can help protect the association in the event that an owner's vehicle is damaged while under the care of an employee. Finally, Stults suggests that, while not compulsory, all associations should be protected by a workers compensation policy. This coverage can come in handy should a vendor every be injured while doing work on the property.

Tom Fontana, area vice president for the Arthur J. Gallagher Company in Holmdel, 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.”

Fontana echoes Stults' take on flood insurance, agreeing that it's usually very cheap. “It will cover you in the event of a loss," he says. After 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.”

It should be noted that cutting corners on insurance coverage in an effort to save money will likely come back to bite an association in the long run. "Scrimping on building insurance limits and perils could result in a condominium or cooperative not being able to rebuild," says Stults. "Although unit owners may have loss assessment coverage on their personal policies that would cover their share of an underinsurance assessment, that coverage is usually not mandatory. If 10, 20, or 30 percent of unit owners do not have coverage, and are underwater on their mortgages, they may just walk and not pay the assessment to rebuild."

Also in his experience, Stults has noted that some boards and associations mistakenly believe that their directors and officers’ liability insurance will protect them should they purchase inadequate property or liability insurance. "It should be obvious that D&O will not provide such protection, or associations would then only purchase high-limit D&O coverage," he says.

"Many associations believe it necessary to constantly bid or change insurers," Stults continues. "Having a relationship with a broker and insurance carrier is very important, especially if you end up facing a large or difficult claim. An association does not want to have to litigate against its insurer to collect. A prompt, fair insurance settlement saves much frustration and cost."

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 Gregory & Appel Insurance, Inc., a nationwide insurance agency based that serves New Jersey.

“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.”

Shopping Wisely

All interviewees agree that an association’s review of its insurance coverage should begin with its insurance agent, ideally one who specializes in community associations. 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 Arthur A. Schwartz, who owns a condominium in Manhattan along the portion of the Second Avenue subway line currently under construction, 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 offers educational booklets on how to pick an insurance agent, and what to look for in insurance. New Jersey has two CAI chapters (www.cai-nj.org) and the Pennsylvania-Delaware chapter (www.cai-padelval.org) which covers Southern New Jersey.

Seeking the advice of trusted peers never hurts, either. As Stults observes, it could result in a quality broker recommendation. "An association that has experienced a large loss, or a series of difficult losses, and is satisfied with the results provided by its insurance agent is a great source," he says. "Insurance is only important when you need it."

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 a frequent contributor to The New Jersey Cooperator. Staff Writer Michael Odenthal contributed to this article.

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