Where Does Your HOA Stand? Insurance Premiums and Changing Coverage

Every month, HOA residents pay monthly fees that are in turn used to pay for a variety of association necessities. One of those necessities is insurance coverage for their buildings and grounds. This isn’t the same as homeowner’s insurance, which insures any property within an individual resident’s four walls in case of fire, robbery, etc. The building’s insurance company covers the actual building structure and its electrical, plumbing and other systems.

Holding Steady?

Thankfully, unlike other necessities today—milk, food, housing and gasoline, just to name a few—the cost of residential building insurance isn’t climbing the charts faster than a new Beyonce single. This might seem surprising, since there doesn’t seem to be anything immune from the rising prices of today’s economy. Add in the fact that there has been an uptick in manmade and natural disasters recently—think collapsing construction cranes in Manhattan, or flooding in the Midwest—and it would seem quite obvious that the cost of insurance protection would be on the rise as well. Fortunately, that’s not the case and HOAs might even be able to save a few bucks without sacrificing coverage.

“The costs of the premiums are falling slightly, and that’s driven by the soft insurance market,” says Michael McCormick, president, Pavese-McCormick Agency in Monmouth Junction. “There is a lot of competition because there aren’t a lot of carriers that will cover that industry.”

Not only are rates going down, but the pros say that menu options for insurance coverage have also changed quite a bit over the last few decades. The standard package policies still exist—these include property insurance, boiler and machinery and general liability coverage, and board members and managers should review the bylaws of their association from time to time to see what’s required.

“The charter and bylaws of a specific co-op or condo association can have a substantial effect on the master policy for the building, any changes made to these documents has the potential to affect future coverages,” says John J. Baldino of the public affairs department at State Farm Insurance Companies in Parsippany.

However, certain events have a tendency to add new insurance or change existing insurance coverage. For example, the terrorist attacks of September 11, 2001 forced a change in terrorism insurance and, ultimately, the passing of the Terrorism Reform Insurance Act (TRIA), passed by Congress in 2002 which made the government responsible for claims from a terrorist attack if the damage exceeds $5 million dollars. Insurance companies can also decide that any given coverage is going to be cancelled come renewal time.

“Some companies may take away coverage, and that forces the board to look at other carriers,” says McCormick. “If, for example, your insurance carrier decides to drop coverage, they’ll generally notify you 60 to 90 days before renewal. It gives you enough time to address it and prepare for it.”

By the Ocean…

When it comes to building insurance coverage, there are only a few differences between insurance coverage in New Jersey and, say, New York. While some New Jersey condo and co-op associations are located in urban areas, other associations are located on the waterfront, which brings with it an insurance challenge that makes New Jersey different from other neighboring states.

“The New York marketplace tends to have more high-rise exposures and you’re not going to see as much of that in New Jersey, except in large municipalities,” says McCormick. “In Central Jersey, you’ll have multiple buildings as opposed to high-rises, but what is unique to New Jersey is the coastal exposure. There are lots of condos located within five miles of the coast.”

In addition to gorgeous views and proximity to the beach, being on the waterfront also exposes communities to maritime threats like flooding and high winds. To address these elevated risks, waterfront community associations have to consult closely with their insurance underwriters and adjust their coverages accordingly. For example, McCormick says that many insurance carriers require wind deductibles, which in some instances can be up to five percent of the cost of the policy.

Cost-Cutting Measures

Years ago, when boards wanted to implement cost-cutting measures, they trimmed a few bucks off their insurance policies by underinsuring their buildings, thereby reducing the premiums. Today, buildings are being insured for their true value—and although this could force an increase in premiums, some insurance companies are providing extra coverage at no additional cost.

“One of the biggest potential drivers of increased costs is that many buildings were severely underinsured in terms of cost to replace the building,” says Thomas R. Kozera, CPCU, president/CEO of SKCG Group Inc., a co-op/condo insurance agency in White Plains, New York. “The realization that most buildings were way underinsured is the single biggest driver of increased budgets over the last few years. The insurance companies are now driving the changes. The insurance companies are recognizing we couldn’t possibility rebuild it, even with the numbers today.”

Replacement costs have spiked dramatically over the last few years, largely driven by the skyrocketing price of construction materials. McCormick says that slips and falls and other water damage, such as roof leaks, can drive prices up.

“What also drives the price up in buildings—especially older buildings—is aluminum wiring,” says McCormick. “Some of the buildings, more so in northern New Jersey, have aluminum wiring that doesn’t take the heat the way the new copper wiring can, and it breaks down. With our increased use of electricity dependency, it heats that up and starts fires.”

Today, when many buildings remodel, they are adding green building features, such as energy-efficient heaters, rooftop gardens, etc., which is another new area for insurance companies. Unfortunately, not all insurance companies are covering green building products or systems just yet. If a building is interested in upgrading to green, then it’s important to include the replacement costs of these newer items—such as heating ventilation and air conditioning systems, energy and water efficient systems, and Energy Star roofs.

According to industry insiders, over the next few years, the insurance industry should begin to respond to consumer demand for coverage for green building products and other upgrade initiatives.

Coverage for My Stuff…

The late, great George Carlin often had great monologues about having too much stuff, but whether you agree or disagree with his too much stuff theory, it is still important—and often required—to have your stuff insured. Most associations require shareholders and unit owners to have insurance that covers everything inside their four walls, since the association’s master policy will not cover damage to the individual units.

In addition, shareholders and unit owners should also carry liability insurance as well, in case of a lawsuit by visitor who sustains injuries inside a resident’s unit, or in case a unit owner’s leaky faucet ruins Mrs. Smith’s unit downstairs. New Jersey residents who live by the water should be extra careful to make certain they have flood coverage.

“Many people are under the impression that their homeowner’s policy covers them for flood insurance,” says Liz Picarella, president of Picarella Insurance Brokers in New York. “Most homeowner’s policies do not automatically include this coverage, and it needs to be added to an insurance portfolio separately. A licensed broker can obtain a policy from FEMA, as well as some private markets that offer flood insurance policies.”

Keeping up with what’s new in the insurance industry is important to make certain your association is adequately covered. The board should be in direct contact with the managing agent or the insurance company and kept up-to-date on any new policies. These experienced professionals can tell the difference between new and valuable coverage and any gimmicky-type of insurance.

“The best resource for a co-op or condo board to keep up-to-date with the latest insurance information is their local agent,” says Baldino. “Many agents offer to meet with policyholders to review their coverage and ensure that it continues to meet their needs. Local agents can also keep customers up to date on the newest insurance products.”

When an association’s insurance is up for renewal, a board shouldn’t feel blind loyalty to their insurance company. Instead, they should shop around for the best prices and for maximum and complete coverage. In this economy, every dollar counts—and the goal is to have good coverage at the least amount of cost.

Lisa Iannucci is a freelance writer and author living in Poughkeepsie, New York.

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