The Insurance Marketplace Cybercast—Volume 48, September 2011 Print Friendly Version  
 
 
INSURANCE MARKETPLACE SOLUTIONS
 
  Condominiums

You've had your condominium on the market for two years. You've negotiated and finally reached an agreement with a well-qualified buyer and the deal will close in a few days. It is then that you receive a telephone call informing you that your condominium association does not meet the new Fannie Mae condominium requirements. As a result, the deal will fall through unless the condominium association purchases a $500,000 fiduciary bond, transfers additional funds into the reserve account, and additional condominium unit owners purchase HO-6 insurance coverage.

What are your options? Here are a few to consider:

  • Call your board of directors and demand that it take immediate action. When you do, the president agrees to add your request to the list of agenda items for the next board meeting that will take place in 20 days.
  • Call your buyer and ask that he use a local community bank instead of depending on a Fannie Mae-backed mortgage.
  • If the sale falls through, file a lawsuit against your condominium association for failing to meet its fiduciary requirements.
 
GROWTH POTENTIAL
 

According to our MarketStance information, there are more than 550,000 condominium associations in the United States. They pay almost $4 billion in annual premium for their standard property and casualty coverages. This does not include premiums paid for condominium directors and officers liability coverage. Property is the primary coverage. Over 50% of the premium is from Businessowners (BOP) policies that are property driven, and even risks not written on BOPs are property driven.

Every state has condominiums; the top two are Florida with over 85,000 and California with over 78,000. However, not just vacation states have condominiums. New York, Illinois, and Massachusetts are in the top ten list of states that have condominium associations.

For more information:
MarketStance website: www.marketstance.com
Email: info@marketstance.com

 
 
 
STATING THE OBVIOUS
 
   

Condominium associations are groups of individual unit owners who live in community. They are corporately responsible for all common property. This is a significant responsibility because the assets of all parties are on the line if an accident or injury occurs. Well-written bylaws and agreements are important, but these assets are still at risk if adequate insurance is not purchased to protect the owners.

 
   
THE HEART OF THE MATTER
 
   

Here is a possible loss scenario:

The Finneygun Condominiums is an exclusive apartment complex that was converted to condominiums. Ten years later, a fire started in the community building and, because of high winds, it spread throughout the complex and destroyed over 90% of the units. The complex was insured for $6,000,000 on an agreed value basis. The total cost to rebuild is $9,000,000 because of significant upgrades required by various building ordinances.

The condominium had $1,500,000 in reserve and plans to assess the members for the difference. A group of unit owners file suit against the board of directors because the insurance arrangement was inadequate.

 
   
THE MARKETPLACE RESPONDS
 
   

Condominiums are not monolithic, and neither is the insurance marketplace. Jamie Schraff, community association program manager at The Distinguished Programs Group, explains, “We place coverage for homeowner associations (HOAs), residential condominiums, office and commercial condominiums, timeshares, cooperatives, and planned unit developments of all sizes and demographics in all 50 states.”

Similarly, Gail C. Pierce, senior commercial underwriter at Roush Insurance Services, Inc., says, “We can offer property and liability coverage for almost any condominium association, regardless of the number of units, construction, or location. This includes the ones with clubhouses, lakes, security guards, playgrounds, and other additional exposures that are typical for them."

Charles Bushong, president of Coastal Insurance Underwriters, explains that they concentrate on the large southeastern market. “We do mainly residential condominium associations. We also have some facilities for commercial condominiums like offices and retail space. We do business mainly in Florida, Texas, and Alabama, all of which have huge numbers of condos.”

Some markets are particularly interested in either urban or suburban exposures. However, Robert G. Morgan at Philadelphia Insurance Companies explains, “We have a fairly broad eligibility appetite. We insure new construction, conversions, garden style, townhouses, mid-rise, and high-rise accounts. From an occupancy standpoint, we insure year-round communities, as well as rental and seasonal communities. From a location standpoint, the emphasis is more on evaluating catastrophe exposures, i.e., terrorism, hurricane, hail, earthquake, winter freeze, etc., than on the urban vs. suburban distinction.”

This broad demographic approach is similar to that espoused by George Cvengros, underwriting supervisor at Burns & Wilcox. He says, “We arrange coverage for residential and commercial condominium associations in urban and suburban locations. We can write associations as small as one unit up to several hundred units, one story or the high-rise variety. All types of construction can be considered.”

Our contacts all explained that coverage is available in both admitted and non-admitted markets. Among the carriers that write condominiums are Century Surety Company, Chartis, Companion Property & Casualty Insurance, Essex Insurance Company, Great American, Ironshore, Philadelphia Insurance, Scottsdale Insurance Company, and Tudor Insurance Company.

The property line of business develops most of the premium and also most of the losses. Mr. Morgan explains, “Frequency is seen in older condo properties, which typically have a higher percentage of rental units. Frequency is evidenced in water-related losses and fires. Severity is seen when a fire can make it to the building roofline that allows for an uninterrupted rapid spread of fire."

Mr. Cvengros is particularly concerned about high-rise condominiums and says, “Agents should ask the insured if the local fire department is equipped to handle a fire in a high-rise condominium building. Other questions include: Are there standpipes and hoses on every floor of a high-rise condominium? Are there sprinklers on the premises, either partially (just in common areas) or totally, throughout the condominium?"

“There are some additional hazards in coastal states, such as wind and flood, that need special products. As a result, the agent must be knowledgeable about coastal exposures and coverages.” according to Mr. Bushong. “For the flood exposure, the condo association needs not only federal flood insurance for the primary coverage but also excess flood insurance. A lot of big high rises have large square footage per unit, and they can quickly use up the maximum limits provided by the national flood program, which is $250,000 times the number of units in the building. These insureds can buy excess flood insurance in amounts ranging from $5 million to $50 million or more if needed. There are a good half dozen carriers that offer these excess limits.”

There are also general liability exposures. “Slip and fall exposures in common areas like sidewalks, pools, and clubhouses are a frequency concern,” according to Ms. Pierce. “However, water exposures (lakes, ponds) can add to the liability exposure from both a frequency and severity standpoint.”

Mr. Cvengros explains, “In a high-rise condominium, life safety factors are critical. Again, important questions are: Does the building have sprinklers, fire escapes, adequate fire extinguishers, etc.? Also, many condo associations have picnics with amusement devices such as bounce houses, which could expose young children to injury and result in lawsuits against the association. Animal bites, especially from dogs, present another liability exposure for condo associations.”

Professional liability is a very real but often overlooked exposure. Ms. Schraff explains, “We most frequently see claims alleging a presumed breach of fiduciary duty. Many of these are actually non-monetary demands, but allege mishandling of association monies. Similarly, allegations of breach of governing documents are quite frequent, as the board’s interpretation of the bylaws and the community members’ interpretation of them can be quite different. In terms of severity for professional liability, employment practices disputes and challenges to architectural review decisions are some of the most costly claims.”

The recession and deterioration of the housing market has had a significant impact on condominium associations. According to Mr. Bushong, “There are a number of vacant units and foreclosed units. A key issue is water damage from fixtures breaking in an unoccupied unit. If no one is in a unit and a water line becomes corroded and breaks, the claim could be a lot larger than if the unit were occupied and the resident discovered the problem and dealt with it immediately. These claims can get messy if the unit owner is underwater on the mortgage and walks away. In the event of damage, it’s hard to find the owner. The association may get stuck fronting the money to repair the damage and clean up the unit. The association will usually put a lien on the unit and, if someone wants to buy it, that person must reimburse the association.”

The recession is also having an impact on professional liability coverage, according to Ms. Schraff. “Boards and their communities are forced to make decisions regarding underfunded reserves, delinquent dues, collection procedures, and sometimes foreclosing on their neighbors’ homes. These are complicated and sensitive issues for even the most experienced business professionals, and sometimes they are left in the hands of completely inexperienced volunteer board members.”

Condominium associations are attractive risks to many carriers, but there are potential coverage gaps that can be uncovered only by asking the right questions. Ms. Pierce provides this excellent advice: “When it comes to a condominium risk, the best thing for agents to remember is to be sure to review the entire risk for all exposures that may exist. This class can have some interesting and unusual exposures that many applicants would not think of when answering their insurance agent's questions. The more information agents have, the better they are able to properly underwrite and rate these risks.”

Also remember that condominiums are subject to local, state, and federal laws. The agent who wants to work with these clients must stay current with these laws and the impact they have on individual unit owners as well as the condominium association.
 
   
WHO WRITES BED AND BREAKFASTS?
 
   
MANAGING GENERAL AGENTS

Contributing to this article:

Burns & Wilcox
30833 Northwestern Hwy.
Farmington Hills, MI  48334
Contact: George Cvengros, CPCU, AMIM, Underwriting Supervisor
Email: GACvengro@burns-wilcox.com
Phone: (248) 539-6037
Website: www.burns-wilcox.com

Coastal Insurance Underwriters
816 A1A North, Ste. 206
Ponte Vedra Beach, FL 32082
Contact: Charles Bushong, President
Email: cbushong@ciuins.com
Phone: (904) 285-7683
Fax: (904) 395-0038
Website: www.ciuins.com

The Distinguished Programs Group
1180 Avenue of the Americas, 16th Floor
New York, NY 10036
Contact: Jamie Schraff, Community Association Program Manager
Email: jschraff@distinguished.com
Phone: (818) 559-1524
Website: www.distinguished.com

Roush Insurance Services Inc.
P.O. Box 1060
Noblesville, IN 46061-1060
Contact: Gail C. Pierce, AINS, CPIW, Senior Commercial Underwriter
Email: gail.pierce@roushins.com
Phone: (800) 752-8402, ext. 18
Fax: (317) 776-6891
Website: www.roushins.com

INSURANCE COMPANIES

Contributing to this article:

Philadelphia Insurance Companies, Inc.
One Bala Plaza, Ste. 100
Bala Cynwyd, PA  19004
Contact: Robert G. Morgan, CPCU, CLU, ChFC, CIRMS
Email: rmorgan@phlyins.com
Phone: (610) 617-7689
Fax: (610) 471-0764
Website: www.phlyins.com

 
 
 
 

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