Know the risks your clients face and educate them
The community association marketplace is experiencing growth in a number of areas. First is in the number of community associations. According to the Community Associations Institute’s (CAI) National and State Statistical Review for 2014, the number of community associations in the United States grew from 10,000 in 1970 to 222,500 in 2000 to 333,600 in 2014. Between 42% and 45% of those are condo associations.
Final 2015 data is not yet available, but CAI estimates the year will have ended with between 336,000 and 338,000 associations. According to Eric Kachel, vice president of program management, bond and specialty insurance at Travelers: “These numbers show that a lot of people may be at risk.”
Growth—or a rebound, at least—also has come in the amount of revenue communities are generating. “A lot is moving and changing,” explains Mark McLallen, president of Condominium Insurance Specialists of America. “Following the financial downturn in 2008, many condo owners lost their homes; fewer condo owners meant fewer folks paying assessments to the associations to keep them functioning well. Most associations have turned the tables, and their assessments are up.”
The turnaround is good news for associations and their insurers. “The lack of money from assessments caused a lot of improvement and maintenance projects to be placed on hold, and that had negative insurance implications,” McLallen notes. “Communities are trying to catch up on projects they put off because the money wasn’t there before.”
Along with an increase in assessment income has come an increase in community morale. “Things are returning to normal as the percentage of units being occupied by owners rebounds,” McLallen says. “Community pride is growing, and condo associations are working to improve their facilities and regain the strong sense of community that existed before the financial downturn.”
Unfortunately, claims also are on the rise. “Overall, community associations are seeing an increase in the number of claims filed against them by residents as a result of decisions made by the board,” Kachel remarks. “This could become a costly, staggering statistic if the trend continues.”
Legislation and court decisions have had an effect. “For example, the Palm vs. 2800 (Lake Shore Drive Condominium Association) case that was resolved not too long ago affected how boards communicate and make decisions,” McLallen comments. “Basically, it said boards can’t ‘meet’ electronically.”
Email, of course, is easy for busy people, and condo association board members are busy. “But the courts ruled that substantive discussions and decisions had to be addressed in meetings that unit owners could attend,” he explains. “That has really changed how many boards communicate. It’s pushed everybody back into the board room or community room or library.”
Short-term rentals are a major issue for co-ops and condominiums. “Most short-term rentals of less than 30 days violate both state and local laws here in New York,” explains Alex Kuffel, president of Pride Property Management. “One of the main problems is that boards are not aware initially that owners are renting their units on a short-term basis.”
Kuffel points out that short-term rentals undermine the founding principles of cooperatives and condominiums. “Plus, they decrease the value of what is typically a home owner’s most significant asset: his or her home,” he adds.
According to Kachel, association growth makes it imperative that those who join homeowner, condominium and cooperative association boards, as well as the agents, brokers and community association managers who serve them, are educated on the unique set of risks they face. “When something goes wrong, it’s vital to have the right protection in place for both the board members and the association’s assets,” he asserts.
“For instance, in most claims, the community manager and the community association itself are named as defendants,” he explains. “Additionally, members of the board may be named individually, and they may not be covered under general liability policies for their professional responsibilities, posing other costly risks.”
Kachel adds, “In fact, directors, officers, trustees, volunteers and managers of community associations can be held personally liable for decisions and actions made on behalf of the association.”
“There appears to be more competition in the condo association insurance market now than ever before,” observes Edward Mackoul, CPCU, CIC, president of Mackoul & Associates. “Not only are there the usual host of carriers that have been specializing in condo association insurance for a number of years, but there are more programs popping up, seemingly every week.”
He says rates at the moment are relatively flat. “That said, we are seeing more and more insurance companies, as well as lenders for cooperative buildings, requiring building limits to be increased,” Mackoul says. “That’s resulting in higher premiums.”
McLallen concurs. “We’re getting increases from an exposure standpoint, but I haven’t seen any really great change up or down in rates.”
He says a proliferation of what might be called post-CAT storm chasers continues to challenge the industry by pushing cosmetic-only claims. “What 10 years ago might have been a $25,000 hail claim, because some roof vents were damaged or the air-conditioning compressor housings were dented, is now a $200,000 or $300,000 roof claim, even though there’s no functional damage,” he comments. “In the Chicagoland area, we’re adopting ISO endorsements for roofing damage and modifying them for siding damage to help address the issue. Some carriers are exiting certain markets altogether.”
Aluminum siding presents challenges, too. “First, it’s easily damaged by hail and wind,” McLallen explains. “Second, you really can’t replace it anymore. Some carriers refuse to consider risks with aluminum siding; others are addressing it through deductibles. That will continue to be an issue for the industry as a whole.”
Another issue is electronic theft. “That’s a big, big deal,” he notes. “We’ve actually had some experience in it with our clients. On one day, four clients had a combined $280,000 of funds stolen through ACH electronic funds transfer. When there’s a properly formatted ACH demand on a bank, it’s typically paid out, unless there’s a hold for some reason.”
McLallen says he suspects the four clients had a common vendor, “and that’s where the problem started. The perpetrators did it progressively. At 9 a.m., they did an ACH transfer for $5,000 from each client. Those went through, so they did another an hour later for $15,000 apiece. Then they did one for $20,000 and kept at it until the accounts were empty.” All the money ended up in one U.S. bank, and just before the end of the day, the money was transferred to Eastern Europe.
“Once the funds are off the Federal Reserve backbone, they can’t come back,” he notes. “So we’re not just dealing with a plain-Jane fidelity issue anymore. There are several different components to it now, and inexperienced agents may not understand the nuances. It creates a potential exposure for association clients, and also for the agent. Fortunately, we had incorporated coverage for such crimes in our product offering, so these losses were covered.”
Kachel says agents and brokers should look for and recommend specialized insurance products. “That’s because defense costs for claims can be significant, and community associations have limited resources to indemnify directors and officers, or respond to expensive litigation, settlement or damage awards,” he explains. His firm’s community association management liability insurance product offers a range of protections, including defense for wrongful act allegations and lawsuits and, where permitted, punitive and exemplary damages.
A good first step for agencies looking to succeed in the growing community association insurance space is finding regional trade groups. “There are a number of community association and real estate groups with local chapters, so there’s probably one nearby,” Mackoul says. “Their memberships generally include property managers and vendors who specialize in community associations.”
He says connecting through associations not only opens doors but also provides learning opportunities. “Agents and brokers should educate themselves on things that are important to community associations so they can pass this knowledge on to property managers and board members,” Mackoul advises.
McLallen concurs. “Laws change, regulations change, sources and methods of potential loss change, as do coverages,” he says. “Agents and brokers need to understand the exposures of the associations and unit owners. They should stay up to date on property management industry trends and then share their knowledge with associations, their managers and their members.”
Kachel puts it this way: “Educate, educate, educate. Many community associations and their boards don’t realize what is at risk. By learning the risks themselves, and conveying them to their clients, agents and brokers will have a great opportunity to expand their business in this area.”
He also recommends working with carriers that offer specialized solutions. “Carriers with expertise in community associations will offer products that help ensure there are no coverage gaps for various scenarios, including employment practices claims or breach of contract,” Kachel explains.
McLallen points out that volunteers serving on boards don’t have time to manage their condo associations, so most are managed professionally. “It’s important to build and manage relationships with these professional property managers,” he asserts. “Don’t take a short-term approach, and don’t view the business as a commodity. Focusing on price is not a good way to build relationships or even to build a book of business you can count on.”
Mackoul agrees. “If you want to retain your clients, you must provide more than just a low premium,” he says. “Someone will always be cheaper. You need to provide your clients with guidance in the form of classes, webinars and papers/articles you’ve written on topics that interest them.
“You need to let them know if they are lacking in coverage and the cost to address it, rather than giving them the same coverage as last year with the cheapest premium possible,” Mackoul adds. “In addition, attend a board meeting to answer any questions they may have regarding their insurance or how the association’s insurance works in conjunction with the owners’ insurance. You need to be the person they turn to all year long, not just at renewal.”
McLallen concludes: “Creating value and educating clients helps earn their trust and shows that you offer more than just a product, a piece of paper, and a line item on the client’s budget. Customers value market knowledge and options. To build a sustainable business, focus on value, not price.”
By Dave Willis, CPIA