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The Insurance Puzzle Making Sense of Premiums and Policies

Insurance is a relatively simple concept that any homeowner can understand. You purchase a policy paying a premium to an insurer, and when a claim gets filed, the insurer pays. So in theory, insuring a condominium or association property should be virtually the same principle—only on a larger scale, right?

Not quite. In reality, making sure your property is properly insured is a multi-layered process that board members should take the time to understand. Having the right kinds of insurance and the right amount of coverage could be vital for your community’s financial—and sometimes physical—survival. A solid understanding of what comprises a typical condominium policy can help your board protect your unit owners, as well as the investment they’ve made in their homes.

The Right Package

According to Joel A. Davis, regional marketing director for Community Association Underwriters in Hoffman Estates, an association's policy begins with what he calls a package policy, which includes property insurance and liability coverage. Property insurance is a first party coverage in which the insurance company will repair or replace the property that is damaged. General liability is a big component of the liability side, the third party coverage. The two main components of general liability are to provide defense to the insured and pay out damages to the injured party, which is subject to a policy limit.

Davis adds that there are several other components that associations should add to the “base” package, one of which is boiler and machinery coverage, which is often not automatically included in many policies.

“The name is a little misleading because it applies to damage of sudden accidental breakdown of a boiler. But the reality is that about 75 percent of these claims are electrical in nature, and they involve things like power surges or electrical arching. So many associations said, "Well, we don't need this coverage because we don't have a boiler,” when in fact, they need it for all other kinds of things such as problems with alarm systems or heating, ventilation, air conditioning, things of that nature. So, it's really what this policy does is it fills in the gap in coverage for property policies,” he explains.

It is also important to include directors and officers or D&O coverage, which is a professional liability coverage which protects the decision-making of the board. The Illinois Condominium Property Act (ILCPA) requires that all associations, no matter how small, purchase D&O coverage, Davis says.

“A major misconception is people think D&O covers the board's misappropriation of funds but that is fidelity coverage. People think directors and officers, 'Oh, that covers if they steal money,' not at all,” says Davis. “Instead, it covers boards if they make a decision to enforce a rule and somebody challenges that rule, or if they enter into a contract with an outside vendor and choose not to pay them because they did not perform their service as specified by the contract. That would be an example of directors and officers liability.”

A Closer Look

According to Alnoor Ladha of Vanderbilt Properties Insurance Brokerage in Manhattan, the main components of a building policy are property, general liability, boiler and machinery, crime/fidelity, workers compensation and disability. Beyond those policies, Ladha says buildings need the additional liability coverage that comes in the form of umbrella coverage.

Ladha says property insurance covers first-party losses, general liability covers third-party claims (which primarily arise in the form of slip-and-fall claims). A standard general liability policy provides about $1 million per occurrence, or $2 million in aggregate coverage.

“When you have a general liability policy and there’s one occurrence, somebody trips and falls, he or she would be able to claim up to $1 million. If there are multiple occurrences, if two or three people fall within that policy period, then you have a limit of $2 million…that’s the maximum they will pay in a given policy period [for all slips and falls].

Beyond that coverage, insurance companies also offer umbrella liability, which is additional liability coverage beyond the standard $1 million policy.

“If you have $1 million in primary general liability coverage, that only covers you for up to $1 million,” Ladha says. “In today’s litigious world, $1 million in coverage sometimes [is not] sufficient, because the legal fees alone can eat up the million-dollar limit. So we provide our clients with up to $200 million in excess umbrella coverage.”

That same principle applies to directors and officers coverage, which covers claims made against the board for mistakes or mismanagement. Generally speaking these days, he says, a building will have $1 million of coverage and can buy up to $200 million in umbrella coverage in addition to the initial D&O coverage.

Knowing Your Policy

A lot of factors go into determining how much a building will pay for its coverage.

“Cost is typically driven on a condo policy by the construction of the building, size of the building, and the number of units in the building,” says Jeff Suba, a producer at Total Insurance Services, Inc in Northbrook. “If a condo has commercial occupants, such as on the first floor of the building, that also contributes to the cost. And obviously history—every insurance company wants to see what the history of the building is in terms of losses. General rule of thumb, that tends to be a good indication of what may happen in the future.”

Both Suba and Davis say it’s important—if not vital—for board members to take an active role in learning about their building’s policy and understanding it.

“The board member volunteers to serve on the board and in so doing, he acts as a fiduciary for all his fellow board members. So he now has a legal obligation to make sure that the policy that they purchase, which is one of the decisions he is responsible for, is adequate and that complies with statue and that adequately protects his fellow unit owners,” Suba explains.

Davis suggests that an association review and update their policy every three to five years with their agent to ensure they are properly covered and that any amendments to the property will be covered by the existing policy or insurance can be purchased to protect them.

Coverage Mistakes

The vast sea of insurance policies can certainly be difficult to navigate but often times both boards and owners make common mistakes that can be averted.

Some condo owners may feel they don’t need homeowner’s insurance, such as an HO-6 policy. This isn’t true. Just like any single-family homeowner, condo owners need to have their own property insured via a homeowner’s policy.

“The building coverage isn't going to pay for a loss to a homeowner's personal possessions,” says Suba. “Everyone has clothing and other personal belongings that are not going to be covered by the condominium association.”

Davis cites an example of an association that suffered a major fire loss last Labor Day. Out of 35 homeowners, five did not have their own homeowner's policy. The Red Cross gave them vouchers to stay in a hotel for five days but after that, they were on their own.

“The other people that had homeowners insurance had coverage known as additional living expenses that would cover up to 12 months for finding them lodging or until they could get back into the premises. So, a lot of people think their personal property, but they don't even think, "Where will I spend the night if there is a fire loss in my condo building? Where would I go? Who would pay for that?" And those people without insurance, for $200 to $300 a year, maybe even less, they could have bought a policy that would have covered them for potentially weeks or months while they're out of their premises,” he says.

And while cutting costs may be on everyone's mind nowadays, Suba explains that while an association's budget may dictate how much they are willing to spend, the cheapest policy is not always the best one.

“Everyone has a tendency to focus on how much the premium is and sometimes overlook important coverages that they should be purchasing,” he says. “We see this all the time. We'll see a premium comparison done which is incomplete because it does not provide the right or minimum coverage that [a building] should be carrying.”

Finally, if possible, a board should try to stay with a company for a couple of years, to build rapport and establish a relationship.

“There are a couple of drawbacks when [associations] jump around,” says Davis. “One is, if they've only been with an insurance company for one or two years and not built up a relationship with them, if they have a few bad claims, many insurance companies will have no problem with canceling or raising their premium significantly. Whereas if they had been with an association or a company for a while, it builds up an experience, then they'll see, well, the profitability in this account is much better when we've had them for a number of years rather than just one or two years. They're more likely to retain them and not cancel and non-renew them, and they might be more likely to go easy on them for any premium increases.”

Whether you are in the processing of reviewing or renewing your policy, having the right kind and amount of insurance is an essential ingredient that will provide some necessary peace of mind for you and your board.

Anthony Stoeckert is a freelance writer and a frequent contributor to The Chicagoland Cooperator. Editorial Assistant Maggie Puniewska contributed to this article.

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