The rising cost of property and liability insurance premiums and the shrinking scope of the coverage available have been sources of continuing and increasing concern for apartment building owners and community associations. The scramble to find the most cost-effective coverage has highlighted a problem that has always existed, but was less obvious in less tumultuous insurance markets — those responsible for purchasing insurance often do not know:

As a result, many properties have serious coverage gaps that often do not become obvious until after a disaster, when the insurer pays less than the amount of the loss, or declines to pay anything at all.

How Much Is Enough?

When community association boards ask, as they often do, “How much coverage is enough?” insurance agents I know invariably reply, “How much can you afford?”

It may be possible to be too rich or too thin, but it is very difficult to have too much insurance today, and very risky to have too little. I haven’t conducted a scientific survey, but I am reasonably certain that most community associations and apartment buildings are woefully under-insured. The Fannie Mae requirement for condominiums (and thus the industry standard) calls for $1 million in general liability coverage. But the amount of coverage needed to make Fannie Mae’s underwriters comfortable is not necessarily the coverage needed to protect a community association (or an apartment building owner) from a potentially ruinous liability claim. There was a time when $1 million sounded like a lot of coverage – but that was long before $5 million and $10 million judgments had become almost routine.

I asked the apartment managers attending a recent Institute of Real Estate Management seminar to indicate, with a show of hands, how much insurance coverage they had. Out of 70 managers in the room, only 2 still had their hands raised at $10 million. How would your real estate company or your community association handle a $32 million judgment awarded to a tenant or a unit owner claiming damages related to mold? What about an accident in which your building superintendent accidentally ran over and killed a child in the parking lot? A $1 million policy would not begin to cover the likely jury award.

Given the financial risks, nothing is more important than the insurance protection you have in place. But I don’t think there are more than five people – including insurance agents – who have ever read their insurance policy or who understand exactly what it covers. What you don’t know about your policy can definitely hurt you. One recent example: A condominium in Gloucester was destroyed completely by fire a few months ago. When the association filed its claim, they discovered that because of a measurement error, the policy understated the size of the development by 10,000 sq. ft. As a result, the coverage was less than required to rebuild the community.

Guaranteed Replacement

In this case, the association will probably be able to sue the insurance agent, or the insurance carrier responsible for the error. But in the meantime, the owners are facing a $50,000 to $70,000 per unit special assessment to cover the insurance shortfall. They could have avoided this problem had they insisted on guaranteed replacement cost coverage, which would have paid whatever was needed to rebuild the development. This coverage is available and affordable, but it isn’t offered by all carriers. So associations have to know enough to request the coverage, and they must make sure the agent they are using represents a company that provides it. If you don’t have guaranteed replacement coverage, you should have your property appraised annually to make sure your coverage is adequate (building standards change and costs increase over time). Also be sure you add coverage for any additions you have built or improvements you have made since the existing policy was issued.

Having enough coverage is critical, but allocating it properly is equally important. A stick-built suburban town house condominium paid $11,000 annually for a policy that provided 100 percent replacement coverage for earthquake damage. That was probably overkill, given the relatively low risk that a quake would completely destroy a complex of this type. On the other hand, this community had a $55,000 per building deductible for wind damage – an extremely high risk for these buildings, which were located on a hill. Having the right amount of coverage overall won’t help if your policy leaves you exposed in the areas where you most need protection.
These are the kinds of issues community associations and apartment owners should consider, but often don’t. Most treat insurance like a commodity and shop for it based almost entirely on price, without considering the nuances that may make one policy, even if somewhat more expensive, a more cost-effective choice than another.

Shopping for Insurance

The best way to shop for an insurance policy is to issue a request for proposals and then have an insurance advisor evaluate the bids you receive, explaining the similarities and the differences, and comparing the costs and coverage different companies are offering. Few apartment owners and fewer community associations actually use this approach, however. In that IREM conference I mentioned earlier, only 2 of the 70 managers said they relied on insurance advisors; most weren’t even aware that they existed.

If you aren’t working with an advisor, you should deal with an insurance agent who specializes in the coverage you need. This is particularly important for community associations, because condominium insurance is complicated and unique; your brother-in-law or a friend of a friend who happens to be an insurance agent is not likely to be the best choice. You want an agent who can analyze the association’s coverage and make sure it dovetails properly with the unit owners’ policies. Otherwise, the association and individual owners could end up paying too much for coverage, or discover after-the-fact that no one had the coverage they needed.

Problem Areas

Having the coverage you need in the areas in which you need it is the biggest challenge. The areas most often overlooked or structured improperly include:

If you are changing carriers and/or agents, ask the agent to certify in writing what the new policy covers. You want this statement to include an apples-to-apples comparison listing the coverage you had in the old policy, the coverage you are getting in the new policy that you did not have before, and the coverage you had previously that the new policy will not provide.