Reducing Liability in a Co-op or Condo
Keeping Premiums Down
By Jonathan Barnes
Insurance can be a hassle to deal with when it comes to your property, but failing to pay attention to the details of your policy could cost you money now and in the future. Knowing the specifics of your building's insurance policy, and also being familiar with the property that the policy covers, can save you money now and for many years to come. While the necessary insurance coverage for a building can become expensive—it doesn't have to be, and you don't have to be an insurance broker to figure it out. Board members can work to reduce insurance liabilities in their co-op or condo buildings, and thereby benefit all of the residents.
It's obvious that reducing liability will lower insurance costs—but how exactly do you do that in a co-op or a condo? Some of the solutions to the problem of rising insurance costs may be as simple as taking sound advice or seeking out the right consultants. Ignoring the problem of increasing insurance premiums is not an option, so doing the appropriate things to reduce your liability will not only save you financially, but you'll also sleep better knowing that your building is safe.
If a building's liability is getting higher, it often is because of more claims being filed against it. Any increase in claims should be viewed as a red flag by board members. When claims increase, so do insurance premiums, costing residents more money. But many steps can be taken to lower a building's liability, and several of these steps won't necessarily cost the shareholders much money. The savings gained from such steps will be reflected in steady premiums.
Watch Your Back(stairs)
Lowering a building's liability affects an insurance policy by making the property more attractive to insurers, as opposed to a building with higher liability due to a history of insurance claims or poor maintenance. A building that has lowered its potential liability will be reviewed more favorably by an insurance underwriter and ultimately will save residents money by keeping insurance premiums manageable. Sometimes, though, reducing liability in a property is about working to prevent future liability-related problems.
Ensuring that all doors are locked at all times, particularly out of the way basement doors and rear entries, lowers liability and increases the safety of the residents. Each building also should practice good maintenance—no wet floors or trip/fall hazards, says Angie Castella, vice-president of York International Agency, a Yonkers-based insurance agency specializing in co-ops and condos.
If possible, you should update your building's electric, plumbing and central air conditioning, says Robert E. Mackoul, owner of Mackoul & Associates, Inc., a real estate brokerage in Long Beach. Update junction boxes from fuses to circuit breakers. Plumbing updates will reduce risks in some older buildings by lowering the probability of pipes bursting and causing expensive property damage. Make sure that your building's air conditioning drain lines and pans also are kept clean.
Be sure that any contractor that is doing work on the property is properly insured. The contractor should have liability, worker's compensation, umbrella insurance and auto insurance, Castella says. "You also want an indemnification agreement."
Contractors who lack insurance should not even be allowed into the building, Mackoul says, noting that New York law places almost total liability on building owners. Contractors should not only provide proof of general liability insurance, but also provide proof of liability and completed operations coverage, Mackoul says. Some larger contracts may require an owner's protective policy and also bonding of the contractor.
Some fairly simple changes can be made to a property to reduce liability. Installing sprinkler systems, burglar alarms and security cameras can positively affect a building's insurance rating, explains Alex M. Seaman, senior vice-president for HUB International Northeast, based in Long Island.
"Any building upgrades make the building more appealing to an insurance company. Insurance companies love doormen," Seaman says. "Anything that will reduce your exposure to claims will have a significant impact."
Taking life safety measures for a building is always helpful in reducing insurance costs. Castella advises instituting a fire safety program, in which the building's occupants are taught how to exit the building in the event of a fire.
One integral part of reducing liability is being prepared to take the advice of experts, even if following that advice might mean costly repairs to a building. The experts know more about the insurance industry than board members do, so listen to them.
"Insurance companies do an annual inspection of the property. In my opinion, that's free advice. Those recommendations [of the insurance company] should be taken seriously," Castella says.
Consult the Professionals
To reduce liability, board members also should seek out industry professionals for advice. Consulting insurance brokers is one route. An experienced insurance broker who knows the co-op/condo market can give you advice on risk management and loss control, Seaman says.
"We have engineering and loss control services where we come into the building to assess loss control and engineering," Seaman says. "Insurance premiums can become a significant portion of the building's fees."
A board of directors also can ask their broker to have the current carrier do a loss control inspection of the property and give recommendations that can reduce the possibility of a claim. In addition, there are companies such as Alexander and Schmitt, and Seer Inspections, which do these inspections for some insurance carriers and could be hired by the board of directors to provide that service to the building, Mackoul says.
"Such an inspection would give a detailed report on the replacement cost of the building, based upon its age, construction, square footage and other conditions, as well as providing a report on loss control measures the building should adopt and life safety issues that should be instituted," Seaman says. "Taking these measures should substantially reduce the possibility of claims to property and lower the risk of claims for bodily injury and property damage."
Insurance companies use past loss history (loss reports) for the past three to five years as an indication in a rating matrix, Mackoul says. Based upon the insurance company's inspections, the company provides recommendations that range from "Critical," in which certain things must be done to the property in a particular timeframe; to "Important," in which things must be acted upon over the next year—to "We'd like you to think about," Mackoul says.
"A safe building would relate to the building security part of any inspections, which would include locked doors, window guards where there are young children and other loss control issues," Mackoul says.
Pay close attention to insurance company loss control recommendations on life safety and security issues. Things such as emergency lighting, hardwired or battery-operated smoke detectors in common areas, locked entrances and exits, and keeping sidewalks and walkways in excellent condition make a big difference, Mackoul says. Ensuring that there is a panic bar on the door allowing access to the roof, and following regulations for elevators, gyms and laundry rooms also are important.
In general, board members should do building-related business with professionals, such as insurance brokers, attorneys and accountants, who specialize in co-ops and condos, Mackoul advises. "Have each of these professionals attend a board meeting each year to provide advice and guidance," he says.
One of the most important measures a board member or shareholder can take to protect herself, though, is to make sure that she has the right insurance.
Getting Coverage
When it comes to insuring a building or condo, a few dollars of preventative insurance payments are worth thousands in claims. If catastrophe strikes your building, simply having the right type and amount of insurance can help to prevent escalating insurance costs in the future.
Board members should be sure that the building maintains an insurance coverage limit that would cover it in the event of catastrophic costs, Castella advises. Review the insurance policy, and find out what exposure your insurer is basing your policy on. Keeping claims down will keep insurance costs down, and thus, keep maintenance fees down.
Board members can make some suggestions to shareholders to reduce liabilities, as well.
"I would recommend that each shareholder maintain homeowner's insurance for their property, and also for third party coverage… Buy insurance—high umbrella limits are available at very reduced costs," says Castella.
Homeowners insurance will provide protection to restore and rebuild the unit as well as provide protection for the cost to replace personal property, Mackoul says. Homeowners may cover the extra expenses incurred by the owner and his family while their home is being restored. Homeowners insurance also provides protection against being sued by the cooperative, other shareholders, or their insurance companies for damages caused by their negligence, Mackoul says.
"Boards should adopt a mandatory homeowners program for the building," Mackoul suggests. "If every shareholder had a homeowners policy in effect that provided a minimum level of coverage, it would reduce problems in the building immensely," Mackoul says.
Jonathan Barnes is a Pittsburgh writer and a regular contributor to The Cooperator and other publications.
Thieves Tap Into Home Equity
Published: July 27, 2008
HOMEOWNERS who have significant equity in their homes may be well-advised to check their credit reports frequently.
That is one conclusion of a recent report from the Identity Theft Assistance Center, a nonprofit industry group, which said that identity thieves had recently begun making targets of individuals with good credit because such people often have substantial untapped home equity.
A home equity line of credit is an ideal vehicle for criminals, according to Steve Bartlett, chief executive of the Financial Services Roundtable, a consortium of banking-related companies that offers financial support to the Identity Theft Assistance Center.
Mr. Bartlett said such credit lines are typically “big pools of money,” and if consumers do not regularly check their accounts, that pool can drain quickly.
The Federal Bureau of Investigation’s annual mortgage fraud report, which was released in April, cited home equity credit fraud as an “emerging scheme” in the slumping real estate and mortgage market.
Those with poor credit have been preyed upon by identity thieves in recent years, because thieves who pretend to be such owners could easily obtain mortgages from subprime lenders with little documentation.
Now that lenders have vastly tightened their lending criteria, criminals who specialize in mortgage fraud have little choice but to move upstream and seek out victims with good credit.
Home equity lines are a favorite option because they are almost as easy to open as a credit card account, as long as a criminal has the proper financial information.
In a typical scheme, the F.B.I. said, perpetrators pose as homeowners to establish home equity credit accounts online.
Criminals will then often send a fax to the bank requesting a wire transfer of funds to a different account. To verify the request, the bank unknowingly calls the perpetrator.
The F.B.I. does not break out various types of mortgage fraud by state, but in general, mortgage fraud is a bigger problem in New York, New Jersey and Connecticut than in many other states. New York is among the 10 states with the highest rate of mortgage fraud, while New Jersey and Connecticut rank in the top 20.
Mr. Bartlett, of the Financial Services Roundtable, said the region was a logical choice for mortgage fraud because of the relatively high value of homes there and the relatively high income of the residents.
Victims of such schemes are typically reimbursed by the lender if a bank investigation confirms fraud, Mr. Bartlett said. But lawyers who represent victims of identity theft said such remedies do not often come quickly or easily.
One way for a homeowner to determine if someone has created an equity credit line is to enroll in an identity fraud detection service like one offered by the Identity Theft Action Center, called ITAC Sentinel.
That service, which costs $10 to $18 monthly, will alert subscribers to credit inquiries or changes to an account.
Mr. Bartlett said that Identity Theft Action Center, a nonprofit organization, earns nothing on the service.
Services like ITAC Sentinel can also provide alerts to debt unrelated to home equity, like credit card accounts recently open in the subscriber’s name.
The major credit bureaus — Equifax, Experian and TransUnion — offer competing credit monitoring services. And a check of a credit report would also reveal a debt to a bank unknown to the homeowner or a debt to an existing bank that has suddenly grown larger.
Go To New York Times Article
What’s Insured and What Isn’t
Published: June 17, 2007
A SURVEY by the National Association of Insurance Commissioners has found that many people believe their homeowners’ insurance covers losses that are not, in fact, covered.
Tom Bloom
“We were a little surprised by the results,” said Sandy Praeger, Kansas’ insurance commissioner and the president-elect of the association.
The survey found that 33 percent of the heads of household who have homeowners’ insurance incorrectly believe that damage from a flood would be covered by their policies. “We warn people every year that damage caused by flooding will only be covered if they have a separate flood insurance policy,” Ms. Praeger said.
The survey also found other incorrect assumptions: 68 percent believe vehicles stolen from or damaged on their property are covered; 51 percent think their policy covers damage from a break in the main water line outside their houses; 37 percent think damage from a broken sewer line is covered; 34 percent assume mold damage is covered; and 31 percent think damage from termites or other infestations is covered.
The telephone survey of 1,000 people nationwide, conducted May 17-21 by International Communications Research, was paid for by the insurance commissioners’ group. Of the 1,000 people, 673 identified themselves as heads of household who had homeowners’ insurance and were included in the survey, which has a margin of sampling error of plus or minus 3.85 percentage points.
“Another thing many people don’t understand is the difference between actual-cash-value coverage and replacement-cost coverage,” Ms. Praeger said.
With actual-cash-value coverage, she said, the insurance covers only what it will cost to repair or replace damage to a home and its contents after depreciation has been taken into consideration, but replacement-cost coverage insures for what it costs to replace or rebuild without considering depreciation. The difference, Ms. Praeger said, can amount to thousands of dollars.
Ron Tepperman, the principal in the Manhattan insurance agency that bears his name, said many homeowners do not realize that certain valuables may be significantly underinsured under a standard policy.
“Most people think they’re fully covered for jewelry, antiques, stamps and coin collections,” Mr. Tepperman said. “But most policies provide only limited coverage for such items.” For example, he said, a standard policy might limit coverage for such items to just $500.
Another thing that many homeowners do not realize, Mr. Tepperman said, is that homeowners’ insurance does not cover personal property and equipment if it’s used for business or that the liability portion of the policy does not cover injuries if a customer or client gets hurt on the property.
Michael Spain, president of the Spain Agency in Mahopac, N.Y., said another hazard that many people believe is covered by a standard policy is earthquake damage. It isn’t.
“Nobody talks about it, hardly anyone has it, but a lot of people need it,” Mr. Spain said.
Edward J. Mackoul, the president of Mackoul & Associates, an insurance agency in Long Beach, N.Y., said that some co-op and condo owners believe they have insurance when they don’t. “Many people think that what’s inside their apartment is covered by the building’s policy when it isn’t,” he said.
What to do?
Homeowners should check with their insurance agents and should buy any additional insurance that may be necessary. They should also determine whether endorsements are available to increase coverage for items like jewelry, antiques and valuable collections. Those who use parts of their homes for business should buy a separate business policy.
Go To New York Times Article
Q & A
Loss-Assessment Riders: Are They Necessary?
By Jay Romano
Published: March 25, 2007
Q A recent letter from our managing agent about our co-op’s insurance coverage suggested that residents’ homeowners’ policies include a loss-assessment rider to “cover certain types of losses incurred by the corporation, which would then be assessed on all shareholders in the form a loss assessment.” Is the suggested rider necessary, or is it simply a matter of cost shifting by the co-op?
A “Loss-assessment coverage is automatically included under a cooperative or condominium homeowners’ policy,” said Robert E. Mackoul, the president of Mackoul & Associates, an insurance brokerage in Long Beach, N.Y.
Mr. Mackoul said such coverage provides that in the event a co-op or condo does not have adequate insurance for a claim against the building and it then imposes an assessment to cover the shortfall, the individual homeowner’s policy provides coverage for that assessment.
“The amount of individual coverage can vary from company to company, but it is usually $1,000 to $10,000,” he said, adding that for an additional premium of anywhere from $25 to $50 a year, the coverage can be increased to $25,000 to $50,000.
Mr. Mackoul said that the managing agent’s suggestion was probably not a matter of cost shifting by the co-op, but was most likely intended to make shareholders aware that coverage was available and perhaps the limits of that coverage.
Go to New York Time Article
Providing Insurance for Board Members
Published: February 5, 2006
IT would be a rare and perhaps foolish person who would serve on a co-op or condo board that wasn't protected by a directors and officers (D & O) insurance policy. But even savvy board members, insurance experts say, may be unaware of significant variations in coverage.
"Not all D & O policies are created equal," said Joel Meskin, vice president for community association products of McGowan & Company, an insurance brokerage based in Fairview Park, Ohio. "And since we want the best people to sit on co-op and condo boards, we have to make sure we're providing them with the best coverage possible."
Mr. Meskin said that co-ops and condos typically have two types of insurance: general liability coverage, which protects the co-op or condo association in the event someone is injured on the property, and D & O coverage, which protects board members and others against claims for "wrongful acts." While most D & O policies provide $1 million in coverage — with some buildings supplementing that with an umbrella policy for as much as $100 million — the scope of the coverage is at least as important as the amount.
Some D & O policies, Mr. Meskin said, do not provide board members with coverage for contractual claims made by third parties. In other words, he said, if a fuel-oil company successfully sues individual board members for breach of contract, policies that do not explicitly cover such claims will not provide protection. It is also possible that a D & O policy will not provide coverage for things like libel, slander and invasion of privacy. "We're seeing increasing numbers of claims based
on comments made in e-mails sent between board members," Mr. Meskin said.
Andrew Schutzman, president of AMS Risk Management and Consulting in Rockville Centre, N.Y., said that board members should also verify the type of coverage they have for fraud or other dishonesty. He said that while most policies do not provide coverage for damages awarded as a result of a board member's fraud or other dishonesty, there are differences among policies regarding paying for a defense.
"Providing a defense is the most important coverage you're going to get from a D & O policy," he said. He noted that with some policies, the insurance company will provide a defense until there is clear proof of fraud or dishonesty. But with others, the company can deny a defense based on an allegation of fraud.
"Boards have to make sure that their D & O policy will provide a defense until there is proof of fraud or dishonesty," he said.
Robert Mackoul, president of Mackoul & Associates in Long Beach, N.Y., said that in addition to the coverage provided by a D & O policy, boards should pay attention to who is covered.
"The better policies are going to cover past and present board members, the corporation or association, volunteers, committee members and even property managers," Mr. Mackoul said. "Narrowly drawn policies will cover only the board itself."
Boards, he said, should also be aware of limitations on claims. Some policies cover only claims for acts that occurred no more than a year or two in the past. "Quality D & O policies don't have such a limitation," he said, noting that such coverage is typically provided only if the board had no knowledge of potential claims when it bought the policy.
One indication that a board's D & O coverage is less than adequate, he said, is when the coverage is part of the building's general liability policy. "Imbedded D & O coverage is going to be inexpensive but not very comprehensive," he said, explaining that such coverage may cost as little as $100 or $200 a year. A separate but comprehensive policy, Mr. Mackoul said, costs $1,000 to $2,500, depending on building size.
"When you consider the stakes," he said, "that's money well spent."
Go To New York Times Article
Protecting Condos Against Liability
Published: January 15, 2006
CONDOMINIUM owners were thankful last October when they learned that a state appeals court had overturned a lower court ruling that said unit owners could be held personally liable for injuries caused by defects in condo common areas. But some condo lawyers are concerned that the decision may not be all it appeared to be, and they are urging condos to take steps to protect themselves.
Tom Bloom
"This decision appears to limit the personal liability of unit owners for claims made against the condominium by third parties," said John Van Der Tuin, a Manhattan real estate lawyer. "But, in fact, it poses new and troubling issues regarding the personal liability of condominium board members while not ultimately providing unit owners with real protection."
The case in question - Pekelnaya v. Allyn - arose after a pedestrian, Michael Taratuta, sustained serious injuries in July 2001 when a piece of chain-link fence fell off the roof of a condo building at 69 West 106th Street.
In addition to suing the condominium association, his family sued individual unit owners in the building. In a ruling issued on Jan. 4, 2004, a State Supreme Court justice ruled that the unit owners could indeed be held individually and personally liable for Mr. Taratuta's injuries.
On Oct. 25, 2005, however, a Manhattan appeals court overturned that decision and held that since the condo's board of managers was in charge of the building, the individual unit owners could not be held liable.
Mr. Van Der Tuin said that while the October ruling does not directly address the issue of personal liability of board members, if its rationale is followed, it can no longer be assumed that board members are insulated from personal liability. And while adequate insurance is one way of protecting board members, he said, no insurance policy covers all claims under all circumstances.
So, Mr. Van Der Tuin said, it is also prudent for individual board members to be indemnified, or reimbursed, by the unit owners, to the greatest extent possible, for any amounts they are found liable for. Some condos bylaws require such indemnification, he said, but the rules may be narrowly drawn, providing, for example, reimbursement for contractual issues but not for liability claims.
"The irony is that if such indemnification provisions are invoked," he said, "the unit owners will, in effect, be subject to the same personal liability that the Appellate Division purportedly limited."
When it comes to insurance, Robert Mackoul, president of Mackoul & Associates, an insurance firm in Long Beach, N.Y., said that most condo associations do not have enough. Most of them, Mr. Mackoul said, have $1 million in basic liability coverage and $1 million in "errors and omissions" coverage for directors and officers.
"For a condominium in New York to be carrying only $2 million in coverage is a mistake," he said. "But it is a mistake that can be easily corrected."
He said it is possible for a condominium association to buy commercial umbrella coverage for up to $100 million at relatively little expense. An umbrella policy for $25 million, for example, could cost as little as $1,500 a year, he said.
Yet another strategy condo lawyers are considering is making the board a corporation. "The incorporation of boards is specifically authorized by the state's Real Property Law," Mr. Van Der Tuin said. "Such incorporation would provide meaningful protection for individual board members against personal liability in their board capacities."
Rhonda E. Kay, an appellate lawyer in Manhattan, said that her firm, which represents the family, has sought permission from the Appellate Division to appeal the ruling to the Court of Appeals, the state's highest court.
Go To New York Times Article
Q. & A.; Methods of Voting for a Co-op Board
Q. The shareholders in our co-op meet annually to elect a new board. In recent years, we have received contradictory directions. Is there a universal method for voting in co-ops? Does a shareholder, for example, vote her full number of shares for each candidate of her choice, or does she have to divide her voting shares over various candidates? . . . Ann Brady, Long Beach, N.Y.
A. Bruce A. Cholst, a Manhattan lawyer who represents co-ops and condominiums, said there are basically two methods of voting for directors in a co-op: straight voting and cumulative voting.
With straight voting, Mr. Cholst said, shareholders cast all their share votes for candidates for each open seat on the board. If five seats are open, a shareholder with 500 shares can cast 500 votes for each of the five candidates she wants.
With cumulative voting, each shareholder gets a total number of votes -- generally the number of shares multiplied by the number of seats up for election -- and can use those votes any way she wants. In an election for five open seats, Mr. Cholst said, a shareholder with 500 shares will have 2,500 votes, and can cast 500 votes for each of five candidates or give all 2,500 votes to one candidate or give 1,250 to one and 1,250 to another, or use any other combination.
''The big difference between straight voting and cumulative voting is that cumulative voting allows a minority group of shareholders to bunch all of their voting power behind one candidate to elect that candidate to the board,'' Mr. Cholst said.
The method of voting a co-op uses, he said, is generally set forth in its bylaws. But since straight voting is considered the default method, for cumulative voting to be used it must be specified in both the bylaws and the certificate of incorporation. Even if the bylaws call for cumulative voting, if that provision is not in the certificate of incorporation, straight voting must be used.
Insurance For a Co-op Unit
Q. My wife and I recently bought a three-bedroom co-op on the Upper West Side of Manhattan. We are uncertain as to the type and amount of homeowners' insurance to purchase. Does the building's insurance cover our unit in any way? Do we need full replacement coverage? . . . Michael Reichman, Moorestown, N.J.
A. Edward J. Mackoul, vice president of Mackoul and Associates, an insurance brokerage in Long Beach, on Long Island, that specializes in co-op and condominium coverage, said that the letter writer would indeed need his own insurance coverage for the apartment. Mr. Mackoul said that while the co-op's insurance policy covers the basic structure of the building, it will not cover any improvements made to an individual apartment, nor will it cover the apartment's contents.
''The co-op will usually be responsible for returning the apartment to the original specs,'' he said. ''And that basically means providing Sheetrock and the first coat of primer on the walls.''
Since co-op shareholders are basically responsible for everything in the apartment from the walls in, the shareholder would be responsible for wallpaper, carpeting, light fixtures, built-in appliances like ranges and stand-alone appliances like refrigerators.
The shareholder should also have adequate coverage for contents and personal property. Such coverage, Mr. Mackoul said, should be on a ''replacement cost'' basis. That provides reimbursement for what it would cost to replace the insured item at today's prices, rather than just the original cost of the item, less depreciation. Such insurance usually costs about 40 percent more.
Go To New York Times Article
|
