If you’re like most apartment associations or condo boards, you simply renew the policy each year, assuming that the cost-of-living increase in coverage is adequate. Nothing could be further from the truth.

Properties change. Buildings age, new buildings go up, new property features are added, and renovations are completed. If associations were doing things correctly, there would be a review of coverage every time the property is altered or at least annually.

Worse, some associations decide early on that covering the property at less than its replacement value will save them money. That may have been true years ago when property values were much lower. But do you know how much that deductible translates into in today’s dollars?

For example, Skyline Apartments’ association bought their policy in 1995. They decided that the property, then valued at $800,000, could be covered at 80 percent. The association put aside the additional 20 percent – $160,000 – for their deductible. Each year at renewal, they simply renew without reviewing their coverage. Board members came and went, and still the property coverage was left unchanged.

Flash forward to 2010. Skyline’s association is now filing a claim for damages due to a tornado, which destroyed the building. However, the damages amount to $1.8 million thanks to increased property values. The association is now on the hook for $360,000.

Worse, since the association didn’t properly evaluate the replacement cost of the building, the insurer might reduce the claim settlement to match only that amount originally insured, and could even tack on penalties  if they were included in the contract.

When did you last review your property coverage? Do you carry deductibles? If so, what can your association afford to pay? Is that in line with what you are contractually in line to pay should something occur?  Property values have become so unstable in this economy.  It’s important for the life of your association and the trust of your homeowners that the values on the properties are accurate.  If you don’t have a current valuation, put it on the agenda, get it done, and then make sure to have your insurance policies updated.

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The more common areas of concern are those pools, tennis courts, walkways, and parking areas. But associations should look deeper into the property and locate maintenance issues before they become large setbacks. 

Five areas to consider:

Foliage. It’s not just the trimming and care of your property landscape that should concern you, but also the types of plants and trees. Some species are prone to disease. That can create epidemics of insects and infestations that can kill off much of your expensive landscape plants. Check for white fly infestations, which can spread to all plants and destroy pricey shrubs. Also, learn what types of trees are on the property and what diseases are currently attacking them. For example, ash trees are experiencing an emerald wood borer outbreak that’s deadly to the tree. A dead tree is a hazard to buildings and people. Remove any trees for which you cannot take preventative measures.

Energy use. It doesn’t hurt to get an energy audit to understand where your association and resident units are losing precious energy. Call in your local utility companies to inspect the property and make recommendations that could save thousands.

Foreclosures. Sure, it’s not up to the association to take care of units not belonging to them. But to protect the overall value of the property, consider doing basic maintenance and lawn care in and around vacant units.

Periodic maintenance. Most associations create a schedule of regular maintenance, but if you see something broken or rotted now, replace it. It could halt further, more costly damage or injury.

Animal damage. Nooks and holes in building facades are great hiding and nesting places for birds and animals. Make sure to eliminate any unwanted residents by repairing holes and closing off areas where squirrels and birds could nest.

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Call it cooking the books, fudging the numbers, whatever you like. Your association board is looking at a potential case of fraud. One or more of your board members may be skimming funds and manipulating the accounts in order to do so.

But if you suspect another board member, should you go to the board with the evidence? Not before you notify the authorities. In cases of suspected fraudulent activity, the actions you take (or fail to take) speak volumes in a court case should your residents sue the board collective over the issue. If you show proper due diligence, you could spare your board a costly lawsuit.

All associations should have a process in place with which to handle fraud investigations. The following six items are basic guidelines. For more detailed advice and assistance, you need to contact an attorney.

- When fraud is suspected, board members should inform the board attorney and local fraud division authorities.

- Remove the records in question to a designated third party, typically the board attorney or an outside accounting firm. Seek your counsel’s advice on whom should be in possession of the suspect records.

- Hire a forensic accountant to conduct a thorough audit and investigation.

- Document the incident and case progression in association minutes. Maintain comprehensive files documenting the process from the first day.

- At your attorney’s prompting, notify the board of the suspicions and investigation. Make sure to coordinate this with your attorney’s permission so as not to hamper the investigation.

- Also, seek your attorney’s advice on how to handle the person or people in question. Ensure that you’re not violating anyone’s civil rights in an attempt to protect your board’s financials.

Walking into a potential fraud situation can be very intimidating.  If you follow these basic steps, and contact your association’s attorney, you can protect both your integrity and that of the association.  Associations are fraught with mistrust and handling the situation correctly will do a lot to ensure the fundamentals tenants of most associations.

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That’s because associations are often required if not expected to keep an arm’s-length distance between their personal businesses and that of the association. If the bylaws state that the association will entertain bids for the various services, it is in their best interests to prohibit board members from submitting bids themselves. It smacks of nepotism and can set your board up for an unsightly lawsuit, one that could be waged against the association board as a whole, as well as individual members. If you’re not insured for directors and officers risks, a lawsuit could drain both association coffers and your own bank account. 

Even unrelated business dealings should be avoided. For example, if your board member owns a home inspection company, imagine the commissions to be had from residents! For that reason, the board member should not do business with residents in communities in which he or she holds a board position.

Likewise, using your connection as a board member to obtain resident lists in order to solicit business is also bad form. The reasons are many, primary being that boards could find themselves named in lawsuits waged by unhappy clients of the board member in question. Insurance coverage will not extend to individual board members’ outside business dealings.

Talk with your association insurance broker to understand the limits of your current coverage. And review your bylaws and state laws to ensure your board members are operating within the law.

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Likely not. Your agreement is not with the person renting the apartment or condo. Your written agreement was signed by the resident in question. The renter has no idea usually that the resident isn’t paying his bills, nor does the renter have control over the resident’s actions. Also, renters pay maintenance fees as part of their rent payment to the owner. It’s the owner’s responsibility to forward those payments to the association, not the renter’s. Neither the association’s agreement with the owner nor the agreement between the renter and owner is set up to force a renter to pay an owner’s expenses, nor should they.

What is the recourse for the association? Can you as an association evict a paying tenant from an apartment or condo you don’t own because the owner isn’t paying the bills?

While your association’s legal counsel will be able to advise you in detail, I don’t think forcing a renter out of a unit by bypassing the resident is possible. However, you as an association may be able to begin foreclosure or delinquency/lien action against your resident, which could allow your association to recoup some of the delinquent association fees.

Unfortunately, associations have little recourse with renters when unit owners won’t pay their bills. Short of forcing a foreclosure and taking over the property itself, the association has to follow the same procedures as with any other unit owner who is delinquent in paying dues.

If your association has attempted to seek payment from renters, that could result in an errors & omissions claim against your association. Make sure to conduct association business in accordance with all bylaws and regulations governing association practices.

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And in today’s uncertain real estate market, those criteria could mean you’re either underinsured and assuming more risk than you need to or you’re paying for too much coverage. Let’s look at it from an underinsured perspective. Suppose your association purchased a new policy five years ago. At that time, the property consisted of three buildings, a pool, and six acres with a paved walking trail. The property value then was $1.2 million.

Since that time, your association has built two new residential buildings and added an exercise facility and community room. The property value today, even with a dip in real estate prices, comes in at $2 million. Your insurance policy is still capped at $1.2 million, leaving $800,000 of your property value unprotected.

That’s not all. Your policy has a 20 percent deductible. For the sake of argument, let’s assume a hurricane and ensuing flood destroyed your entire property. Under your existing insurance policy, your condo association is left to pay a $240,000 deductible on the original amount of $1.2 million in coverage. However, since no coverage is in place for the additional property, your association is also on the hook for the remaining $800,000. If you’d increased coverage, your total deductible would have been $400,000. Instead, your association’s total out-of-pocket expense is $1.04 million.

Likewise, your association may be paying for coverage it doesn’t need. Suppose your association property is sitting in a region hit hard by the housing market collapse. Your original $1.2 million value has dipped to $800,000 and your occupancy levels have plummeted to 30 percent. Not only are you carrying – and paying for – $400,000 too much in property coverage, you aren’t carrying enough protection to offset lower occupancy levels.

Don’t assume that the status quo coverage still fits. If you haven’t reviewed your coverage in the last year, call me. 

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All risk coverage typically covers your association from all perils. There are exclusions, such as earthquakes, acts of war, or terrorism, but the policy covers most events that can befall your property. In fact, the standard all risks policy spells out coverage exclusions rather than listing every covered event. If it’s not excluded, it’s covered.

Broad form coverage covers losses resulting from a wide variety of events, some listed on policy endorsements or in policy language. Typical broad form coverage includes damage from fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, or volcanic action, plus falling objects, ice, sleet or snow weight, and accidental water damage.

What’s the difference? Broad form insures only those perils listed. All risk insures all those perils not excluded. All risk insurance coverage is often called “special” form. In general, an all risk policy offers associations much more coverage than a broad form policy.

Which coverage type is right for you? If your current association insurance broker is writing broad form, ask about the all risk coverage. Also, ask why the broker has opted for broad form over the all risk policy. It could be that your association is not exposed to as many risks as those requiring an all risk policy.

If you’re unsure about whether your association needs all risk or broad form, contact me. I can help you examine your association practices and property needs to determine which type of policy will work best for your association.

Flickr photo credit:  Fatty Tuna

Too often associations have claims denied because the coverage they once had was dropped due to budget concerns. Also, many association boards failed to understand critical elements of their policies, leaving them with unnecessary or unknown gaps in coverage. The most common areas that cause trouble for associations include:

• Misrepresentation of facts on insurance applications: if you’re unsure, don’t fill out the application until you are sure. Many a policy claim has been denied and coverage cancelled due to inadvertent or intentional misrepresentation on applications.

• Policy exclusions: Don’t assume that all claims filed will be covered. If you’re unsure, read the exclusions section of your current policy. If you’re still unsure, talk to an insurance specialist. Don’t leave to chance any gap in coverage.

• Co-insurance penalties: When determining the value of your covered property, make sure it’s the most accurate representation of the entire value of the property. If not, you could see claims paid on just that portion of the value you have insured. For instance, if you insure your property for $500,000 and it’s worth $1,000,000, your insurer will pay your claims based on that $500,000 amount, leaving you to pick up a huge coverage gap.

• Deductibles: If your deductible has been increased within the last few years, now is the time to re-examine that decision based on your association’s current reserves and claims history. Often the cost savings you think you’re getting is negated by claims.

If it’s been a while since you last reviewed your insurance coverage, contact me for an evaluation of your policy and recommendations based on your current business structure. As businesses change, so should coverage. Keeping your policies current and in line with property values is an easy way to alleviate unexpected claims issues.

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Associations are allowed to charge reasonable late fees. But the definition of reasonable, and the frequency and application of reasonable, could land your association in hot water should you not lay out your terms from the start. Late fees should not outpace the amount due, nor should they be so high that collection becomes impossible. Many associations assess a $25 late fee, which meets the reasonable criteria.

Look at your late-fee process. Do your bylaws allow for a late fee to be collected should association fees become past due? If so, make sure the fee is reasonable, and that you and your occupants understand the assessment process and frequency of any subsequent late fees. Courts in the past have found that compounded late fees do not fall within the definition of reasonable fees because associations have not openly stated the fees will compound each month the bill remains unpaid.

Also, make sure that it is clearly defined in your contracts with unit owners how late fees will be assessed. It is well within your rights as an association to charge a late fee for each overdue bill. For example, if Fred Smith is late with his $350 June assessment, a late fee off $50 applies to that bill. Should it remain unpaid in July, associations should not tack on another late fee. It is past due at $400. However, if Fred fails to pay his July assessment as well, he now owes the association $400 for July in addition to the $400 he owes for June.

To make sure you’re able to collect late fees, establish a written collection process, with clearly stated late fees and application of those fees. If you intend to compound late fees, say so in your documentation. Also, provide each unit owner with the process, in writing, preferably on the agreements signed upon occupancy. If you need assistance devising a workable late fee/collection process, contact us.

Flickr photo credit:  David Blackwell

Once again, the government is ramping up efforts to tally the country’s population. With the 2010 census about to get underway, the US Census Bureau is asking apartment and condo associations to help them reach as many residents as possible. Since participation in the census is a federal requirement, associations need to determine how census workers will gain access, especially in secured facilities.

And make no mistake – census workers are given carte blanche when it comes to gaining access and possibly gaining repeated access in order to fully complete their responsibilities. Associations cannot deny access to any census taker who has shown proper identification.

In order to comply with federal regulations, make sure your property managers or any security staff understand that access must be granted to census workers. That includes allowing them access to secured buildings and any apartments they request. They are allowed to knock on doors, ring doorbells, use call boxes, etc. Also, there may be times when the census workers must return to the building to attempt resident contact again. If census workers cannot locate occupants, they are within their rights to ask property managers and associations for occupancy information. While you’re not expected to supply the information immediately, you should provide the requested information within a reasonable amount of time.

But how do you know if the census worker is legitimate? All census workers will be issued a census badge, which property managers may ask to see. When in doubt, contact the nearest Regional Census Center to verify a census taker’s status.

Associations should expect to see census takers after the April 1st deadline, in which all residents are required to return their mailed questionnaires. Expected in-person visits are slated from May through August of this year.

Flickr photo credit: bob the lomond