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.

Flickr photo credit: bitmask

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.

Flickr photo credit: crystaljingsr

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. 

Flickr photo credit: snacktime2007

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.

Flickr photo credit:  bulent_yusuf

The idea for the Federal Housing Administration’s new rules and enforcement was to allow for more buyers to qualify for FHA loans, thus increasing business for condo and apartment associations. But how good is it?

In fact, realtor associations and builders groups are opposed to the new rules, stating that the FHA has just made it that much harder for new building projects to be delivered and for existing apartment and condo complexes to qualify for the federal lending program. Apartment and condo associations agree. One section of the new FHA rules limits how many buyers of condo and apartment units can get an FHA loan. And the rules limit the number of FHA-backed loans to half of the existing units in a building.

 Among some of the new requirements is the stipulation that loans will be approved only for units in buildings where the association boards have deposited a minimum of 10 percent of its annual budget in a maintenance and repair reserve account. If your association property has a small number of units, the requirement puts FHA loans out of reach for your unit buyers.

Worse is if your association is over a month late in assessments, your buildings are excluded from FHA qualification. Likewise, if more than 10 percent of all units are owned by more than one investor, the property will not qualify.

The new FHA rules and enforcement are designed to safeguard the financial health of the organization, which is holding either delinquent or foreclosed status on 18 percent of its insured loans. Its own financial reserves are now below federal minimum standards.

If your association’s property is already above the federal loan threshold, there’s not much you can do to bring your property within compliance. Talk with an experienced association insurance broker to understand how these new rules will affect your association and what steps you can take to protect against the financial impact of the new federal loan limits.

Has your association been affected by the new FHA rules? If so, how?

flickr photo credit: HUD Public Affairs

For additional information:

HUD: Condo/PUD/Subdivision Lookup

HUD: Mortgagee Letter 2009-46B: Condo Approval Process for Single Family Housing

HUD: Mortgagee Letter 2009-46A: Temporary Guidance for Condominium Policy

HUD: Mortgagee Letter 2009-46 A & 2009-46B Frequently Asked Questions

The larger issue may be a depletion of funds available, but a sound insurance policy can help your association recover more quickly. The underlying issue, however, could be more harmful in the long run. In order for an embezzlement to occur, at least in the minds of your residents, someone had to be ignoring something. True? No. But getting beyond that perception can be difficult, if not impossible.

1. If your association is the victim of embezzlement by one of your board members or staff, don’t attempt to hide it from your residents. Instead, become proactive in informing your residents on the situation and its progress through any legal channels.

       2.   Provide residents with written communication that details the alleged activity (and make sure not to blame anyone lest you set your association up for a libel or slander lawsuit), what is missing, and how your homeowner’s association board is addressing it.

        3.   Remember to continue your communications with your homeowners. Update them regularly even if there isn’t much to report. They need to see their homeowner’s association is on top of the situation and working toward a swift resolution to the issue. Reporting the problem to them and then ignoring further communication sends a signal to residents that the board is uninformed or ignoring the situation. While neither may be true, residents can’t know what’s being done without you telling them.

A number of business insurance policies cover damage to reputation and loss of income as a result of that damage. Contact your homeowner’s association broker to discuss what options are available to you. Your broker is an excellent source for developing a communications plan that puts the minds of your residents at ease. That can go a long way to alleviating any damage to your reputation or future business.

Flickr photo credit: Arenamontanus

 Most apartment associations have rules that prohibit or limit greatly the ability of owners to rent their units. The strong argument has always been that the unknown variable – the tenant – could be a detriment to the value of the property as many unit owners in the past have been reluctant to live in a mixed-use community. However, with so many empty units and so much financial strain on both apartment associations and homeowners, flexibility is the new buzz word of the industry.

 For starters, new buyers may balk at purchasing a unit with rigid ownership terms. In a stagnant real estate market, smart associations will adopt more flexible rules regarding what unit owners can do with their properties. Allowing long-term rentals and taking part in the tenant vetting process can give associations some control over the rental while giving the unit owners the flexibility necessary to avoid foreclosure.

 Associations should limit how many people can occupy the unit. Also, setting a consistent rental rate and conducting background screenings on all rental applicants can help associations maintain property integrity and ease the concerns of existing owners. Those owners wanting to rent their units should be required to file all leases with the association and pay all association fees and any administration costs.

 If your apartment association is considering allowing rentals, check with your association insurance broker to understand how these changes could affect your coverage. Remember that any change to the association rules should be run past your broker to avoid any gaps in coverage.

 Flickr photo credit:  interpunct

 That’s because some homeowners require the use of service animals. Seeing-eye dogs are the obvious exception to your board’s rules. And the exception should be made, because to deny a disabled person the right to animal assistance is in direct violation of federal and state disability legislation. But some pet owners are going to great lengths to claim disabilities in order to keep pets that wouldn’t otherwise fall under the definition of a service animal.  What about a service monkey to assist the disabled, or a guide horse for the blind?   It’s an area of the law that lacks clear definition, and while the Department of Justice has a proposal pending that would exclude exotic animals (such as snakes or other wild animals, there’s no clear legal precedent to follow.

 So how do you as a board, decide who in your community is in need of a service animal and who isn’t; what type of animal is considered a service animal and what isn’t. And more importantly, can you legally make those decisions? While your community association may not be comfortable defining what constitutes a service animal, you may be able to put parameters on that animal’s interaction with the rest of your community. For example, if a resident claims that he needs his pet raccoon to reduce his stress levels, your board could require that the animal not come within say 500 feet of another resident.

 Community associations should consult with a legal expert to address the issue of service animals. Find out if your state allows for your board to require proof of disability, as well. Check also with your insurance broker to understand what policy requirements you must meet in order to maintain proper coverage.

Has this been an issue for your association?  How did your board handle it?  Do you agree or disagree with their decision?

 Photo credit: The Guide Horse Foundation