Yet some condo associations are finding the first right of refusal arrangement, that which allows the condo association board the opportunity to either buy or refuse to buy any unit up for sale, a godsend in a mighty tough market. One condo association in Chicago has developed a plan to become its building’s landlord, offering to buy up vacant units under the first right of refusal clause, rent them out, and resell them after the market conditions improve.

 Another reason condo associations are resurrecting what was once considered a discriminatory practice – to ensure the new owners can afford the condo unit. With more foreclosures in the market than at any time in recent history, condo associations are eager to curb the loss of association fees and residents by hand selecting the next wave of residents.

 A number of states have prohibited the first right of refusal action. New Jersey passed the New Jersey Condominium Act, which expressly prohibits the practice. Still, many condo associations do have this provision in their bylaws, though it isn’t often exercised due to the risk of discrimination claims.

 Should your condo association use first right of refusal to ride out a tough economy? Talk with your insurance broker. Understand what your state’s laws are, and determine if the benefits of purchasing units and becoming a landlord outweighs the risks. It’s a drastic change from the original function of a condo association, but if foreclosures are plaguing your property, it may be a viable alternative.

Flickr photo credit: allaboutgeorge

Photo credit: Flickr Gregor Rohrig

In the last post, we talked about insuring-to-value on a Replacement Cost basis, and about how it is advisable to insure at 100% of RC. We also introduced the concept of Property Coinsurance, which can be thought of as a “quantity discount” that gives you a better rate, provided that the limit of insurance you select meets or exceeds the coinsurance requirements you selected when arranging for your policy. Be aware, though, that to meet the requirements, the limit you select must be adequate at the time of loss – it is not enough to request a limit that is adequate on the first day of the policy.

Here’s an example: let’s say you get a professional property appraisal on your building on October 1, 2009 that says the insurable RC of your building on that date is $1,000,000. Your Property insurance policy renews on January 1, 2010, so that policy will run from 1/1/2010 to 1/1/2011. With that policy, you might be dealing with a loss that occurs on December 31, 2010 – fifteen months after the appraisal. Because your Property Coinsurance clause refers to the RC at the time of loss, if building costs were expected to be inflating at 5% a year, you should have asked for a limit of $1,062,500 (on a 100% coinsurance basis) on your 1/1/2010 renewal, to take care of the actual RC for that 12/31/2010 loss (5% inflation times 1.25 years since the appraisal = a factor of 6.25%).

Building cost inflation factors vary from time to time, and at any given time they will be different in different parts of the country, and they also will vary by type of construction (for example, in the fourth quarter of 2008, building costs for apartment or condo buildings of frame construction might have been 4% higher than a year earlier, while apartments or condo buildings of steel and brick construction might have been 9% higher than a year earlier). Your appraisal company (or your insurance agent or broker) can provide some guidance or advice in these areas as you consider the right limit of insurance to buy.

Even in recessionary times, commodity prices can undergo sharp increases, so one eye should always be kept on the impact of building cost inflation. In times of very high inflation, like we saw some 25 years ago, Property policy limits might need to be adjusted two or three times during the course of the policy year.

Photo courtesy of flickr - Last NYC Hero

Homeowner associations are under constant pressure to keep costs down.  With the natural disasters that have occurred in the past year or so, the pressure is growing as insurance costs increase and are easily the largest expense in the budget. 

Many Condominium and other community associations have considered self-insurance as an option.  Self-insurance can reduce an associations’ premium by 20-40%.  As good as that sounds, self-insurance should be fully investigated before jumping in.

What is self-insurance? 
In a very loose interpretation, self-insurance is a typical property/casualty policy with an extremely high deductible in which the association is responsible for paying claims less than the deductible.  State regulations to self insure Condominium, Cooperatives, Homeowners’, and Timeshare associations vary and must be carefully reviewed for your particular state and circumstance.  

Those in favor of self-insurance feel that in their particular case the possiblility of a major catastrophe affecting all members of the plan is so remote and unlikely that the benefits outweigh the risks. 

Those against self-insurance think that should a catastrophic event occur they would be financially unable to pay the claims in the instance of full replacement coverage.

If you think self-insurance is something to look into, contact an independent agent with access to multiple markets who specializes in insurance for community associations.