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

Flickr photo credit: everdred

[technorati tag afeuck6w4j] With hurricane season in full swing and hurricanes now kicking up throughout the Atlantic, condo associations might want to review and update emergency plans before facing a possible evacuation or shelter situation. If your property is located within a hurricane, tornado, or flood zone, it would be wise to review and reiterate to their residents what emergency plans are in place and what residents can expect during an emergency.

Prepare a list of actions for your residents to take in the event of an emergency. Some of the necessary information includes: 

• Updated residency status/contact information throughout the year. For instance, if your residents typically travel for work, encourage them to let someone in the office know of their whereabouts in case of an emergency. 
• Utility contact information. Residents should be instructed to turn off gas utilities and to secure any outdoor furniture, grills, etc. Also instruct residents not to light matches or use gas appliances during a storm. A leak could be undetected and could result in injury or death. 
• Any keys to cars or units should it be necessary to move a car out of harm’s way or enter the property for safety reasons. – Emergency supplies needed. 
• Copies of important documents. 
• Ample food and medicine for at least 5 days. Also, plan on 1 gallon of water per person per day.
• Evacuation plans, including reiterating that those choosing to stay behind when ordered to evacuate will not be rescued until it is safe to return to the property. 
• Agency contact information for those with special needs. 
• Pet preparedness, including medicines and evacuation plans.
• Safety precautions during the storm and after. 
• A list of emergency evacuation shelters. 
• A list of condo unit areas that homeowners are directly responsible for. 
• A reminder that some homeowner policies include coverage to stay elsewhere during renovation to a damaged home.

Check with your insurance broker to determine what your responsibilities are to your residents during an emergency event. Ask the following questions: 

• What information must I provide to residents? 
• How often do I need to inform them of emergency plans and other information? 
• Is our condo association required to force an evacuation prior to a hurricane or other natural disaster? 
• Can our condo association designate one area of our property as a shelter area during emergencies?

If you have questions, talk with your condo association insurance broker. Preparing for disaster long before it happens can save you money and save lives.

Flickr photo credit: aprilzosia

Even if your condominium or apartment complex is located outside California, you’re still facing an earthquake risk. That’s because all 50 states to date have been hit with earthquakes, and 39 states have suffered losses, according to the California Earthquake Authority. More than 5,000 earthquakes hit every year, and losses can be devastating. The San Francisco earthquake in 1906 caused $235 million in damages (an amount equal to $5.1 billion today).

So who insures the risk in the condo association world? Are condo associations responsible, or do unit owners bear the burden of insuring against earthquake damage?

In some cases, condo association insurance for earthquake damage is no longer available. Thanks to historic losses that proved unequivocally that insurers were under-pricing earthquake losses, many carriers opted to exclude homeowners associations from their list of buyers. That puts the onus of coverage onto the unit owners, who may not be aware of the association’s lack of coverage. If your condo association is one that is prohibited from purchasing coverage, let your home owners know. Inform them of the insurer’s lack of coverage availability, but also let them know what their options for their units and personal belongings are. Owners are able to purchases up to $50,000 in earthquake loss insurance and an additional $25,000 in personal property coverage.

Consider, though the risks of not having coverage. If your association is able to purchase it and you decline, your board could be sued for “failure to adequately insure” the premises. Also, the costs of not insuring could be exponentially higher than the costs of coverage. And if your association drops coverage one year, then attempts to buy it in another year, it could be difficult to find thanks to availability of policies.

Check with your broker or your insurer to see if your association can purchase earthquake insurance. Whatever the outcome, communicate your coverage or lack of coverage with your unit owners and residents.

Flickr photo credit: Robert S. Donovan

The question arises every summer – should you allow your residents to grill on the property premises? If you’re wondering how a contained grill can cause problems, consider this: Over 500 fires occur annually thanks to gas grill usage. Charcoal is no safer – over 20 deaths and 300 injuries occur each year thanks to charcoal and the related carbon monoxide poisoning threat it poses.

In condos and apartment complexes the risk increases. Your residents may not consider that dripping grease, nearby flags or plants, or even an open window into their own unit can create fire and carbon monoxide dangers. If you’ve banned them from use on balconies or attached patios/porches, you’ve gone a long way to preventing a devastating fire or accident.

But what about using grills on the property? Most loss control experts say that a minimum of ten feet away from any building is recommended. Should you allow your residents to use grills in common areas, such as on common patio areas or around pools?

Consider first the traffic in that area. Around pools, young children could come in contact with hot surfaces. Also, pool toys, balls or even water could land on the grill, damaging the grill or causing the propane tank to explode. On common patio areas, the traffic may be less of an issue, especially if you section off an area for grilling. Also, mounting your grill in an approved manner – with 15 feet of separation between grills, with the grills firmly secured to the ground, and following all state and local ordinances pertaining to grill use – will allow your residents the pleasure of the barbecue without the added liability to your association.

Have questions? Give me a call. I can help you determine if your grilling area meets all requirements, plus I can check your association insurance policy to make sure it includes coverage specific to association-supplied grills.

Flickr photo credit: beancounter

Ten Business Insurance Renewal Reminders – “Let Us Know”

To insure a Home Owner or Condo Association is to worry – if you’re worried about whether or not something may need to be covered, let us know.

1.  Read your policies, paying attention to the limits, conditions, and exclusions. If you have questions or concerns, let us know.

2.  Liability limits can be increased – if you’re concerned, let us know.

3.  Commercial General Liability (even with an Umbrella) doesn’t cover all types of claims. If you’d like to discuss Employment Practices Liability, Directors & Officers Liability, Fiduciary (ERISA) Liability, Professional Liability, International Liability, Cyber-Liability or other types of protection, let us know.

4.  Selecting adequate Property insurance limits is your responsibility – if you underinsure, there can be coinsurance penalties and/or you’ll come up short after a serious loss. Replacement Cost requirements have nothing to do with Market Value or Book Value – what would your building(s) and contents cost to replace, brand new, if destroyed?

5.  Studies show that even with adequate limits on buildings and contents, businesses that don’t have enough “Business Income Insurance” fail within three years almost 50% of the time. If you’re concerned, let us know.

6.  We need to be told when or before there are changes to your business operations, locations, products handled or services delivered.

7.  With few exceptions, Workers Compensation is required by law for all businesses. If you don’t have it insured somewhere, let us know.

8.  Property insurance policies don’t cover all perils. If you’re concerned (for example) about Flood, Earthquake, or Equipment Breakdown, let us know.

9.  Do you have any (or enough) Crime insurance? If you’re not sure, let us know.

10. Do any of your business contracts contain insurance requirements? If so, let us know.

Flickr photo credit: MBK (Marjie)

Standard Property insurance forms, unless properly endorsed, specifically exclude monetary losses that arise from the enforcement of building ordinances, building codes, or similar laws.
 
You may have carefully set a 100% Replacement Cost limit on your policy that is adequate to cover inflationary increases, but that “replacement” is to replace your building with “like kind and quality” of design and materials. Upon applying for a building permit to start repairs after a loss, you may be advised you’ll have to:

A. Tear down the undamaged portion of your building; and/or
B. Pay for the cost of that demolition to the undamaged portion; and/or
C. Replace the damaged portion (and the torn-down undamaged portion, if applicable) with construction that meets current codes, including (perhaps) such things as sprinkler and alarm systems, ADA-compliant entryways and facilities, earthquake- or windstorm-resistant construction features, etc.

None of the additional costs of such items are covered by standard, non-endorsed Property insurance forms – regardless of the Replacement Cost limit of insurance you purchased.

Insurance coverage for these items is available (for example, the Insurance Services Office, or “ISO” form that provides coverage is CP 04 05 “Ordinance or Law Coverage”). That form covers the above listed items, and a limit can be selected for each one, Coverage A, Coverage B, and Coverage C (sometimes coverages B and C share the same limit).

Some Property forms automatically include as an “Extension of Coverage”, a modest amount of “Ordinance and Laws” coverage – and often the limits on that coverage can be increased at modest cost.

It is unlikely that your insurance agent or broker has access to the knowledge required to assess your exposure to such losses. Rather, periodic consultation by you with an architect and/or an experienced local builder (or construction industry attorney) may be required. They have the knowledge to advise you, based upon how old your building is and what features it has, as to how much extra you’d have to pay to “build it to code” today or tomorrow; with that information you can talk with your agent or broker about getting proper insurance against this potentially significant exposure.

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 credit: flickr snapman

These days, most insurance against direct risks of property loss is arranged on a Replacement Cost (or “RC”) basis. The main alternative that is sometimes used is to insure property on an Actual Cash Value (or “ACV”) basis, which is defined as “Replacement Cost (at the time of loss) less Accumulated Physical Depreciation”. ACV insurance may sometimes be the only alternative available, but it should be avoided if at all possible, and understood fully if adopted.

Total losses can, and frequently do, happen. Even a relatively small fire can involve so much smoke damage, and water damage from fire suppression that the cost to make everything right equals the cost to replace the entire building and its contents. A big wind and rain storm can take off a roof, blow out windows, and soak everything so badly that a total loss occurs. One of the basic rules of risk management is “Don’t risk a lot for a little”. If your insurance program is properly designed, you can insure to 100% of your property’s RC at little or no increase in cost over skimping on Property insurance limits.The workings of Property Coinsurance helps control the cost of insuring at full RC. I like to describe Property Coinsurance as a “quantity discount” whereby the insurance company lowers the rate per $100 insured, the closer you get to insuring at 100% of values. As an approximation, the rate applicable to insuring at 100% of RC is 10% less than the rate to insure at 80% of RC. So, if your building could be replaced for $1 million and the 80% rate to insure it was $0.20 per $100, the premium for that $800,000 limit would be $1,600. If instead you elected to insure the full $1 million using 100% coinsurance, the rate would be about 10% lower, or $0.18 per $100 insured and the premium for that $1 million limit would be $1,800… 20% more insurance for just 12.5% more premium. We’ll go a little deeper into the subject of Property Coinsurance in a later blog.

It is uncommon (but not unheard of) for commercial Property insurance policies to provide “Guaranteed Replacement Cost”, which is a coverage enhancement that is sometimes provided by Homeowners insurance companies in their “preferred” or “executive” policies. If you elect 80% coinsurance and insure for $800,000 in the above example, and if there is a total loss, you’re only going to get the $800,000 – which obviously leaves you $200,000 short of the amount needed to rebuild. If your commercial insurance company does offer “Guaranteed Replacement Cost”, you’re paying a bit extra for the feature (and they will be careful to ascertain that you are actually insuring with at least a 100% limit anyway).

Remember, it is you, and not your insurance agent or company, that is responsible for determining the Replacement Cost of your property. RC has nothing to do with what the property originally cost, or its market value, or how it is carried on your books. Rather, RC means what it would cost to actually replace your property on the day the loss occurs. A professional appraisal from time to time would be ideal; or an opinion from a knowledgeable local contractor.