YOUR HOME: Insurance Coverage For a Co-op
By JAY ROMANO November 28, 1999
Homeowners are often admonished to make sure that the hazard and liability insurance on their homes is up to date and that it provides all the needed coverage. Co-op shareholders are likewise advised — usually by boards of directors or the building’s lawyers — to obtain insurance for the furniture and fixtures within their apartments, because the coverage provided by the building’s hazard policy essentially stops at a tenant-shareholder’s door.
But co-op boards also need to be diligent when determining the insurance needs of the building itself and carefully scrutinize the fine print in their policies.
”Casualty insurance is a very technical, but very important tool for protecting shareholders from the loss of their investments in the event of a fire or other catastrophe,” said James G. Samson, a Manhattan co-op lawyer. ”But unfortunately, in the search for the lowest possible insurance premiums, many boards of directors end up settling for restrictions in their policy that could later come back to haunt them.”
Mr. Samson said that while boards are often aware of the basic perils and hazards that are covered by their building’s insurance policy, they are often surprised to learn of some of the things that some policies do not cover.
For example, Mr. Samson said, a policy that provides ”fire and extended coverage” actually provides coverage for only a limited number of additional perils, including lightning, explosion, wind- or hailstorm, smoke damage and a few less likely occurrences such as sinkhole collapse and volcanic action.
What is not covered by such a policy, he said, are things like damages caused by defective or malfunctioning boilers or machinery, floods and water seepage and losses or additional expenses that may arise as the result of interruption of utility services, government action or new municipal laws or ordinances.
”Some of these exclusions can be particularly troublesome,” Mr. Samson said, explaining that in the event of a catastrophic fire, for example, the building’s insurance policy will often fail to provide coverage for the cost of complying with more restrictive building or fire codes when the building is repaired.
”That could result in the co-op corporation or condominium association paying the cost of complying with the new laws,” he said. ”And that cost could be catastrophic for many buildings.”
In fact, insurance experts say, even policies that are referred to as ”all-risk” policies generally do not provide coverage for such costs.
”One of the most common exclusions listed under the standard all-risk policy basically eliminates coverage for costs associated with changes in municipal rules and regulations,” said Andrew M. Schutzman, president of AMS Risk Management & Consulting, in Rockville Centre, N.Y. In fact, he said, because the term ”all-risk” implies broader coverage than it actually provides, such ”all-risk” policies are increasingly described as those that provide coverage for ”special causes of loss.”
”That means the insurance company is saying: ‘We’re going to cover you for everything except for what’s specifically excluded,” Mr. Schutzman said. In addition to excluding coverage for changes in local laws, he said, other types of coverage that are typically excluded in such policies are coverages for flood, earthquake and employee dishonesty.
”And the term ‘flood’ doesn’t just refer to what happens when a river ends up in your basement,” Mr. Schutzman said, noting that most policies also exclude from coverage losses associated with backups of sewers and drains and for seepage that may result from heavy rains or water main breaks.
In most cases, he said, co-ops and condominiums can obtain coverage for things like sewer backups, seepage, floods, earthquakes, employee dishonesty and changes in municipal rules and regulations. But to do so, Mr. Schutzman said, they must purchase separate policy endorsements covering such perils.
One item of special interest to older buildings that is being excluded from general liability insurance policies with increasing frequency, Mr. Schutzman said, is coverage for claims resulting from exposure to lead-based paint.
”There are plenty of policies out there today that now have lead-paint exclusions written into them,” he said.
Mr. Schutzman noted that since insurance carriers must file notice of such exclusions with the State of New York, it is unlikely that a carrier who has done so would then agree to remove the exclusion.
”Obviously, you’re better off having coverage for lead-based paint claims,” Mr. Schutzman said. ”But that means you may have to obtain your coverage from another carrier to get a policy without the exclusion.”
Mr. Samson, the co-op lawyer, said that another area of concern about insurance relates to the issue of how much coverage should be maintained.
Generally speaking, he said, most co-ops and condominiums carry what is known as ”replacement cost” coverage. That means that the amount of insurance purchased is theoretically sufficient to completely rebuild the structure if it is totally destroyed. In many cases, however, the actual amount of coverage purchased is somewhat less than what it would cost to totally rebuild the building.
”Some co-op corporations and condominium associations are tempted to underinsure their buildings,” Mr. Samson said. ”The theory is that rarely does a casualty occur that totally destroys the building.”
However, he said, if the amount of coverage carried is not at least 80 percent of the replacement value of the building, there is a possibility that the carrier would only be required by law to pay a pro-rata share of claims that are filed. That pro-rata share — calculated by dividing the amount of insurance purchased by the amount required — would be applicable to all claims filed under the policy against the carrier.
So, for example, if a property owner with a $1 million building is required to have $800,000 worth of replacement-cost insurance, but only purchases $600,000 worth of coverage, the carrier would only be required to pay a 75 percent share of any claims filed.
”That means that even in the event of a small fire, the co-op or condominium receives only a portion of the cost of the casualty,” Mr. Samson said.
Robert E. Mackoul, president of Mackoul & Associates, an insurance broker in Lynbrook, N.Y., said that co-ops and condominiums can almost always avoid problems like the one described by Mr. Samson by making sure that the insurance carrier provides what is known as an ”agreed amount” endorsement. With such an endorsement, he said, the carrier acknowledges that while the insurance being purchased is less than what it would cost to rebuild the insured property, the carrier nevertheless agrees to waive its right to pay claims only on a ”pro-rata” basis.
Mr. Mackoul pointed out that another endorsement co-ops and condominiums should attempt to obtain from their insurance carrier is what is known as a ”waiver of subrogation.” He explained that without such a waiver, the insurance company would have the right to sue a third party who may have caused a problem that resulted in a claim being paid by the company — even if that third party was a shareholder.
”The smartest thing a co-op or condominium board can do to avoid these kinds of problems is to get their property and casualty insurance from a company and broker that specializes in dealing with those kinds of buildings,” Mr. Mackoul said. ”That’s probably the best way to avoid getting burned.”