Condo Media - October 2024 - 27

TUESDAY, OCTOBER 15
NOON TO 1:00 P.M.
The insurance
industry is a
billion-dollar
for-profit
industry.
One of the main factors
that goes into the profit
and loss of insurance
carriers is claims. In
the years 2012-2017,
the insurance industry
averaged $70 billion in
claims per year. In 20182023,
this increased to
$101 billion; this type
of shift cannot go
without major changes
in the industry.
Assuming you relate to
community associations,
you have noticed one
of the changes in the
form of major premium
increases with property
insurance. While no time
is a good time for higher
insurance premiums, the
rate hikes are coming on
top of massive service
cost and materials price
inflation that associations
were already trying to
cope with. For many
associations, the cost of
insurance is proving to
be difficult to absorb,
and some associations
have been faced with
very difficult decisions.
Managing Costs
ALL-IN VS. BARE-WALLS POLICY
One way to reduce insurance costs is to reduce the number of claims made to the
master insurance policy. Generally speaking, in a typical garden-style building containing
multiple units, the best practice is to maintain so-called " all-in " master policy
insurance. This type of insurance covers the building as well as the units, including fixtures
but excluding personal property and furnishings (see sidebar on page 28 discussing
the importance of owners having an HO6 policy). Some associations are amending
their condominium documents to permit a " bare-walls " policy instead to lower their
insurance costs. This type of policy only provides coverage for the structural elements
of a unit and excludes sheet rock, finished flooring, built-in fixtures like cabinets and
countertops, etc.
While a bare-walls policy may be less expensive, switching to this type of policy is
not without risks. In the event of a casualty loss, unless the unit owner has their own
HO6 policy covering the portions of the unit not covered under the master bare-walls
policy, the owner could be faced with paying tens of thousands of dollars to restore the
unit. If an owner can't restore the unit, this could impact the values of other surrounding
units. Likewise, even if an owner has an HO6 policy, when a loss occurs, because
there are multiple insurance carriers involved, adjusting the loss can be more complex
and challenging.
INSURANCE DEDUCTIBLE INCREASE
Another option that can help reduce claims to the master policy is increasing the
applicable insurance deductible. By raising the amount of the deductible (or moving to
a per-unit deductible), smaller claims will not be reported to the master carrier, and this
does help reduce the loss history over time. However, raising the applicable deductible
too much can also seriously impact the ability for mortgage loans for purchasers of units.
Fannie Mae requirements for condo projects limit the amount of the insurance
deductible to no more than 5% of the property insurance coverage. If an association
has 10 units, and the coverage is $1,000,000, the maximum deductible is $50,000, and
the maximum per-unit deductible would be $5,000. If an association does not meet
the requirements for Fannie Mae, then purchasers looking to purchase units will not
be able to obtain Fannie Mae-backed mortgages, which can impact the marketability
of units. Recently, we have seen a spike in the number of associations running into this
issue and faced with the decision of whether to keep the higher deductibles and risk
unit marketability.
Fortunately, some insurance carriers have recently come up with a quasi-solution
that lenders have mostly accepted. Upon direct request from a lender, carriers can add
a 5% deductible cap on the policy; reading that no claim will have a deductible that
exceeds 5% of the total building value in the event of a catastrophic loss. This resolution
has satisfied some lenders and has allowed policies to maintain higher per-unit
deductibles for most losses but caps the deductible amount at 5% in the event of a
catastrophic loss affecting all or most of the units.
If your carrier is willing to implement the cap, there still may be some obstacles.
One potential issue is how the deductible is apportioned in a catastrophic loss.
Will some units have to absorb the higher-deductible amounts while others receive
the benefit of the deductible cap? It is also important (as always) to review the insurance
provisions contained in the condominium documents before making any changes
to the policy. But if your association is having difficulty meeting the deductible cap
required by Fannie Mae, this may be an option that your carrier could implement,
and you should inquire about doing so.
October 2024 CONDOMEDIA 27

Condo Media - October 2024

Table of Contents for the Digital Edition of Condo Media - October 2024