Up Against the Wall

Built in 1969 as a super-luxury rental, Plaza 400 is a massive structure with its share of high-class amenities. The 40-story tower on First Avenue and 56th Street has seven passenger elevators, two service elevators, a 520-car garage, a laundry room, a lounge, and a penthouse health club. The property was converted to tenant ownership in 1981 and self-management in 1983.

Needless to say, the residents of this 600-unit cooperative are accustomed to paying a premium for their high standard of living. But its board members were stunned when their insurance broker informed them that he couldn't get them coverage any more because the building was in a "high-risk" zone. After some scrambling, the luxury co-op managed to obtain insurance - but with a 280 percent increase in premiums.

"Last year the premiums went up 30 percent," recalls Steven Chesnoff, Plaza 400's board president. "Now that looks like a bargain."

Plaza 400 is not unique. An 11-story, 70-unit cooperative on 49th Street off Third Avenue - also in a so-called "high-risk" area - was notified 48 hours before its insurance expired that its carrier could no longer cover the property. According to Don Levy, director of management at Lawrence Properties, the manager, the co-op actually lost its insurance carrier and was without insurance for 72 hours. "They didn't give us a lot of time to shop around," remarks Levy ruefully.

In his two decades in the business, Levy has never seen anything like this. Buffeted by the terrorist attacks of September 11, the stock market drop, and troubles within the industry itself, the insurance business is staggering - and co-op and condo owners are, or will be, paying the price. "New York City took it on the chin with the terrorist attacks," observes Michael Spain, president of the Spain Agency, an insurance broker. "It's still reeling 18 months later."

Even before 9/11, the industry was hurting from years of fierce, in some ways self-defeating, competition. Many insurers had been cutting premiums in order to pick up new business. "It was an unhealthy price war," Spain says, which cut the reserves that insurers should have been building up in the case of hard times. In any event, the reinsurance companies, which supply the bulk of the coverage to insurance firms, were there to pick up much of the cost.

That all changed with the terrorist attacks on the World Trade Center. The reinsurance operations had to pay huge sums to cover the massive damages to those in Manhattan's downtown area. The reinsurers passed those costs on to insurers, who subsequently raised premiums. "When the insurance companies went to renegotiate with the reinsurers, they got killed," says Spain.

Things only got worse. Many insurers had invested profits in the stock market - only to lose them when the market plummeted. "I think that actually hurt the industry more than the attacks," Spain notes.

Years of underpricing premiums had also led to increased staff cutbacks as the industry tried to keep its profit margins up on relatively low-maintenance accounts. With the increase in claims post-9/11, however, insurers found themselves woefully understaffed - which is part of the reason, says Carla Vel, president of the Distinguished Properties Group, a broker, why there are so many last-minute renewals and rejections. "With added concerns, it takes three times the amount of work now with the staff that's been reduced over the last decade," says Vel.

There are also fewer insurers out there. Some have gotten out of New York entirely, while a number of others have had their ratings by the A. Best Company, which evaluates financial stability of a company, downgraded from the A to B range. That, in turn, has affected properties where lenders require the use of A-rated carriers, forcing them to scramble for new carriers.

The decrease of firms offering coverage has increased the workload for those that remain. And with fewer firms competing, there is less reason to offer discounts and/or speedy service. Or, as one broker says about the late renewals/rejections: "They do it because they can."

Besides terrorism and the stock market drop, carriers also have to factor in increased cost of sending out adjusters and specialists - previously on asbestos, now on the new concerns about mold. "To protect themselves from future claims, the insurance adjuster has to spend time checking out these issues," Vel says. "If you also have to send out a mold expert, that adds to the claim expense. It's the cost of doing business." But it reduces profits, which in turn reduces staff.

Experts say the federal antiterrorism insurance assistance law, signed in November 2002, provides little practical help and more paperwork. It requires that insurance companies offer terrorism coverage but also allows them to charge additional premiums. (Insurers had 90 days from the enactment of the law to notify policyholders of the increases in premiums.)

"Delays are caused by the huge workload, a lot of inefficiencies, and a lot of new circumstances," Vel says. "The [insurers] are looking at the terrorist bill now - the insurance companies have to send out a lot more paperwork. They have to absorb a different workload with a smaller staff."

With financial problems multiplying, most carriers have tried to reduce their risk and build up their reserves. They have established officially unacknowledged "red zones," which vary from company to company but are generally defined as "high-risk" areas near landmarks, bridges, or other potential terrorist targets. What happens is that a small building in a "red zone" may not be a terrorist target per se but will still not be covered if the carrier is at its limit.

"It's a question of concentration of business with the insurance companies," explains Barbara Strauss, executive vice president at York International, a broker. "They don't want to take too much value in any one zip code. If they did, they could take huge losses. They try to spread out the risk."

Some carriers have also increased the cost of replacement value for a building. According to Spain, many insurers are reevaluating properties. "If you were priced at $40 million, maybe at $125 a square foot, now carriers are saying, 'We can't rebuild for that price; it's really $170 a square foot. So that means your building is now valued at $60 million.'"

Caught in a bind, some properties are using multiple carriers to make up the total insurance package. "If you have a building valued at $100 million, you may try and get one company to write up half of it and another to do the other half," Strauss says. "But both policy premiums are based on the $100 million value, so you are still paying higher premiums."

Others are turning to so-called "non-admitted" carriers. These companies are not protected by New York State guarantees that protect admitted carriers. They are thus riskier and also can be more expensive. But for many, there are few other options. Manager Steve Kessler, director of operations at Grogan Associates, reports that 2 Tudor City, a 333-unit co-op near the United Nations, could not find an admitted carrier and had to turn to a non-admitted one - and then had to pay a 200 percent increase. "They had us by the short hairs," he admits. "We needed the coverage."

Some are debating whether to take higher deductibles and also not make claims in some cases as a way to keep premiums down. "A good option for a board is to examine the claims they are submitting," says Spain. "When evaluating you, insurance carriers look at the frequency of the claims. They look at the three- to five-year picture. Boards can look and say, 'Let's take higher deductibles, a $5,000 deductible, so we don't put in as many claims.' That's one way to try and keep premiums down."

Still, with premium increases running from 30 to 300 percent, everyone acknowledges there are few solid options for beleaguered boards, already in a squeeze with declining property values and increasing taxes.

"We are covering the increase in premiums from the operating funds," complains Plaza 400's Chesnoff. "But that came on top of the 18.5 percent property tax increase that just came down. We had to pass an assessment to pay for that. Then there are utility bills, and the other costs in running the building. It's tough. Co-op owners are being put under great duress. Expenses are pretty high. I hear about other buildings being pushed against the wall. You begin to wonder about whether New York is a good place to live in anymore."