Required “What If?” Protection

They wouldn’t drive without car insurance, yet many shareholders don’t have homeowner’s insurance for their co-op apartments. And they can be resistant to boards’ efforts to impose an insurance requirement on them. Talk with the board of one posh Upper East Side co-op. Its board asked its shareholders to vote on an amendment to the proprietary lease that would require each of them to get homeowner’s insurance. But the amendment was voted down, reports attorney James Samson, a partner with Samson, Fink & Dubow. Case closed – until over 40 radiators in the 200+-unit co-op ruptured during a 48-hour period this past January.

What a difference a catastrophe makes.

Barely five months later – and still reeling from the incident – the shareholders met in May and approved an amendment to the co-op’s proprietary lease, requiring insurance.

In the bad old days, shareholders had an excuse for remaining uninsured: it was difficult to get insurance for a co-op apartment. No longer, says insurance broker Michael Spain, president of The Spain Agency. In fact, it’s relatively easy and inexpensive to get such insurance, adds broker Ed Mackoul, vice president of Mackoul & Associates. Typical co-op or condo policies, providing both casualty and liability coverage, cost $200 and up a year. (Casualty coverage applies when the policy holder’s property is damaged by another person, while liability coverage applies when the policy holder damages another person’s property.) So why aren’t more co-op owners covered? (Insurance is less of an issue in condos because banks require unit-owners to have insurance when they close – but, explains Samson, there’s no such requirement for co-ops.)

According to Mackoul, many mistakenly believe that the co-op’s insurance will cover any damage to their apartments or their personal property. The broker notes that such a policy only covers the structure but not the contents of the building. That is, damage to the building itself and the apartments’ subfloors, walls, and ceilings.

Homeowner’s insurance covers damage to shareholders’ personal property, and any improvements they’ve added (such as kitchen cabinets, window shades, tile, wallpaper, or hardwood floors that weren’t originally in the apartment). It will also cover any injuries or damage done to a third person or his property by a shareholder. For example, if someone slips and falls in a shareholder’s apartment or a shareholder’s A/C unit falls out of his window and hurts a passerby, homeowner’s insurance would cover those injuries, says Spain. And if a shareholder’s bathtub overflows and damages the downstairs neighbor’s apartment, homeowner’s insurance would cover that damage, he adds.

Such insurance also has other less well-known benefits. For instance, if a shareholder loses the use of his apartment because of an incident, his insurance will pay for a hotel stay or rent for a temporary apartment. Depending on the policy, such coverage will usually include a time or dollar amount limit. And if the co-op issues an assessment to cover repairs after an incident, homeowner’s insurance will cover the shareholder’s share of that assessment. The limit on such coverage ranges from $2,500 to $10,000.

Spain has seen the consequences of shareholders not having insurance. If an accident at the co-op damages a shareholder’s apartment or property, he may have to pay out of pocket for his losses – or he may go after the co-op for compensation. Also, if someone gets hurt in an uninsured apartment, the injured person may sue the co-op, he warns. And if something happens between shareholders – like an overflowing bathtub – the situation can quickly become adversarial and pit neighbor against neighbor.

Homeowner’s insurance eliminates many of these difficulties. If an accident does occur, having insurance “softens the blow,” says Mackoul. The shareholders can simply notify their insurers and let the insurers take it from there. Plus, having insurance reduces the likelihood that shareholders or other injured parties will go after the co-op for compensation.

Spain says co-op boards would be “smart to insist that everyone has insurance.” If your board wants to impose such a requirement at your co-op, you’ll need to amend your proprietary lease, which requires a supermajority in most co-ops. The amendment should require all shareholders to get homeowner’s insurance for their apartments, and spell out the type and minimum amount of coverage required, Samson advises. It should also give the board the power to change these requirements, as needed. And it should require that shareholders add the co-op to their policies as an additional insured. Then, if a shareholder cancels his policy or lets it lapse, the co-op will be notified by the insurer. (Some insurers may balk at adding the co-op.)

So how do you convince your shareholders that approving an insurance requirement amendment is in their best interest? Remind them that “if you have something of value, you want to insure it,” suggests Spain. It’s also not a bad idea to “scare them,” adds Samson. Explain what can happen if they don’t have insurance, using “war stories” like the Upper East Side co-op’s experience. Also, ask how many shareholders already have insurance – “peer pressure” may convince the ones without to get it as well. And ask them if they’re “comfortable living beneath someone who doesn’t have insurance,” stressing the point that insurance is an inexpensive, responsible way to protect against “what if?”