Our Coverage Doesn’t Cover You

True story: Shareholders at one Manhattan co-op voted down a referendum that would have required them to buy homeowners insurance. Then one day some water pipes burst, the building’s insurance didn’t cover all the damage, and the board had to issue an assessment to make up the difference. Shareholders who had homeowners insurance got reimbursed by their insurance companies for the assessment amount. Those without had to pay out of pocket. And the next time the board tried to require homeowners insurance – the shareholders voted it down again!

The one thing you can’t insure against, it seems, is shortsightedness. That notwithstanding, boards still may want to push to mandate that co-op shareholders and condo unit-owners carry insurance, as many buildings already require.

Why? What difference does it make to the co-op or condo as a whole if shareholders carry homeowners insurance on their individual apartments? “It fills in a gap for everybody and the building itself,” says attorney Matthew J. Leeds, a partner at Ganfer & Shore and an adjunct professor at Fordham Law School. If an uninsured owner’s bathtub overflows, ruining the bathroom of an uninsured owner a floor below, then you have neighbor suing neighbor for damages. And if the overflow creates a moldy mess inside the common walls, the building would either have to fix that at its own expense – possibly suing the first owner to recoup – or else fix it and file an insurance claim, which could raise the building’s premiums.

“It goes for a much smoother-running building when everybody has coverage,” says Steve Greenbaum, director of management at Mark Greenberg Real Estate. “God forbid there’s a claim between neighbor and neighbor, the co-op doesn’t have to get involved. Instead, they call their own insurance companies.”

“Our concern as a co-op entity is that [shareholders] at least have liability insurance, because a worker in someone’s home could trip and fall and then they’re going to go after the contractor, go after the owner, and go after the co-op,” says Michael Herzog, a retired accountant and finance manager who’s been board president of the 68-unit Cedarhurst Park Corp. in Cedarhurst, Long Island, since it converted in 1988. “So any insurance [shareholders] have will protect the co-op.”

Can You Require It?

But while recognizing that there might be good reasons for homeowners to carry insurance – aside from the intrinsic fact that it protects the individual homeowners themselves – boards are often reluctant to require it. “Some people either don’t focus on what would be good for them or they find it paternalistic,” says Leeds, “and some people think it’s an added expense” they can’t or don’t want to pay. A basic homeowner policy for a middle-class apartment in the New York area costs about $350 to $600 a year, or roughly $29 to $50 a month.

Yet both co-op and condo boards can indeed mandate it. While it’s possible to do so with a board vote that adds it to the house rules and regulations, it stands up better when challenged by contentious individuals if you amend the building’s operating documents – the co-op’s proprietary lease, the condominium’s bylaws – which generally requires a super-majority of homeowner votes.

Before you go to the trouble of arranging that, be sure to check those selfsame documents first. The requirement might already exist, unbeknownst to boards and homeowners. And if it doesn’t, get outside professionals to help convince homeowners to amend the rules.

“People don’t realize their exposures, and that’s the key point,” says Patricia Batih, vice president of sales and marketing at the insurance agency Mackoul & Associates. “Maybe have an insurance broker come out and speak to the homeowners, like fire marshals or police [liaisons] or other professionals do.”

Should you bother, given that banks and other lenders already require homeowners insurance in most cases? Yes, because otherwise, you just don’t know if it’s true in all cases. “I can’t imagine a bank lending money to someone without making sure they have insurance,” says Greenbaum. “But I’ve seen it. I’ve seen it a lot.”

Insurance 101

What exactly should you require? A board could, one supposes, simply require homeowners insurance and leave it at that. But specifics are important, since “many shareholders have inadequate insurance,” says James Samson, a partner in the law firm of Samson Fink & Dubow. Adds Leeds: “If the deductible is too high it’s almost like not having insurance, because the threshold is so hard to reach before the insurance company gets involved.”

The standard nomenclature for homeowners insurance is:

• Coverage A: Dwelling (the declared value and covers direct physical damage, including to carpeting, floors, and even some elements of decor)

• Coverage B: Other Structures (such as tool sheds or detached garages, which can be pertinent to townhouse condominiums and the like)

• Coverage C: Personal Property (loss of things that aren’t a permanent part of your home, such as furniture and clothing, and is generally limited to 50 to 70 percent of the “Dwelling” coverage amount; it excludes such items as fine art, jewelry, and coin collections, which can be insured by a separate “endorsement,” also called a “rider” or a “floater”)

• Coverage D: Loss of Use (offers reimbursement for the amount of additional living expenses incurred when one’s home is uninhabitable)

• Coverage E: Personal Liability (pays for claims and legal defense arising from injury or property damage to oneself or others, whether by accident or negligence; “Medical Payments” can be a subsection of that or its own separate section)

“We had required $300,000 liability insurance,” says board president Herzog, but in January, “we passed at our board meeting a rise to $500,000.” He continues: “We also indicated that if you have an umbrella policy for a million, you can have that instead of the $500,000 liability insurance.”

A personal umbrella policy (PUP) is a type that provides liability coverage beyond that of your automobile or homeowners policy – somewhat like the overdraft function of a checking account. “We also take the position that what you do with the rest of the insurance is your business,” he adds, referring to the specific amounts for coverage other than liability.

“We recommend half-a-million [minimum liability coverage], since we are in a very litigious society,” Batih says.

“That would be the very bare minimum,” says Don Mayer, an account executive for the insurance brokerage the NIFC Agency (known as Northeast Insurance & Financial Consultants outside New York State). “I would write a policy with at least a million per accident, two million aggregate per year. The difference in price is minimal.”

Make sure that your owners get the right type of insurance. There are several categories of “HO” (for homeowner) policies, but only two are applicable here: HO-4, which is standard rental insurance, and HO-6, which is specific to condominium and cooperative apartments.

“If it’s an owner-occupied co-op or condo [unit], the policy is an HO-6,” says Batih. “If it’s being rented out, the person renting it should have their own HO-4, and the owner’s HO-6 doesn’t apply more. They should cancel the HO-6 and write a special policy – some companies call it a ‘landlord package policy’ – and that’ll protect the owner’s interest in the [apartment] and his liability exposure. If you’re subletting for a couple of months, that’s different. But if you’re renting it out for a year or something, you should have a landlord package policy and your renter should have an HO-4.”

Enforcing Safety

Passing a policy is all well and good, of course, but how are you going to enforce it? In a 100-unit building, say, with a hundred different policies and possibly as many different insurance dates, who’s going to keep track of that? It’s simple enough to enter owners’ start and end dates into a database that alerts a manager when a policy is about to lapse, but then follow-up manpower is needed for recalcitrant owners who didn’t renew or for those who procrastinate on sending proof of coverage.

“We don’t have a mechanism for enforcing it,” Herzog concedes, echoing a lament of many boards that have required homeowners insurance. “It’s complicated, and management companies are not going to ask [owners] to submit their certificates every year. So at this point we have to leave it up to [our shareholders] to comply. Where we do have a little latitude is on sublets,” he says. “We will not allow a sublet unless the shareholder and the subtenant each have liability insurance, and since sublets are only one-year leases, after a year we can enforce it again.”

The specific mechanism, at least, for enforcing the requirement is for a managing agent and/or a co-op/condo association to be a “certificate-holder,” which is done through something called a “binder of insurance” – a document that says coverage is on force on this day and at these amounts.

Many professionals talk about an “ACORD 25 Certificate of Liability Insurance,” which provides the same information. That’s a standard form published by the Association for Cooperative Operations Research and Development (ACORD), an insurance-industry organization. “But that’s normally for commercial lines [of insurance],” says Batih. “In personal lines, a broker will give a binder of insurance, which says basically the same thing.”

Another method is to have the managing agent and/or co-op/condo association listed as an “additional insured,” also known as an “additional interest” or an “alternate payer.”

“There’s a big distinction between an additional insured and a certificate holder,” says Mayer. “A certificate-holder is simply the person who requested the certificate. An additional insured is an entity actually named in the policy: they’re covered by Mr. Smith’s insurance policy just as Mr. Smith’s covered.” Does it cost extra? “In many cases there is a charge, generally nominal,” he says.

However, points out Batih, “Fewer and fewer insurance companies are willing to list the building as an additional insured, because it’s a conflict of interest. If there’s a debate over whose responsibility the damage was, the homeowners’ insurance company is repping both the building and the owner.”

There’s a trump card to all this, in the case of particularly recalcitrant homeowners. “If a building has an effective insurance program and a thorough provision in the operating documents,” says Leeds, “a board could say that if a shareholder or a unit-owner does not have insurance or the insurance lapses the building can obtain insurance on their behalf and charge them for it.”

And all the normal penalties apply as well. For co-ops, ultimately, eviction under the proprietary lease; and for condos, fines, and liens.

Now, if only boards could buy homeowners insurance to protect against aggravation, apathy, and constant complaints from homeowners, coverage would be complete.