Insurane Trustees

A condo association you represent in Brooklyn had a devastating fire this year, and you got a surprise when the insurance settlement came through. Tell us about that.

One of the first things you have to do after a fire like this is to dip into those obscure provisions in the bylaws dealing with substantial damage to the property of the condominium. As I was reading through this, I came across a provision that says that in the event there is an insurance claim payment of more than $250,000 to the corporation, you have to put it in an account overseen by an insurance trustee.

What is an insurance trustee?

I had to go to the declaration of the condominium where there's a list of defined terms used consistently throughout the governing documents. I discovered that the insurance trustee is a bank designated by the condominium board of managers, which has to be of a certain size financially – in other words, financially stable – and has to have an office in New York City. That's all it is.

Did the settlement your client received from the insurance company exceed $250,000?

Substantially so, yes.

So you had to put the money into this bank account. It sounds almost like an escrow account.

As I read through the rest of the documents. it became clear that this is essentially an escrow account. It's not a trust with a capital T, where the insurance trustee is the one who actually decides how the money is spent or invested. It's not that at all. The condominium board of managers continues to control the account, and they're the signatories on the account. The trustee is just making an accounting to the unit-owners as to how the money is spent.

If a condo board gets a sizable insurance settlement, can it just go to any bank in the city and set up this insurance trustee account?

We found out it was quite tough to find a bank willing to do this. My first instinct was that this has to be something that happens all the time. Since the managing agent's accounts were with Chase, and I know Chase has a trust department, I figured I just had to find the right person to talk to. It turned out they weren't interested. Nobody at Chase seemed to be familiar with this insurance trustee role. So I started making calls, and we found banks that said they would do it, they understood it.

What were the banks?

One of them was Israel Discount Bank, the other was Wilmington Trust. One of the problems you run into, of course, is they want to charge money for…

No! Banks want to charge fees?

Exactly. And it looked like the annual fee was going to be around $25,000. But when you have to restore a building, you want every penny, so the concept of spending $25,000 a year in fees was something we had to think about. I also felt it probably could be negotiated since their role was essentially just to hold the money. It turned out that Israel Discount Bank has been doing this in five or six other similar circumstances in the city, so they were comfortable with the entire process and understood it. They basically said: “Yeah, you just open an account. We can open a separate account later if you want to invest some of the money for a period of time.” So it was pretty straightforward.

So if a condo experiences a major calamity and there's a sizable insurance settlement, what needs to happen?

Very quickly you start the process of identifying the bank that's going to be the insurance trustee. In our case, we ended up getting an advance check very quickly from the insurance company to start emergency stabilization work, and you need to get your hands on the money fast. So you would need an account you can put it in, and you want it to be a clean process of deposit and withdrawal.