Do You Have Enough Lost-Income Insurance?

Imagine that your building suffers a fire or some other catastrophic event, and several units become uninhabitable. The shareholders or unit-owners vacate during renovations, which means the co-op or condo’s monthly income declines while bills still have to be paid. Will your business income insurance carry you through the restoration if it drags on longer than a year?

“Ninety-five percent of the buildings in the city are underinsured when it comes to the loss of business income,” says Michael Stoop, risk adviser at Metropolitan Risk Advisory. “It takes a little bit of effort to find the right kind of insurance, and not everybody wants to put in that effort. Nor do they want to spend the money once they get the answer that the effort yields.”

Most policies are written for a period of 12 months. If the restoration drags on longer, the building is uninsured and faces an income shortfall. When an insurance carrier gets a loss-of-income claim from a board, it arrives at a monthly dollar amount of coverage for lost income, minus expenses the building is no longer incurring because of the vacancies. Then the clock starts ticking – usually within 72 hours of the catastrophic event – and it stops ticking 12 months later. In many cases, this is not enough time to complete repairs, and the building may run out of coverage before units are habitable again.

“Then the question is: when exactly is an apartment habitable again?” says Ken Jacobs, a partner at the law firm Smith Buss & Jacobs. “If the shareholder has made changes or improvements to the apartment, the proprietary lease states that the corporation is not responsible for those alterations or improvements. Such an apartment might not be ready to be occupied because of all the work the residents had done, but the co-op has done everything it’s supposed to be doing.”

Conflicts will arise between the resident’s homeowner’s insurance and the co-op’s lost-income insurance. Barbara Strauss, an insurance broker and executive vice president at York International, remembers an extreme case. “A unit-owner ordered tiles from Italy,” she says. “Those tiles came by boat, and it took six months to get here. Therefore, the insurance adjuster said, ‘There is no way I’m going to pay you for six months’ loss of maintenance when he could’ve gotten tiles around the corner!’”

Other problems can arise. “It gets complicated when individual apartments are ready for occupancy, but the Department of Buildings might not allow the shareholders to reoccupy,” Jacobs says. “For example, all the gas lines have not been tested, and they cannot test the gas lines before every apartment is restored. Then you might get into an argument with the adjuster. All these things will cause delays.”
The insurance carrier will ask for speedy work, and it falls to the board to document all the delays and the response time. “Furthermore, the insurer may challenge whether the actual costs of operation during restoration are justified,” Jacobs says. “Maintenance charges pay for the costs of operation of the building, such as doormen and porters. Did the building need this many employees even though there were fewer habitable units?”

If something truly catastrophic happens, the common 12 months of insurance coverage will probably not be adequate. “I represent two buildings,” says Jacobs. “Half of one building on 69th Street was destroyed, and it has taken 24 months to rebuild. In another building on Spring Street, six apartments were damaged. Because all the systems were very interconnected, it took more than a year to repair, but the insurance company was not willing to pay for more than 12 months of lost maintenance.”

The time to take steps is before disaster strikes. “All buildings in the city should conduct an insurance review of their business income valuation,” says Stoop of Metropolitan Risk Advisory. “Also, boards should give all shareholders or unit-owners a template to make sure that everyone has the right amount of homeowner’s insurance coverage.”