Insurance: Expect to Pay More for Less

Blame it on New York State’s one-of-a-kind Scaffold Law, that prolific incubator of lawsuits. Blame it on climate change or low interest rates. Blame it on “social inflation,” an upward creep in perceptions by injured parties of what they are owed, along with a willingness to pursue complaints through the legal system. Blame it on the rising populist sentiment that has led to a flurry of seven-figure damage awards from juries. Or just blame it on the inescapable fact that New Yorkers love to sue one another.

No matter where you place the blame, there’s no escaping this fact: The cost of insurance for co-op and condo boards is going one way – up – in 2020, and possibly beyond. The cost of some policies is tripling as the market becomes “hard,” in industry jargon, meaning insurance carriers are reacting to declining profits or outright losses with a three-pronged pincer movement: they’re raising customers’ deductibles and premiums while trimming coverage limits. In short, co-op and condo boards can expect to pay more for less coverage. It’s time for boards to adapt and to start budgeting for the inevitable.

‘Enough Is Enough’

“What insurance carriers are trying to do today is correct profitability problems,” says Elizabeth Heck, president and chief executive of the carrier Greater New York (GNY). Prior to 2019, rates had been relatively flat and profits had been relatively stable. That began to change when lawsuits and jury awards increased, climate change began hitting insurers’ bottom lines, and the companies that insure insurance carriers, known as re-insurers, found that their rates were behind the times.

“When re-insurers realize they’re underpriced, they push back,” Heck says. “And when they put pressure on us, we have to raise our prices. Remember, it’s a very global economy. Wildfires in Australia and California are a symptom of climate change, and they affect companies nationally.”

More locally, Heck describes insuring New York co-ops and condos as “a difficult class” of business. “Carriers go in and out of the market because it requires a lot of expertise, and you have greater exposure to liability claims,” she says. “Habitations also have greater danger of property loss than, say, office buildings, where people are usually in the building eight hours a day. As a result, carriers have gotten more selective about who they will insure, and some have pulled out of New York City. It’s too hard, too much exposure.”

In an open letter to clients about rising insurance costs, Stephen DeMatteo, managing director at the brokerage York International, writes: “The single biggest driver is the claim values being paid by insurers related to the New York (State) Scaffold Law” – Labor Laws 240 and 241, which hold building owners, including co-op and condo boards, liable for any worker’s injury even if the worker was at fault. “Over the past 24 months, many older claims are being settled or going to trial, and the values are routinely in excess of $1 million. The combination of plaintiff attorneys, unions and opportunistic claimants seeking large paydays is a recipe for disastrous outcomes.”

Edward Mackoul, the president of the insurance brokerage Mackoul Risk Solutions, can vouch for DeMatteo’s assertion. “I was having lunch the other day with the president of a large insurance carrier,” Mackoul recalls, “and he told me they’ve had more liability claims that exceeded $1 million in the past seven years than in the company’s half century of existence combined.”

As a result, many co-op and condo boards take out umbrella policies, which add significant liability coverage. But in response to rising claims and payouts, carriers have begun to adjust umbrella policy prices, too. In the good old days of the “soft” insurance market, Mackoul says, an umbrella policy might have had a $100 million liability cap for an annual premium of just $1,200. Today, that coverage has typically been slashed to $25 million, and the premium has quadrupled.

“Insurance is cyclical,” Mackoul says. “We haven’t had a hard market since Hurricane Sandy in 2012. We are now in a full-blown hard market. I’ve been in this business for 25 years, and this is the most difficult hard market I’ve ever seen.”

One management executive expects most umbrella policy premiums to jump by as much as 30 percent this year. The prediction is based on the fact that some carriers have been paying out 100 percent – or more – of their premiums. With the number of lawsuits and the size of payouts on the rise, carriers are reconsidering writing policies for buildings with numerous outstanding violations. In the executive’s words, “Insurance companies are saying, ‘Enough is enough.’” (see related article on page ??)

Short Tails, Long Tails

To understand why the cost of insurance is suddenly going up, it’s best to go back to the source. Every insurance policy begins with an actuary, an employee of an insurance underwriter who uses a potential customer’s personal history along with a much larger database to predict the carrier’s likely level of risk. From there, the actuary can estimate how much the carrier should keep in reserve to pay out possible future claims, as well as where premiums, deductibles, and coverage limits should be set. (Some carriers have the underwriting department set prices.)

“Pricing is based on historical trends,” says Arthur Zaremba, the chief actuary at the Glencar Insurance Co., an underwriter that insures New York co-ops and condominiums. “That includes loss trends, inflation, rate changes. The goal is to ensure that in the next 12 months, the carrier won’t suffer losses.”

But recent events and trends have complicated the math. In 2013, Hurricane Sandy ravaged the city – and the insurance market. Things returned to normal for several years, then along came an uptick in litigation and jury awards. “What you’re hearing a lot lately is ‘social inflation,’” Zaremba says. “Jury awards have been much higher in the past year or two. Litigation began increasing in the second half of 2018, and in 2019 both litigation and exposure kept increasing.”

People in the insurance industry talk about “tails,” meaning the time it takes for trends to become apparent and thus affect costs. The two biggest insurance costs for co-op and condo boards are property and liability coverage. The former has a “short tail,” with claims usually filed immediately after a fire or leak, and settlements following quickly afterward; the latter has a “long tail,” with personal-injury lawsuits and liability claims sometimes dragging on for years. Today, the tails of recent claims, both short and long, are contributing to the rising cost of insurance.

“Once those years with bad losses make their way into the rating calculations, you see industry loss costs increase,” Zaremba says. “At that point, when a policy is renewed, you’ll see higher premiums.”

Reining In Rising Prices

While rising insurance costs look inevitable for the foreseeable future, there are steps co-op and condo boards can take to ease the pain. Zaremba and others in the industry agree that history trumps individual incidents. A building that has had no insurance claims for years and suddenly has a disastrous leak or fire will probably be looked on by the insurer as the victim of a fluke when the policy comes up for renewal. On the other hand, a building that has been the target of half a dozen slip-and-fall claims in the past year is likely to be regarded with intense skepticism, even if the claims are smaller in dollar value than the disastrous leak or fire. In the insurance world, history matters.

So boards are advised to institute and execute strict maintenance programs that keep the future from becoming the building’s dark and damaging history. “There are many maintenance items your managing agent should be aware of,” says Barbara Strauss, executive vice president at York International, “including cracks in the sidewalks, emergency lighting, maintenance of washers and dryers, overall building maintenance.” Also, she and others advise, clear violations at the Department of Buildings, tighten building security and carefully vet contractors’ insurance coverage. Some boards put a line in the budget to replace or wrap water lines in any apartment where the walls are opened during a renovation or combining of apartments.

Insurance carriers hire an inspector to visit a property when a policy is first issued, and these inspectors return periodically after a policy is renewed. Today’s hard market has raised the stakes. “Now the carriers are following through more diligently on the recommendations of their inspectors,” Strauss says. “They’re going to want a photograph that proves you repaired the sidewalk or installed a fire extinguisher or changed the circuit-breaker panel if it was considered a fire risk.” She adds a warning: “It’s a horrendous fight to try to get better pricing for your building.”

While better pricing is every board’s goal, it should not be the sole driver of decisions. “One thing boards should remember when looking at insurance policies is that price is not the only factor,” says GNY’s Heck. “Look at coverage limits. Do you have enough business-income insurance to cover lost maintenance after a fire? If you’re in a flood zone, do you have enough flood insurance? How about liability? A $25 million cap on liability might be enough. One option is to pay a higher deductible so you save on premiums without sacrificing coverage.”

The importance of a clean history becomes apparent when conventional carriers refuse to insure a risky property and the board is forced to turn to secondary insurers, known as Excess and Surplus lines, which take on high-risk clients after doubling and tripling premiums. “These E&S insurers are being very opportunistic in their underwriting approach and pricing,” says York’s DeMatteo. “Doing everything you can to satisfy a current standard insurer is an absolute imperative. The E&S marketplace is no friendly port in this storm.”

In the end, insurance is a guessing game. Here are educated guesses on the likely duration of this storm from two veteran insurance brokers: “This isn’t going to end anytime soon, so boards need to budget for increases,” Mackoul says. “Eventually it will level off, but premiums won’t come down for the next year or two.” Strauss agrees: “I really feel this is going to stay this way for a couple of years.”