Insurance Fallout: When Neighbors Don't Play Nice

A shareholder or unit-owner is upset. She sends an email to the board, saying it needs to step in. If the board does nothing, she’s going to bring in her attorney. What happens next?

It’s a common situation, whether it’s noise or smoke going into an apartment, and it has a ripple effect. If the unhappy owner copies her attorney on that e-mail, it creates what is called an incident. That incident is reported to the insurance carrier, and it is viewed as a possible claim. Because of this, it is added to the co-op or condo’s loss run report, which is a permanent record for the next five years.

How big a deal is that?

When you have an incident, there are two other things that you could possibly have: an actual claim, where it was more than a bluff and the person filed a lawsuit with their attorney; or a loss, where you lost the lawsuit and a monetary amount was paid by the carrier to this person. So all this goes on your five-year loss run, which is the record an insurance carrier will use to decide what premium the building has to pay in the future.

What kind of insurance are we talking about?

These types of claims come under the directors-and-officers coverage. And they can be somewhat contagious because it’s more of a mentality than an actual incident. So when someone is upset and they send their attorney after the board, they’re in a legal battle. And then another shareholder joins in, and another one. Now it sometimes can feel like a lottery ticket where others feel like they want to get their pound of flesh as well. And so this would be a claim against the directors-and-officers insurance, and it’s something that can definitely increase your future premiums.

This loss run sheet stays with the board, whether they switch insurance carriers or not. Is that correct?

That’s correct. It doesn’t matter who’s on the board at the time. If there was an incident, a claim or a payout from a loss, that will follow that building for the next five years on policy renewals and future calculations of their premiums.

What kind of financial hit does a bad loss run sheet carry?

We had a recent case where there were all three – an incident, claim and loss – and their D & O coverage, which is typically about $2,500 a year, went up to a little over $6,000. All because of people not playing nice in the sandbox, as I like to put it. And when I talk about the ripple effect, this board’s umbrella insurance carrier did not want to cover the D & O. Umbrella policies cover claims over and above your other policies – your building, liability and D & O. But through a lot of negotiation, they finally decided they would cover any claims that exceeded the D & O coverage – if the building bought another million dollars’ worth of D & O insurance. So they bought the initial million in coverage, let’s say that premium was maybe $3,500, and then they had to buy another million in coverage. So now their insurance premiums have doubled to over $7,000, and they have some exclusions as well.

Co-op and condo boards always want to know: How can we make more money? Where is there any ancillary income we can bring in? How can we save money? This is an area where the way people interact with each other can directly affect the finances of the building. 

At the annual meeting where everybody’s looking at the financials, does a board ever point out a shareholder and say, “Our insurance has gone up $4,000 because of you”?

It’s never a good idea to point someone out in a crowd and say that at the shareholder meeting. As a chief financial officer, I always go back to the numbers. I tell boards and residents that insurance costs are one of the things that all of the people in the building can collectively reduce. So when there’s an issue, it’s so much better to have a conversation. We can invite a shareholder in, and we can talk about it and walk through it. We tell them that sending that legal certified letter or contacting your attorney, although it’s the New York way sometimes, it’s just so disruptive and it can cost everyone more money. So I try to remind shareholders and unit-owners of that. And just in a neighborly way, it’s the wrong way to go because it doesn’t end well, no matter what. 

So it’s not that shareholders can’t bring their complaints to the board. It’s the manner in which they’re brought.

Correct. I would advise people with a complaint to first contact the management company. Sometimes a manager can try some type of arbitration if it’s just between neighbors and not something directly controlled by the board. We will try anything to avoid the legal part of it. Once the shareholder’s attorney gets involved, then the building’s attorney gets involved – and now we have two attorneys billing at the same time when the solution might have been cheaper than the legal bills that are going to accumulate. So we will try our best to come to some type of solution or resolution before we have to get to that point. Of course, there are times when attorneys and insurance have to get involved. But many times it can be avoided.