Protect Your Building: Mandating Insurance for Shareholders and Unit-Owners

Consider this nightmare — and real-life — scenario: A leak occurs in a Manhattan condo apartment, and with the unit-owner not living there at the time, it goes unnoticed for days, damaging the line of units below as well as the building’s elevator equipment, since the shaft is located next to the affected apartments. None of the unit-owners carry insurance. Seeking to be made whole, people in the damaged apartments end up submitting claims against the building’s policy, and the board also has to file its own claim for the elevator. The end result? Multiple black marks on the condo’s loss run history, with painful premium increases almost certain to follow.

It’s a cautionary tale, but not an uncommon one. When shareholders and unit-owners don’t have insurance, boards are dangerously exposed to liability, litigation and a blow to their bottom line. In the current insurance market, where coverage is shrinking, premiums are rising and renewing policies is more difficult than ever, that risk is something no co-op or condo can afford. “This is the first time in 20 years where insurance premiums are making a material impact on building budgets and leading to maintenance and common charge increases,” says Eric McPhee, an executive vice president and the director of risk management at Orsid New York. “Boards are more aware and focused in avoiding the pitfalls that have contributed to the declining markets. They are frustrated with the lack of options.”

PROTECTION PLAN

The primary reason for requiring insurance is to ensure that shareholders or unit-owners have coverage for damage caused by their neighbors, which is most commonly due to water leaks or burst pipes. “When parties don’t have insurance, owners who suffer damage and have to pay out of pocket are going to sue their neighbors to get reimbursed and submit claims against the building,” says Brandon James, a partner at the law firm Borah, Goldstein, Altschuler, Nahins & Goidel. “And if the building’s carrier rejects those claims, people are going to sue the board. And even if you win in court, it will cost you time, money and headache, so it’s a lose-lose situation.”

Boards also need to shield themselves from labor-related insurance claims that can arise when work is performed in individual apartments, thanks to New York’s onerous Scaffold Law, which holds contractors and property owners — including co-ops and, on rare occasions, condos — responsible if an employee is injured in a gravity-related fall due to improper safety equipment. “There’s definitely been an uptick in these labor claims, which is why many buildings will not allow people to bring in contractors unless shareholder insurance and contractor insurance are in place that lists the building as an additional insured,” McPhee says. “That requirement could be in the alteration agreement or a separate document, but I’m seeing an increase in boards focusing on this.”

Instead of taking a piecemeal approach with residents who are doing apartment alterations, co-ops and condos should move proactively to require insurance for all shareholders and unit-owners. “Unfortunately, there’s typically no language in a co-op proprietary lease that says you must have insurance, and condo bylaws that do mention it often say it’s recommended but not required,” James says. Mandating coverage, however, is a challenging process since it requires amending your governing documents, which, in turn, means securing a supermajority vote of shareholders and unit-owners.  

COMING TO TERMS

The first step for boards is determining what the requirements will be. The key one is liability, which covers property damage or personal injury occurring within a shareholder’s or unit-owner’s apartment as well as damage caused to other units or injury to others in the building. “You want a minimum of $500,000 in coverage, although we’re seeing buildings recommending $1 million in liability coverage, and then a $2 million or $3 million umbrella policy on top of that,” says Justin Kraus, the personal lines supervisor at the insurance brokerage Mackoul Risk Solutions. 

Then there’s the all-important waiver of subrogation, a standard clause that prevents the shareholder’s or unit-owner’s insurance company from pursuing a third party — that is, the board — to recover damages. But in order to be effective, “that waiver also has to be specified in the proprietary lease or bylaws,” Kraus adds. “As long as the waiver is in the governing documents, insurance carriers are obligated to follow it.”

Owner policies should also include $75,000 to $100,000 coverage for apartment repair and improvement costs, and $25,000 to $35,000 for personal property, Kraus advises. There should also be loss assessment coverage so shareholders and unit-owners won’t have to pay out of pocket if there are claims against the building and its master policy fails to cover all the costs and it imposes an assessment to make up the difference. “We recommend a minimum of $15,000, and it can go as high as $50,000,” he says.

While setting minimum liability coverage is a must, boards should be mindful that specifying certain dollar amounts for everything else comes with a downside. “You can require everyone to have X amount for repairs or personal property, but 10 years from now, that’s not going to be adequate,” Kraus explains. “Instead, you could say that the coverage limits are at the discretion of the board. That way you won’t need to update your bylaws every couple of years.”

Sophie Bird, a senior vice president of real estate practice at IMA Financial Group, also advises boards to stay away from setting specific minimums for personal property coverage. “You never want to be in a situation where a shareholder says, ‘Well, you told me to carry this amount and it’s nowhere close to what I need,’” she says. “Boards should encourage shareholders and unit-owners to have a conversation with their insurance brokers about what it would cost to rebuild the inside of their units in the event of a loss.”

GETTING OWNER BUY-IN

Once the required coverage amounts have been decided, the next step is having your attorney draft a formal amendment before presenting it to shareholders and unit-owners. Of course, it’s no easy feat getting people to pass an amendment that puts more of a burden on them. But there are ways to change minds and get them on your side. “You can make the argument that requiring everyone to have insurance is going to help them in the long run because without it, the building’s premiums are going to continue to go up, and maintenance and common charges will increase along with them to make up for that,” Bird says. “The money’s coming out of their pocket either way.”

James, the attorney, agrees that explaining the domino-effect economics can help. “You can hold a special informational meeting, conduct a mail campaign and distribute letters with numbers that clearly show how requiring insurance is in everyone’s benefit,” he says.

And what if boards can’t muster enough support to amend the proprietary lease or bylaws? They can change the house rules. “That may not be as rock solid a solution, but in light of the difficulties boards are facing, it’s a close second,” McPhee says. “And from what I’ve seen, it can be effective.”

KEEPING TRACK 

Once requirements are in effect, boards face the daunting task of monitoring who has insurance and making sure there are no gaps in coverage between policy renewals. Turning to your management company is an option, but many are reluctant to take on the added responsibility. “It’s time-consuming and challenging due to the different expiration dates,” says McPhee, who recommends boards use third-party services provided by companies such as BCS Insurance to monitor insurance coverage.

Here’s how it works: The board informs BCS what its insurance requirements are and then provides a list of shareholders and unit-owners. “We basically just get a name and email address, and then we reach out to people to obtain their certificate of insurance,” explains David Gubbay, the CEO of BCS. “From there we do our review and talk to their insurance agents. If something is missing in the coverage, we notify the board.” BCS also gives boards access to its online interface, where they can see a listing of owners and their compliance status. The service costs about $50 per apartment per year.

Mackoul Risk Solutions offers its own service, Building Guard, which similarly tracks compliance with insurance requirements set forth in the bylaws or proprietary lease. “Over the course of the year, we follow up with shareholders and unit-owners and notify them 30 days prior to their policy renewal date, and send two additional reminders if needed,” Kraus says.

Ken Jacobs, a partner at the law firm Smith Buss & Jacobs, encourages boards to pass a house rule that, in addition to releasing the board from liability for property damage and personal injury, “also states that shareholders and unit-owners are subject to fines and legal action if they don’t have insurance,” he says. “It gives boards some leverage.”

With insurance requirements and monitoring in place, boards can breathe easier. “When there are battles between neighbors, you’re less likely to get sucked in because you’ve removed the building’s insurance policy from the equation,” says Michel Finder, a partner at the law firm Braverman Greenspun. “It allows boards to focus on the business of running their buildings.”