INSURANCE POLICY BASICS — AND SECRETS

Securing adequate property-damage coverage is of basic importance for responsible board members. You should evaluate the building and insure for at least 80 percent of its replacement value, to avoid potential co-insurance issues. Make sure to read carefully the exclusions and fine print. This might come as a surprise, but you "all-risk" policy may still exclude coverage for terrorism, environmental hazards and other items, and you may need to buy "special endorsements" to assure being insured.

Sometimes you're even required to. Mortgage lenders mandate certain coverage amounts and seek to be named as additional insureds on your building's policies. And condominium bylaws often require that the board purchase certain types of insurance — review your organizing documents and mortgages to make check.

Who's Liable?

Protecting your assets against catastrophe is only the first step. Directors and managers must also protect their shareholders and unit-owners against potential court judgments arising from personal injury or other litigation brought by third parties against the board.
There are three types of liability policies all real estate organizations should have:

• General liability

• Directors' and officers' liability ("D&O")

• Worker's compensation

General liability protects against claims of personal injury or property damage allegedly caused by the negligence of the building's board, management or employees. We're all familiar with the "slip-and-fall" claim, where a person falls on a slippery or defective surface, suffers injury, and seeks medical costs, pain-and-suffering recompense and other claims.

Having general liability coverage is means A) the insurance company will pay for the cost of defense, and B) will pay any judgment or settlement. The obligation to defend is broader than the obligation to indemnify, so even if the claim is far-fetched and may not fall within the coverage granted by the insurance policy, the carrier will usually defend it at no cost to the building.

General liability also protects against claims based upon alleged negligent building maintenance. Water, smoke or mold damage in apartments, even if caused by a rainstorm, fire or leaking toilet, may lead to claims that the damage would not have occurred had the roof, building envelope or pipes been properly maintained.

Many boards, in response, now require owners to carry their own property insurance. But even when they do, some individuals still brings claims against the building rather than file against their policy, to avoid a potential hike in their premiums. Also, if they file against their own policy, their insurer may seek to collect any sums that the building paid to the individual. To avoid this, require that owners obtain policies with a waiver of subrogation claims against the cooperative or condominium.

When to Go for D&O

Directors' and officers' liability type protects board-members against claims of negligence or other improper conduct. Most cooperatives and condominiums are obligated by their bylaws (and cooperatives by New York State's Business Corporation Law) to indemnify their officers and directors for expenses incurred in defending suits brought against them for board-related conduct.

Such as? Alleged improper rejection of an apartment-purchase application. Failure to create a reasonable accommodation for a handicapped occupant. Injury or damage from negligent maintenance. Libel or slander. Waste of corporate assets.

With D&O policies, as with general liability, the obligation to defend is broader than the obligation to indemnify. So, an insurance carrier may pay to defend a claim of improper discrimination but may not indemnify a someone who has been found guilty of it. Fun fact: Insurance firms aren't permitted to indemnify against punitive-damage awards in New York State, and may not pay to indemnify an officer or director found to have engaged in improper conduct. Still, the ability to have defense costs covered is a very important financial consideration.

Many coop/condo boards will seek to be represented by their own counsel rather than one appointed by the carrier. But sometimes the amount of attorneys' fees that the carrier will reimburse is less than what your counsel charges. You have to decide if you're willing to pay the difference to have your counsel defend the claim, or to simply use counsel assigned by the carrier.