Miscommunication and Missed Insurance Payment Could Cost Condo $24 Million

"You had the perfect storm occurring during the perfect storm," attorney Jonathan Wilkofsky of insurance-specialty law firm Wilkofsky, Friedman, Karel & Cummins quips ruefully.

Lido Beach Towers, he says, has long carried $46 million in flood insurance, administered through FEMA and the National Flood Insurance Program (NFIP). Such insurance covers a structure itself, including common areas and including damage from a storm surge, according to the Insurance Information Institute. It doesn't cover damage caused by floodwaters to the personal belongings of individual condo or co-op owners.

Storm on the Horizon 

After Hurricane Irene hit in August 2011, says Wilkofsky, "The FEMA adjuster who went to the site realized there were commercial passageways in the building that were below grade, so FEMA considers them basement spaces. And they charge a higher premium for buildings with basement space. After it was reported to the underwriters at FEMA, the underwriters took a year to do anything about it and during summer 2012 required an additional premium of a little over $20,000 -- basically a doubling of the premium."

FEMA communicated this, Wilkofsky says, with insurance broker Dennis Miller of the Denis A. Miller Insurance Agency in Long Beach, and, as Lido Beach Towers asserts claim in a lawsuit filed against Miller and two management companies, Kaled Management, of Westbury. The condo by this time had switched to Cooper Square Realty — now FirstService Residential — and according to Wilkofsky, "Kaled, in its contract, had agreed to continue to be responsible for forwarding correspondence. It's a specific provision in the contract that survives the end of the contract."

FEMA told Miller and Kaled, according to the lawsuit, that if the additional premium weren't paid on time, coverage would be reduced to whatever the extant payment would cover — $16 million, down from $46 million. "Miller does nothing with it," Wilkofsky says. "Lido has the money in its account but didn't know about it." FEMA again wrote to Miller and Kaled, with nothing forwarded to the board or the Cooper Square, he adds. The three plaintiffs have yet to respond to the suit.

In the meantime, no one — not Miller, not the management companies, not the board and not the board's regular attorney — appears to have notified FEMA about the change in management.

Lightning Strike

"It wasn't until after Sandy hit that the FEMA adjuster came out and the documents showed only $16 million in insurance. The folks at Lido thought it was a typo — a 1 for a 4." The FEMA adjuster looked into it and confirmed the figure. "A check for the full premium was sent immediately," Wilkofsky says. "FEMA returned the money and proceeded to adjust the loss based upon coinsurance," which cut the $16 million in half.

Coinsurance in this context can be a little difficult to grasp. As Wilkofsky explains, "Let's say a homeowner, to save on his insurance premiums, figures that if there's a fire it'll probably be in the kitchen, so instead of insuring a million-dollar house for a million, he'll do $300,000 because the odds are the house won't burn down but just the kitchen. This throws insurance companies' actuaries off. So the companies developed the coinsurance penalty: You have to insure at least 80 percent of the value of your property or you begin to pay this penalty"

The penalty is a mathematical formula based on the amount of coverage —in this case $16 million — compared to the amount of damage — which in this case FEMA assessed as $32 million. When the calculations were finished, FEMA issued a check for only $8 million.

Like the old fable about a kingdom falling for lack of a nail ("for lack of a nail, a horseshoe was lost; for lack of a horseshoe, a horse was lost; for lack of a horse, a battle was lost; because of one battle, a war was lost; because of that war, a kingdom was lost"), that unsent $20,000 premium may cost the condo $24 million.

Looking for a Silver Lining

Wilkofsky is appealing the decision, of course, following a formal process for contesting FEMA decisions. And he points to FEMA having known since 1992 about the passageways being basement space but not acting on it. "We believe there are moral reasons FEMA should exercise discretion and waive this problem." 

Does FEMA even have discretion. "We believe it does, in appropriate circumstances. We understand — they don't want to open the Pandora's Box to other co-ops and condominiums making this claim. But this is a unique situation." Until the appeal is resolved, he says, it's uncertain whether they would pursue FEMA in court.

The lesson for other condo and co-op boards? For one thing, be proactive and check with your insurance broker every so often to confirm your coverage is up-to-date — especially if you've made any major changes lately, like switching management companies. Also, don't assume that when you drop one management company for another that every single document and piece of correspondence will transition properly — and ask your new company to double check with the old one about late correspondence erroneously sent there.

The story of Lido Beach Towers and the vanishing $24 million is far from over. We'll keep you apprised.

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