Insurance Costs after Irene and Sandy: Q&A with an Independent Broker

Habitat: What's been the immediate impact of Hurricane Irene and superstorm Sandy in terms of insurance costs?

Michael Spain: The insurance carriers are being more selective when they look at a new client property. Insurance premiums are going up a little bit, not a lot — 8 or 10 percent increases seems to be the norm.

Habitat: The current U.S. inflation rate is 1.5 percent, so 8 or 10 percent seems high.

MS: You're absolutely right. The insurance industry is kind of peculiar in that prices can go up and down, and sometimes you see a 15 percent decrease [so it's not directly comparable with inflation].

I think these storms have made companies more nervous. They're going to look more at a property's geography —  where your building is and whether they think storms can be an issue. With these storms we've had in the last few years, almost everybody seems to be in a storm zone.

Habitat: Aren't there government maps delineating those zones specifically? 

MS: That's only for flood insurance. In general because of these storms, I think pricing's going up a bit and some of the coverage will change, like sublimits on backups of sewers and drains.

Habitat: Explain "sublimits."

MS: Sublimits is an industry terms. Many buildings' policies have [coverage] limits on things like sewer and drain backup. A building might have a $100,000 or $250,000 [coverage] limit [for that], and those could be reduced with future renewals.

Habitat: Can a condo or co-op board negotiate with insurance carriers, or is it like the price of bananas at the supermarket — it's whatever it is per pound and that's it. 

MS: It's up to your [insurance] broker to look into these things and negotiate them for the buildings. But it can be a take-it-or-leave-it situation with certain coverages and certain limits, with what the carrier is comfortable with.

Habitat: A board's broker can always turn to another company.

MS: Yeah, but sometimes that's not as easy as it sounds Maybe you've got a good overall price, or you don't have that many other options. So you may find yourself having to take less coverage on these [sublimit items] than you want to. For example, say your building is paying $50,000 a year for insurance, and you had a $500,000 sublimit for backups of sewer and drains. And now [the insurance carriers wants to reduce it to] $100,000. It might not feel good, but another insurance company might charge $73,000 [and keep that $500,000 sublimit]. You might make a decision you don't want to send $23,000 more for a higher sewer-backup sublimit. 

Habitat: Would having generators, which can power pumps and otherwise help mitigate storm damage, lower a building's insurance costs?

MS: Yeah, but it's not like a home policy where if you have a generator you get, say, 7 percent off. The broker can say a building has a generator and the carrier looks at it as one part of the overall "risk profile." The idea is an [insurance] underwriter looks at the building's past claims and thinks about future claims. Having a generator may have a positive impact on that and may allow the underwriter to offer better pricing. 

Habitat: But it might not.

MS: A lot of people who buy [home and car] insurance are used to good driver credits, etc. Commercial insurance doesn't work the same way. I don't want a building to think, 'Oh, we put in a generator, we'll save a certain percentage." The benefit to being proactive and doing something like that is to try to reduce or negate future claims. And by doing that buildings can have a real positive effect on [lowering] future premiums. A generator helps in that while you might not get a break on your [present] premiums, the bigger picture is, "Hey, if we put a generator in it may reduce future claims, which would mean lower premiums in the future." 

Habitat: As we're facing what the vast majority of scientists call global climate change, is there ultimately much that co-op and condo boards can do to soften insurance costs?

MS: I think each board can reflect upon how these storms impacted their building and what steps they can take in the future to avoid what happened to them or to other buildings they know of. So many stories came out of [buildings that stored] generators in basements that then got flooded, or how they couldn't get heavy cans of fuel up [by stair] to the generator on the 20th floor. And maybe there's nothing you can do, and you have to think through to, "What would be our next steps [after a storm disaster]?"

Michael Spain is president of the independent insurance broker Spain Agency, Inc., founded in 1922, which specializes in co-op and condominium insurance.

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