A lot of factors go into determining the extent and cost of a building's insurance coverage: replacement cost, location, number of units, and claims history top of the list, but on closer inspection, there are plenty of ways to better position your building to qualify for lower premiums - and avoid some of the pitfalls of shopping for insurance.
When assessing a building for coverage, insurance providers go over everything with a sharp eye. They'll count the number of units, the size of the building, the presence of swimming pools or tennis courts, and the size of the lot the building is on. Most insurance companies will factor in the size of the building first, coming up with the estimated replacement cost per square foot. For instance, if your building is 10,000 square feet, the insurance company will determine the cost of replacing the materials in one square-foot, then take that dollar amount and multiply it by 10,000 to determine the overall initial replacement cost.
But that's only the beginning. When insurance companies talk about fire risk, for example, they usually follow the COPE acronym: Construction (is it fire resistant?), occupancy (is there someone in the building who makes explosives, or is there potential for a fire from a restaurant in the building?), protection (is there a sprinkler system in the building?), and exposure (is it next door to a hazardous site?)
Other factors are loss experience, the history of the property, and the record of losses - all factors which may lead to higher rates. "Insurance companies charge for frequency and severity [of claims]," says Herb Feldman, CEO of Great Neck-based Alpha Risk Management, an insurance consulting firm, who added that there are ways to get around frequent claims (see sidebar.)
Interestingly, while not necessarily a factor in and of itself, insurance companies and insurance consultants like to see owners value their property. "What we basically look for in a condo or co-op," says Carol Guerra, a commercial property and liability manager at Allstate, "is that the management has a pride of ownership and their morale is high about insurance."
Various insurers use their own hierarchy of criteria to assess a building's insurability. According to John Simone, managing director of the Brownstone Agency Inc., an insurance provider based in Manhattan, the first thing his assessors check is if a building is up to code; the result is usually a pretty good indication about the character of the building manager.
"When we insure a building, we want to see that the building manager is on top of things," Simone says, adding that the outside of the building has to be checked for liability hazards as well. "If there is a bad sidewalk, that must be repaired. The owners just need to keep the building in good shape."
Some insurance companies will also make a distinction between insuring a condominium and insuring a co-op: a lower rate may be given on a condominium, as it may have less exposure than a co-op. In general, a co-op or condo is considered a better risk for the insurance company than a rental building. "You take better care of something that you own, as opposed to something that you rent," says Ed Mackoul, vice president of the Long Beach, New York-based insurance brokerage firm of Mackoul & Associates.
Making sure your building looks attractive and is up to code is the first step before inviting the insurance company over for coffee and discussing rates. According to Simone, as much as 30 percent can be taken off a building's premium if everything is up to code, and there are plenty of small things a building manager and super can do in order to make their building look better - both for residents and the insurance company. Things like hardwired smoke detectors, proper handrails and fire escapes, child-safe window hardware, exterior pavement free of major cracks, closed fire doors with proper panic hardware, well-lit walkways and hallways, and neatly pruned plant growth between and around the buildings, improve not only appearance but insurability.
Some maintenance issues - such as major faÃ§ade repair projects or mold eradication, for example - should be dealt with before shopping for or renegotiating an insurance policy. Mold isn't covered by most policies anyway, but insurance companies know to check for it by looking for water damage, and the risk of a mold problem can cause even bigger problems with insurance companies, say brokers.
Another factor to consider is if there is any lawsuit pending against the board - whether it is shareholder-versus-board or board-versus-city - that may or may not have an impact on the building's ultimate premium. "If a suit is shareholder versus the board, it would likely only impact the board's directors and officers policy," says Feldman. "Actions against the city shouldn't have an impact." Brokers have differing opinions about the overall impact of pending litigation on a building's insurance costs, but most agree that if there is significant litigation against the board, it may be considered a factor and justify a higher premium.
Regardless of a building's particular policy or premiums, one money-saving recommendation offered by some brokers is to try to sidestep involvement with the insurance company entirely by not submitting claims for small damages. If a building has a $2,500 deductible, and a leak causes is $5,000 in damage, it may not be worth it to file the claim to collect $2,500, since the appearance of the claim may boost insurance rates in the future.
One way to discourage sending in claims for every little thing is to sign a policy with a higher deductible that makes filing less attractive. For example, setting the building's deductible at $10,000 instead of $2,500 will likely discourage indiscriminate claims. Money will be saved in premiums at the outset, says Simone, and the savings can go into a fund to pay those small property damage losses that are less than $10,000.
Taking the insurance company out of the loop for smaller claims can assist the board when it comes time to renegotiate their general liability and property coverage.
Insurance companies have to provide notice, by law, that your building's coverage is being dropped. Ten days is the minimum notice for non-payment of premium, but a notice of 30, 60, or 90 days must be given before a building is dropped for an underwriting reason. The building owner can usually negotiate the cancellation notice before signing with the insurance company, provided it is done before anything happens.
While it's rare for a building to be dropped outright by its insurer, one surefire way to have a policy voided is for a co-op or condo board to fail to correct known, observed deficiencies - like a marquee about to fall down, or unsecured doors. Feldman recalls a famous case of unsecured doors: there was a restaurant attached to a co-op, and unbeknownst to the building's board, the restaurant employees had access to the rest of the building. One of those employees allegedly entered the residential part of the building and assaulted a resident. "If there is notice [of a problem], and the board still hasn't corrected it, it is a very serious situation," says Feldman.
In order to get the best insurance for your building, policy brokers highly recommend engaging in a competitive bidding process as one would for any other service contract, and to analyze and renegotiate again every three years or so, using an insurance brokerage firm to handle the bidding process if necessary. "One thing to remember is that cheaper isn't always better - always be with a strong carrier," says Simone. "That's very important, because if there is a loss, you have to know you have a good company behind you."
For a sidebar story on insurance trends, click here.