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Recovering Fraud Loss Insurance May Cover Corrupt Acts

There is some good news for cooperatives and condo-miniums that feel they have suffered because of the

alleged bribery, extortion, kickbacks and other corrupt acts of some real estate managers and management companies. Insurance may cover the losses imposed upon them, but only if they act quickly and with discretion.

Flying into court may be the wrong way to resolve insurance coverage matters. Instead, boards should work with brokers, agents, and insurance companies to extend the period of time during which recovery suits can be brought. Then, give notice and sit back and consider whether pursuing insurance is the right course of action.

Review Your Coverage

Most co-ops and condos carry crime insurance or fidelity bonds to cover losses resulting from dishonesty by employees and agents. This coverage is, for the most part, broad enough to encompass dishonesty by real estate agents and management companies. However, an immediate and thorough review of all possibly applicable insurance policies is vital.

In addition, your management firm should carry insurance against fraudulent practices by its employees, and if wrongdoing is suspected, a dialogue should be established between the board and its management firm as soon as possible, for two important reasons: First, management companies may express reluctance in notifying their insurance companies of possible corruption within their own ranks. Without any notice, there will be no insurance. And second, some real estate management companies are not well capitalized and have little, if any, financial backing. If their insurance companies do not cover the losses, nobody will.

An insurance recovery plan should be developed and implemented by boards that have reason to believe that their buildings suffered financial losses due to fraud or other illegal practices on the part of their managing agents. Such plans must take into consideration three deadlines: The first deadline is that, according to New York State law, policyholders must give immediate notice if any losses are suspected. Some insurance companies contend that a policyholder forfeits all insurance coverage if it gives notice more than seven days after it learns of a possible loss. Notice should be given through brokers or insurance company agents.

The second deadline deals with handling the particulars of dishonesty insurance. Generally, policyholders must provide full particulars to insurance companies within 60 days of the date of loss. Failure to give an insurance company a timely proof of loss could result in a forfeiture of insurance.

Obviously the deadline for filing a proof of loss is a problem for most boards. This problem could be made more tolerable if insurance companies agree to extend the deadline. Some insurance companies will do so; others may not. If granted, deadline extensions for filing a proof of loss must be in writing.

Filling in the Blanks

An obvious problem boards will face is the requirement in most dishonesty insurance policies that full particulars must be provided. The District Attorney may not provide detailed information regarding the prosecutions until all indictments have been adjudicated. The legal process may take several years and leave boards without full particulars in order to prove their cases.

If an insu f7f rance company refuses to extend the proof of loss deadline, boards should file a claim using the information presently available to them. The proof of loss should state that more information will be furnished when available. Policyholders have forfeited insurance coverage for failure to file a claim, but no policyholder has been forced to forfeit for filing a proof of loss which was incomplete and later supplemented.

The third deadline is that many insurance policies require that the policyholder bring a lawsuit against the insurance company to recover on the policy within one to two years after the loss or after the expiration date of the current policy. But since the alleged wrongdoing dates back several years, lawyers for some boards are concerned about the running of a six-year period of limitations. The situation regarding insurance is even worse! Boards may have to face the fact that insurance coverage under older policies may have been lost.

Dishonesty insurance is sold to cover wrongdoing by employees and agents. Kickbacks of the type alleged by the District Attorney's office are typical of the kind of losses that should be covered. However, such insurance generally excludes coverage for any acts committed after the discovery of past dishonesty by those employees or agents. Boards should immediately contact their insurance brokers to determine whether an agreement can be reached with their insurance company to provide coverage for such individuals until after the final settlement of the criminal cases they're involved in. If an extension will not be granted, the broker should be requested to look for alternative insurance coverage immediately.

Mr. Schutzman is president of the insurance consulting firm AMS Risk Management. Eugene R. Anderson and John W. Fried are partners in the New York law firm Anderson Kill Olick & Oshinsky.

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