If an electrical fire destroys your newly renovated kitchen, will your co-op pay to replace your space-age stove and slate countertops? If a pipe bursts in your condo and your $10,000 wallpaper is ruined, who pays to fix it? The answers to questions like these may lie in your building's underlying documents and should be considered when buildings and individual unit owners are purchasing insurance.
"Whether your building is a co-op or condominium may make some difference but the biggest thing is to determine from your building documents what the co-op or condominium association is required to insure," says Thomas R. Kozera CPCU, president and CEO of SKCG Group, an insurance provider in Hartsdale, N.Y. "For example," says Kozera, "who is responsible for replacing a wood floor damaged by a leak? In a condo, it is generally the unit owner." But he adds, in a co-op, it may not necessarily be clear-cut. If owner number one puts in a new floor and it is damaged, it will probably be his responsibility to replace it, but if the unit is sold, depending on what's spelled out in the building's documents, that new floor may become the property of the corporation and they would have to replace it."
"It is not always clear in the documents," adds Kozera. "Insurance companies can help, but we are not lawyers; buildings should consult their lawyer for a positive determination. [Governing] documents vary widely and are [often] very difficult to change."
In terms of types of insurance, Kozera says replacement and perils are essentially the same for both condominiums and co-ops. From the insurers perspective, "Insurance companies in general might view condos as slightly better," says Kozera. "In general there is more risk of financial difficulties in a co-op, which would cause them to neglect maintenance, thus creating increased risk for insurers." He adds that there are only a few firms currently writing co-op and condominium insurance, but that those firms are "extraordinarily familiar with New York City."
Buildings, in general are finding that insurers are scrutinizing past claims more carefully. "Buildings with several incidents of water damage may not get insurance because New York State currently does not allow exclusions for mold," says Kozera.
The recent focus of media attention on the issue of mold may spell a headache for co-ops looking to refinance their underlying mortgage. "It's now becoming more common to see banks requiring a "micro/bio-matter" endorsement on policies when refinancing underlying mortgages," says Arthur Schwartz, vice president at Masters Coverage Corp., a Manhattan insurance broker. "Banks want policies that will cover remediation for mold." He adds that mold is not excluded, per se, from basic coverage but more lenders are requiring either a separate policy, or buildings are buying additional coverage.
"HSBC, for example, is requiring buildings to apply for specific mold insurance, or to make a representation that it cannot be obtained at a commercially reasonable price," says Schwartz.
Regardless of whether the building is a co-op or condo, there are three basic categories of insurance to consider: property coverage, general liability, and directors and officers insurance (D&O). Determining how much to get and specific endorsements is very specific to each building and depends largely on the wording of the underlying documents as well as the size, style and location of the building.
"Up until two years ago, buildings were significantly underinsured," says Kozera, citing figures in the $80 to $90 per square-foot range. "You can't replace a building for that," he says. "Today insurers - having paid big claims - are insisting on higher valuations." In terms of replacement values, Kozera says, "To verify the right amount of insurance, you need to go to someone who builds buildings. Insurance companies only use a rating formula that is not very specific, and not always an accurate indication of replacement cost." The consensus among brokers seems to be many Manhattan buildings are insuring in the range of $200 to $250 per square foot.
Buildings can customize their property coverage by adding endorsements for special circumstances, like floods, earthquakes, or backed-up sewers and drains. "A few years ago, very few buildings bought earthquake insurance, now some buildings are asking about minor limits after we experienced a few small tremors," says Kozera.
General liability covers claims up to $1 million. Claims above $1 million are covered by a building's umbrella policy. The upper limit of the umbrella is determined by the building. The umbrella covers specific forms of liability not covered under the general policy, including D&O insurance, explains Schwartz. While the protections offered under D&O policies are the same for co-ops and condos, Schwartz says, "There may be some difference in insurability for D&O insurance in a co-op conversion that still has a lot of sponsor units and the sponsor still has seats on the board. Firms tend to prefer a condo built as a condo compared with a co-op conversion."
"One weakness in many buildings is that they do not buy proper fidelity insurance," says Kozera. Fidelity insurance covers the building against a dishonest board member or someone serving on a committee in the building. "If properly endorsed, it also protects against dishonesty by the managing agent," says Kozera, adding that the larger claims tend to arise from managing agent wrongdoing. Kozera says it is a mistake for a board or Homeowner's Association (HOA) to simply ask the managing agent to show evidence of fidelity coverage. "The managing agent may have $500,000 to $1 million in fidelity coverage, but that would be spread over all the buildings that they manage." He advises buildings to buy coverage for managing agent fidelity as a rider to their own policies. As for limits, the board should choose a fidelity limit that they are comfortable with. Kozera cautions that it may be too late to increase coverage after an incident is discovered.
Joseph Ross, chief executive officer at Century Coverage Corp. in Valley Stream tells his clients - co-ops and condominiums alike - that "Nobody should be allowed to do work on the premises without a certificate of insurance naming the building or homeowner's association as additional insured. In the industry, this is called risk transference." Ross says this applies to work being done in the common areas of the building as well as in individual apartments. "Don't let any vendor or contractor do any work without general liability or product liability insurance," he says.
Experts note that because most lenders do not require condo unit owners and co-op shareholders to carry homeowner insurance, many individuals wrongly believe they are covered under the building policy. "I'm amazed that unit owners don't carry adequate insurance for themselves," says Kozera. He adds that a good homeowner's policy not only protects the contents of the insured apartment, but helps pay for the resident's own mishaps in the case of fire or water damage due to shareholder or unit owner negligence. If damage results from one unit owner's negligence or mishap, that owner is nearly always responsible for repairing any damages to neighboring apartments. In other words, "It's your responsibility to pay for the Picasso downstairs," says Kozera.
According to Cathy Torres, personal lines manager at Campbell Solberg Associates, a Manhattan insurance brokerage firm, "Generally, it's the same coverage for co-ops and condos. You insure from the studs in. For example, a pipe would be covered by the building, but fixing the wall would be the responsibility of the unit owner."
Torres says a basic policy should cover additions and alterations, personal property, loss of use, personal liability, and loss assessment. Additions and alterations - sometimes called "improvements and betterments" - typically are not covered by a building's policy. So, depending on the building's underlying documents, if your new bathroom complete with marble countertops and swanky fixtures is destroyed by a broken water pipe, the building will likely only be required to restore it to its original form, prior to improvements. Personal property covers all clothing and furniture and other valuables - basically, anything that can be moved. Loss of use covers living expenses if your apartment is uninhabitable due to an insured event. Torres says the amount of loss of use coverage is typically 20 percent of the value of the contents.
Personal liability does not just cover personal injury, says Ross. "In insurance terms, personal injury also includes slander and defamation of character." Finally, the loss assessment clause covers building assessments that arise from an insured event.
Ross says determining the right amount of insurance can be "a sticky wicket." The standard homeowner's policy covers clothing and furniture but does not cover things like fur, he says. High-end items like jewelry, fine art, and furs should be scheduled separately on the policy. Ross adds that unit owners "should consider getting coverage against sewer and drain back-ups, since that's not included in standard water damage coverage."
When determining the amount of coverage, especially in a co-op, Schwartz advises shareholders to determine what they actually own - as opposed to what's owned by the co-op. In some buildings, major appliances - even if they're inside private apartment units - are the property of the cooperative corporation.
"The biggest mistake people make it they do not take into account improvements like built-ins and remodeled kitchens and baths, which are quite costly to replace," says Schwartz. He advises that these items should be itemized on that property coverage policy.
While the differences between insuring property inside a co-op versus a condo are not huge, it's important for homeowners to have a working knowledge of their insurance policies - to know what they are covered for, what they're not covered for, and what falls under their building's umbrella policy. Industry experts advise buildings and individuals to periodically review their coverage to ensure that they are adequately protected - especially following renovations and improvement projects or major purchases. The chances of a flood or earthquake on the Upper West Side may be relatively remote, but a solid policy and a familiarity with it insures that you don't have to worry either way.