No one needs to be reminded about the personal loss and devastation that Superstorm Sandy brought to the Jersey Shore in October 2012. Natural disasters like these are on the rise and serve to underscore the importance of having appropriate insurance policies in place. While board members have a good grasp of common insurance coverage such as homeowners, liability and umbrella, there are other specialty insurance policies to consider.

“The biggest issue we see is the underinsurance of older unique buildings. Insurance companies can generally penalize an association when the building is underinsured which is referred to as coinsurance,” says Jon Schildt, managing principal of Calculated Risk Advisors, a national consulting firm and professional liability insurance brokerage. “If a building is underinsured and property damage occurs, owners are often shocked when they find out that the damage will not be fully reimbursed.”

When looking in to specialty insurance policies, it is often recommended to revisit existing policies to guarantee that all the proverbial ducks are in a row. “Boards need to speak with broker/agents who understand condo insurance and make sure the condo’s needs are met,” says Ronald Diskin, president and CEO of the East Hanover-based Ronald Diskin Associates Corp. “Each case is different, depending on the bylaws.”

Going Green?

In recent years there has been a growing trend centering on “green” specialty insurance. More and more boards are looking into related policies; however, it is suggested to double-check policies to best understand what is covered, green or otherwise.

“Environmentally-friendly installations like solar panels once installed are usually considered part of the building coverage,” says Cheryl Rhine, CIC, an account executive at the Toms River-based BHB Insurance Services. “Boards should check with their insurance representative to see if their carrier has any special requirements or exclusions.”

Schildt explains that insurance companies are starting to offer endorsements, for an added cost, that will rebuild damage to the building to LEED specifications, but he added a caveat. “Claims where enough damage is done to require that level of construction are extremely rare and the coverage is likely to never come into play.” What is more important, he adds, is “ordinance or law,” which will cover the cost of rebuilding to current (often greener) building codes.

There are generally two types of insurance policies offered for green buildings. The first can translate, on average, into a two to three percent increase in premiums, which covers higher upfront costs of green materials but guarantees that, in case of a loss, a conventional building will be rebuilt to green standards. The second policy type is offered to associations that are already considered a green building. The insurance insures existing green modifications against loss.

Flood Maps

The rise in natural disasters has caused significant changes in the way insurance policies are written and/or interpreted. This is perhaps best underscored by 2012’s Superstorm Sandy. The impacted Jersey Shore, for example, has been remapped in relation to floods zones. To this end, the Federal Emergency Management Agency’s (FEMA’s) Flood Hazard Mapping Program identifies flood hazards, assesses flood risks and partners with states and communities to provide accurate flood hazard and risk data to guide mitigation actions.

In a concerted effort to better protect residents and property owners moving forward, last year New Jersey adopted amendments to its existing Flood Hazard Area Control Act rules. This sets minimum elevation standards for the reconstruction of houses and buildings in areas that are in danger of flooding.

From the famed Jersey Shore to Hoboken, these amendments could change the state’s residential topography. “The biggest news now is the new FEMA maps because it essentially says who can build where and how people can rebuild,” says Conor Fennessy, vice president of government affairs for the New Jersey Apartment Association (NJAA) in Monroe Township. “The new flood insurance program is still a question mark for many, but it will impact premiums.”

According to FEMA’s website, Flood Insurance Rate Maps (FIRMs) include statistical information such as data for river flow, storm tides, hydrologic/hydraulic analyses and rainfall and topographic surveys. How this impacts existing or future insurance policies remains unclear. While beneficial in certain respects, the Flood Hazard Mapping, part of the National Flood Insurance Program, is changing flood insurance requirements.

“I cannot give a snap answer with regard to FEMA flood insurance, but in general if a building has flood insurance that provides building coverage so there is no loss of rents if a tenant has a flood,” says Diskin. “It is based on their exposure and the premium is determined by those exposures. Each insured’s needs differ.”

Rhine adds that “flood” is a separate cause of loss and is usually excluded on other policies. “Boards should consult with their insurance professional for what limits are recommended for their buildings and residents should remember that their personal belongings must be insured on their own personal flood policy,” she says.

Misunderstood Policies

One common, but often misunderstood, insurance policy is known as Directors and Officers coverage or D&O. This policy insures directors and officers of businesses, corporations and other entities against a legal judgment.

Boards should know the difference between the D&O policy that comes with their own commercial policy versus the additional coverage that they could purchase to supplement that coverage. One Midwest property manager explained that he is currently working with an association that tried saving the $1,500 annual cost by dropping the additional D&O policy. Eight months later the board was sued and the D&O included in their commercial liability policy didn’t cover the defense. “So the $1,500 they saved has ended up costing them almost $90,000 in less than two years,” he said. “And the lawsuit is still in the discovery stages.”

Another misunderstood or overlooked insurance policy is worker’s compensation. While many boards believe that using insured contractors removes the need to spend the approximate $800 per year for a worker’s compensation policy, it is flawed logic. “What they fail to realize is the coverage is if your insured contractors’ insurance policy isn’t adequate to cover a claim or if an owner uses a non-insured contractor who gets injured while working on the property. The cost to avoid such risk is minimal,” he added.

Specialty insurance policies also include non-owned auto coverage, which protects the association in case a board member has a vehicle related accident while performing association business. There also exists special insurance coverage for expensive building equipment such as the boiler system, pool or HVAC equipment. “Equipment and Machinery coverage, also known as Boiler and Machinery coverage, will add mechanical breakdown coverage to building equipment,” says Rhine. “Boards should make sure the coverage is either included in their package policy or purchased on a separate policy.”

Under the right circumstances, specialty insurance can save associations both time and money. And the annual rates are general nominal compared to the possible liability. “An example would be a Special Events Policy for a one day event at a community,” says Rhine. “We once had an animal mortality policy in force for a Border collie dog in a golf course community—the dog was hit by a car and sadly died. The coverage provided death benefits.”

While usually recommended for those properties located in or near metropolitan areas, terrorism insurance is another specialty policy that has gained in popularity since 9/11. Schildt explains that approximately 60 percent of commercial insurance buyers purchase Terrorism Risk Insurance often without hesitation due to the low cost or lack of a broker explaining its purpose. Brokers, he says, may also simply add the cost into the price of the package insurance premium instead of providing it as a separate option. However, only when $100 million dollar in losses is realized will the federal government and the respective insurance company begin to split the payments to those injured. The government has capped total reimbursements at $100 billion.

“The coverage or exclusion is only triggered when the Secretary of Treasury deems an event an act of terrorism. The Secretary of State and Attorney General must then agree with the decision. The Boston Marathon bombing, which the president defined as terrorism, was not deemed as such for insurance purposes and therefore not subject to the terrorism insurance program,” notes Schildt. “This means a condominium building in the area that did not purchase terrorism coverage would still likely have their claim paid—despite the newspapers and the president labeling it terrorism.”

Covering the Unexpected

When it comes to understanding what a board insurance policy covers coverage opposed to a unit owner, a gray area can exist. It often comes down to the amount of the deductible. Associations are required to insure the inside of the units up to original construction grade or to the original shell of the unit. However, unit owners should also carry a policy, experts say. Owner’s deductibles are likely to be much lower than an association’s deductible.

Depending on the amount of the association’s deductible versus the damage to the affected unit(s), the association may not even consider a claim. Since board members are often in flux with new and inexperienced members joining the dais, it is critical to seek guidance to ensure that the proper policies are in place to cover all possible insurance claims.

Another seemingly obscure, but increasingly common problem that should be insured against is sewer backups. Because of aging sewer systems and other factors, the problem of sewers backing up into a building and causing damage is becoming a real concern for some buildings. But sewer backup coverage can protect a building from this unfortunate hazard.

“Sewer backups are not covered under a typical homeowner’s insurance policy, nor are they covered by flood insurance,” says Loretta Worters, vice president of the Insurance Information Institute, a New York City-based non-profit that informs the public about insurance. “Those types of coverage must be purchased either as a separate product or as an endorsement to a homeowner’s policy.”

A sewer backup could be traced to an aging sewer system, combined pipelines, or blockages created as a result of tree roots. A sanitary main blockage that is left undetected could cause a backup into your building. While some don’t realize it, homeowners and building owners are responsible to their sewer “lateral” which connects the building’s sewer system to the main lines in the street. A break or backup in this area of the system also can be costly.

Sewer backup coverage is available for a nominal cost, and usually is just an additional premium. Most co-op and condo buildings don’t get this type of insurance, but they should, Worters says.

“It is always important to hire the right experienced professionals that understands the unique needs of a community and can advise the board accordingly. There are many specialty policies that are available and can be beneficial in the right circumstances,” says Rhine. “The most important thing is for boards in residential communities to interview and hire insurance professionals who have expertise in this area.”

For more information on insurance, visit the Insurance Information Institute’s website: www.iii.org. To assess your risk of a flood, visit the National Flood Insurance Program website, at www.floodsmart.gov/floodsmart.

W.B. King is a freelance writer and a frequent contributor to The New Jersey Cooperator.