Along with management fees, insurance premiums represent one of a homeowners association's largest annual expenses - and with good reason. Protection from major financial loss is integral to a civilized society. Without the security of insurance coverage, our world would have a different look and feel.
Would anyone invest millions of dollars to build a gorgeous, sprawling condominium complex without the safety net of an insurance policy, knowing that one ill-placed candle could cause a fire, and thus financial ruin? Who would spend hard-earned money on beachfront palaces, if one natural disaster could wash the whole thing away, literally and figuratively? Who would buy into a condo or co-op without the protection insurance provides, relying only on blind trust of dozens - if not hundreds - of strangers?
Insurance policies come due every year. Savvy managers send them to bid every year, to ensure that the homeowners association is paying the lowest premium for the best service. HOAs, then, tend to be in the proverbial driver's seat when it comes to insurance, especially in the age of the Internet. But what happens if a homeowners association is dropped by its insurer? While not a frequent occurrence, this does happen, leaving the HOA scrambling.
Why would an insurer drop a client? How can HOAs protect themselves from getting dumped? And if it happens, what should the board do? Here are some words of wisdom that may help if your association ever finds itself in such a predicament.
The most common reason an insurer will drop a client is, the insurance company is losing money. Obviously, expensive claims are the main culprits when an insurer hemorrhages cash. Policyholders who are chronic claimants are the ones most at risk of having their policies dumped.
Getting dropped by an insurer "is probably due to losses in numerous claims," says Greg Blair, a partner with Nottingham Insurance in Hamilton Square, an independent insurance agency in its 90th year of operation. "It's all about loss control."
Interestingly, it's not usually one huge claim that will compel an insurer to cut bait - although that does happen. It's more the insurance equivalent of death by a thousand paper cuts.
"Companies would rather see a big loss than a lot of little losses," Blair says. "A bad fire doesn't necessarily make [an association] a bad risk. Insurers know that sometimes those things happen."
Instead of focusing on one catastrophe or mishap, insurers are wary of a pattern of smaller losses. For one thing, they add up. For another, an endless pattern of claims tends to indicate a problem with how the condo or co-op is run. Furthermore, smaller losses tend to spread like viruses.
"Once someone finds out one person sued for something, another person will do it," Blair explains. Ultimately such suits - while initially profitable for the individuals - are self-defeating. "If you have a lot of losses," Blair says, "it will be difficult to find insurance."
A plague of little losses is not the only financial reason an insurance company will drop a client. Sometimes, the fault is not with the HOA but with the underwriters, who underestimate the cost of insuring a co-op or condo.
"Companies come into the market and don't price policies properly," says Blair. "They don't collect enough premiums to sustain the losses. You can lose money in that type of business."
This often happens when a large insurer decides to dip its toes in the HOA water, as it were, only to find the temperature just a little bit too hot.
"A company might decide not to do HOAs anymore," Blair says. In that case, getting dropped is "a unilateral decision."
Because insuring a condo or co-op is different than insuring an individual homeowner, it is not uncommon for companies to misread the writing on the wall. And while the plague of little losses remains the single biggest reason HOAs have their policies dropped, it's not as though insurance companies won't tell you why you were dismissed, says Paul Felsen, president of Felsen Insurance in Denville. "When you get the [non-renewal] letter, it will have the insurer's reason on it," he says. "They just can't say, 'We don't like you.'"
How, then, can community associations protect themselves from having their insurance coverage not renewed?
"Find ways to stop losses," Blair says.
There are many ways an association can follow this advice. One step many homeowners associations have taken is putting indemnity clauses in the bylaws, to prevent residents from suing the HOA. This would help in the case of a common claim, the slip-and-fall.
"Get a copy of your loss runs from your carrier for the last three years," advises Felsen. "Are there a lot of slip-and-falls? Mold claims? Drainage claims? If you've got 25 slip-and-falls a year, people are attempting to use your association's liability coverage as their health insurance."
"I know that if we have a bad winter, two years later, we'll have a bunch of lawsuits," adds Blair. "They go after the landscaper. They'll go after the HOA."
If residents couldn't, by rule, sue the HOA because they slip and fall on an icy sidewalk, many of the smaller losses would never occur. This certainly takes power away from the individual - what happens if the board did something truly negligent? - but there's no question that the group would benefit.
Another step that could help prevent little claims is having a relatively high deductible. Thus, what would be small claims could be paid directly by the HOA, if so determined, keeping the condo or co-op in the good graces of the insurer.
Frequent, thorough inspections and quality maintenance can also help nip potential problems in the bud. Is there enough salt on the ice? Was snow shoveled promptly enough? Are the fireplaces cleaned regularly? Are there gas grills on the terraces? Are the screens in the dryers free of lint?
"If you get a policy cancellation, there's a problem," says Phil Alampi, a principal with Condominium Management of New Jersey in Glen Ridge.
If a homeowners association has its insurance coverage dropped because of the plague of little losses, the board can implement the changes and go back to the same company, or see what kind of premiums they can get from competitors.
"There's always an insurance company that will write you," says Felsen. "You don't have to get hysterical. Somebody will write your insurance - you just may not like the price."
Insurance companies must by law give notice of their decision to not renew a policy. While the rules mandate a 30-day grace period, generally the HOA will know about it before then.
"Most companies will give it much more than that," Blair notes. Companies relay the decision as much as 90 days before, so dropped HOAs have a few months' headstart on finding new coverage.
To recover from being dropped by an insurer, the HOA must do two things. The first order of business is to assess why the policy was not renewed and to address any problems. If, for example, the HOA was dropped because of too many minor losses, the board should examine ways to improve the standing of the condo or co-op.
After steps have been taken to fix outstanding problems - assuming there are any - the HOA should then solicit bids for the business, just as it would every year. This involves the managing agent reaching out to independent insurance agents, who in turn reach out to insurance companies they use.
"You have an independent agent who handles the XYZ Corporation, and you tell them, 'Please, by August 1st, have three bids for me,'" Alampi says, describing the usual way the process works. "We handle it differently," he continues. "I go to five different agents. I ask them what their area is - Greater New York, Philadelphia. I say, 'I want you to go to your best guy for me.'"
Alampi, in other words, plays to the strengths of the independent insurance agents, tapping into the agents' closest business relationships. "I'm presenting one bid from one agent. This way you're getting real bids, honest bids, if God forbid your coverage gets cancelled," he says.
For Alampi, this is a yearly routine, not just in the rare occasion when coverage gets dropped.
"Insurance is one of the top three or four items in the budget," Alampi says. "You've got to do a good job every year."
Greg Olear is a freelance writer, novelist, professional astrologer, web designer, and stay-at-home dad living in Highland, N.Y.