The collapse of the Champlain Towers South in Surfside, Fla., in June is bringing increased scrutiny to the condominium insurance market. Ninety-eight people died after the building fell, highlighting the need to review the legal requirements and standards related to ongoing maintenance and structural integrity of condo buildings across the country.
Condo owners, along with condo and homeowner association boards, are asking important questions about the safety of their communities and taking a closer look at their policies to make sure the appropriate level of coverage is in place. Insurers, meanwhile, are closely reviewing their condominium master policies, asking serious questions about board operations, reserve funding, maintenance and regulatory compliance.
Prior to the collapse, the property/casualty insurance market already faced challenges from capacity constraints and higher-than-expected losses stemming from a significant number of natural disasters in recent years, including hurricanes and wildfires. The resulting hard insurance market has translated to higher P/C premiums, stricter terms and reduced limits on coverage.
This trend — already expected to continue for the next few years — will likely be exacerbated by the Surfside fallout.
What This Means For Insurers
Insurance professionals must work quickly to set new parameters for condominium master policies, particularly P/C coverage. Increased focus should be on maintenance and reserve funding to ensure the safety of the structure and protection of condo owners’ investments and well-being. In areas with recertification ordinances, it’s critical to request proof of recertification as soon as possible. It may be necessary to cancel, or not renew, policies for buildings not in compliance with inspection requirements.
Priority should be placed on buildings in at-risk areas, such as coastal Florida. Coastal Florida already has experienced upheaval in the P/C market in recent years, with some insurers pulling out of the market entirely. The prevalence of older condo buildings such as Champlain Towers South presents greater liability and risk due to hurricane exposure, historically underfunded reserve accounts that fund future capital improvements, and the tendency of some association boards to delay maintenance.
Gaining A Foothold On The Future
It’s essential for boards of directors, managers, agents, attorneys, engineers and insurers to be proactive in assessing risk and updating coverage limits. It’s also important for insurers to recognize the new opportunity this presents. Insurance professionals should focus on strengthening their relationships with policyholders and inform them all of the services available to them to manage risk and plan for the future.
An effective risk management program ensures due diligence of risk exposures and identifies necessary mitigation tactics. Agents and brokers can assist condo and homeowner associations with building inspections, reserve studies and other risk management services to provide a safe environment for employees, residents and guests.
Insurance professionals should work with policyholders to identify and address gaps in the condo association’s bylaws and policies to ensure maintenance takes precedence. Regular and preventive maintenance should be viewed as part of an overall risk management strategy and not as an unwanted expense. Association bylaws and policies may need to be amended to include provisions requiring periodic assessments of the structural integrity of the building, as well as ongoing maintenance and general upkeep. Professional engineers can evaluate the building’s structural integrity and other critical areas, including balconies, parking facilities, stairwells, pools and other common elements. By detecting problems early on, associations can save significant amounts of work and costs down the road and prevent avoidable tragedies.
Studies of funding reserves can help association boards — and insurers — gain insight into the property’s structural integrity and fiscal health. Reserve studies help condo and homeowner associations develop a proactive, fiscally responsible approach to long-term maintenance and assess how well the reserve fund is keeping pace with common area deterioration, as well as the ability to cover emergencies. The study provides funding plan recommendations to avoid the need to take out costly loans or levy special assessments in the future. The study helps the nonprofit corporation bring to light that having a strong financial plan in place is part of the board of directors’ fiduciary duty. The duty of the board is not to lower assessments or ignore future financial needs.
Identifying Coverage Gaps
Insurance professionals can work closely with policyholders to establish the appropriate level of association coverage for all potential liabilities. In many cases, association boards will find their current policies will not be sufficient to cover potential property damage and personal injury claims. Policies should include coverage for these six areas at a minimum:
1. Property. Covers physical damage to condo association buildings, common areas and other specified property.
2. General liability. Protects the association against injuries that take place on property covered under the policy and protects against lawsuits for allegations of property damage.
3. Crime and fidelity. Protects the money the condo association has in its operating and reserve accounts from embezzlement, check fraud and misappropriation of funds as well as computer, social engineering and wire fraud.
4. Excess liability (umbrella). Provides coverage beyond the limits of the general liability policy to protect against unforeseen losses.
5. Directors and officers. Liability protection for members of the board of directors.
6. Workers’ compensation. Coverage for injuries incurred by employees, contractors, freelancers or volunteers while working on condo association property.
Beyond these six areas, insurance professionals should recommend other important areas of coverage, if applicable. These areas include sewage backup, ordinance or law coverage and flood and earthquake insurance, as well as coverage for wind and hail damage caused by hurricanes. Cybersecurity coverage should also be considered if the association conducts a significant portion of its financial transactions — including dues collection — electronically.
One area that is often overlooked in P/C policies is debris removal. If a structure is damaged from a storm or fire, debris removal is a critical step in the rebuilding process. In many cases, associations will find their current coverage limits are insufficient to cover debris removal resulting from significant building or property damage.
Condo and homeowner associations that take a proactive approach to risk management, particularly long-term maintenance planning and reserve funding, will benefit from protecting the safety and security of their buildings. They also will protect the unit owners’ investments and resale value. These steps may also translate into more favorable terms, limits and rates of coverage.
Laws and regulations related to condo and homeowner association boards differ by city, county and state. It’s anticipated the Surfside condo collapse will spark new regulations across the country to prevent such a tragedy from happening again. Insurance professionals can become trusted sources for risk management, assisting policyholders with important risk mitigation tactics as well as keeping policyholders up to date on any changes in regulatory requirements.