Condominium association insurance policies are rapidly increasing in cost, outpacing inflation. The changes have affected property, liability, and directors and officers (D&O) policies. Why are these changes occurring, and how should associations respond?
Property damage claims most frequently arise from natural disasters. Beginning with the record-setting 2020 hurricane season, the United States has experienced an unusually heavy period of severe weather. The year 2023 has seen an inland hurricane in California, blizzards, severe thunderstorms, hail, and tornadoes. The storms of June 15, 2023 produced 13 tornadoes in southeastern Michigan and northern Ohio. Property damage and personal injuries have resulted in more insurance claims and payouts.
Recent changes in Michigan premises liability law will result in more frequent personal injury lawsuits, and a corresponding increase in liability insurance claims.
Lawsuits by co-owners against the association or the board fall under D&O policies. The increase in co-owners working remotely has caused them to spend more time in their units. With condominiums now serving as both home and office, co-owners now turn more attention to the workings of the association and the board. Associations have seen an uptick in requests to inspect association records, and co-owners challenging their association’s administration and management. Dissatisfied co-owners may use community-related social media to compare and coordinate complaints. Boards should take care to respond to genuine concerns, and to address any problems that the association is able to resolve. Boards should also consult with their accountants and attorneys to ensure that their associations are complying with financial and legal filing and reporting requirements.
Maintenance and Reserves
The 2021 collapse of Champlain Towers South in Surfside, Florida caused governments and insurers nationwide to more carefully examine condominium associations, their building and improvements maintenance, and reserve funds. Insurers are now directly imposing requirements for specific maintenance and repair projects at a level not seen before. Examples have included road resurfacing, roof replacement, and electrical upgrades. If associations fail to comply with the requirements, the consequences have included policy nonrenewal, immediate policy cancelation, placement in high-risk pools, and increased deductibles for specified hazards.
The Michigan Condominium Act and Condominium Administrative Rules require associations to maintain a reserve fund for major repair and replacement of common elements. The Rules note that this minimum standard may be inadequate for a particular project, and the association should analyze the condominium and determine if additional funds should be set aside. Attorneys and community managers have long advised associations to obtain reserve studies to identify necessary maintenance and repair projects, and to establish an assessment budget to fund those projects on schedule. Compliance with a reserve study will avoid deferred maintenance items that may cause an insurer to restrict coverage. With Fannie Mae and Freddie Mac also now inquiring about deferred maintenance on loan approval questionnaires, reserve studies are now becoming essentially required.
Fewer Insurance Options
Overall, fewer companies have been writing condominium insurance policies over the last several years. Those that remain may impose additional limitations and exclusions on policies. For example, policies now nearly universally exclude mold, which is one of the most frequent causes of necessary repairs in Michigan.
With fewer underwriters offering policies, and more claims by and against associations, insurers’ costs have increased. This has translated into an increase in premiums for associations. There is also a tradeoff between limits, deductibles, and premiums. Boards may see value in accepting a higher deductible or lower policy limit to obtain a lower premium. However, boards must consider whether the association will be able to cover the out-of-pocket expenses of the deductible, or worse, a claim exceeding the policy limit. Even with these considerations, some associations have received quotes for policy renewals in 2024 with a premium increase of 25% or more over comparable policies from past years. Therefore, boards will need to consider whether the association should increase the regular assessment to cover the costs of the new policy. Increasing the regular assessment will never be popular with the co-owners, but is likely preferable to an additional or special assessment to cover the cost of a shortfall.
Boards and community managers should communicate with their insurance agents early in advance of a renewal, to ensure that the Association has the best options for affordable and appropriate coverage. Boards and community managers should also coordinate with the association’s attorney to confirm that the policies under consideration properly addresses all the common elements and any portions of condominium units that the condominium documents require the association to insure.
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