Board Levies Special Assessment to Sue Potential Tenant

The New York Times Ask Real Estate column (available here) outlines a potentially frightening financial issue that could also face Chicago condo owners. The resident writing in presents a scenario where his association’s board has voted to file a lawsuit to stop a restaurant from occupying their first floor retail space. The board will than assess every owner, regardless of their position on the potential tenant, to pay for legal fees. The columnist cited a similar lawsuit in 2013 against a Denny’s who attempted to occupy a downtown condo building. The case was settled and Denny’s moved in.

The important issue at hand is how much power the board has to impose their will. Rewriting bylaws to stop this sort of action is possible, but not without risk. Board members should entrust a skilled lawyer to handle the process and as well as ensure the Directors and Officers insurance covering the board is appropriate. Individual board members can be personally sued by other owners over an allegation they breached their fiduciary duty.

Not all condo Directors and Officers (D&O) policies are the same. Many low priced “packaged” coverages are included for minimal cost and would not cover this type of allegation. A small building can purchase strong D&O coverage for a $600-750 while larger buildings can run $2,000-$5,000. Once a claim has been filed, the future premiums can skyrocket.

Prevention is always the best strategy. Is is recommended that a seasoned condo attorney is involved in any bylaw changes and their advice is followed closely. Any remember, things are not always as bad as they seem. An eater review of the downtown Denny’s that faced a $10M lawsuit from the condo building where they were attempting to rent space has a surprisingly  good review – “…the two meals I had at Denny’s were not as bad as I’d feared…” and “…a relative bargain”.

Contact today to discuss better protecting your association from the costs of operating in a litigious society.

Condo Associations Responsible for Disclosing Owner Data

An LA Times article cites a growing concern for all businesses, loss of personally identifiable information. The article brings up a scenario where copies of condo owners check and bank records are freely copied and distributed. An organization disclosing personally identifiable information is likely breaking ever increase web of state laws protecting consumers from hacks and other data loss.

In California the law allows each individual to recover up to $3,000 if the disclosure was willful, intentional or reckless and $500 if accidental. Illinois generally caps damages at $100 per individual but requires the person who disclosed the information and requires the victims to be notified and provided credit monitoring.

Because of the rise of hacks and leaks the government has been quick to enforce these laws to protect harmed consumers. With the cost of responding to this web of regulations increasing many insurance companies exclude coverage for loss of personally identifiable information. Stand alone policies, requiring separate underwriting and premium, are readily available.

A condo association has three choices – ignore their exposure, purchase insurance or eliminate the risk. The easiest and cheapest option is to not store (physically or electronically) any personally identifiable information. This includes bank account numbers, social security, drivers license and date of birth information. There should be no reason for an association to have these. Any copies of checks or computer scans should be deleted once they are no longer needed.

The second option is to purchase insurance. Many insurers will add the coverage to a condo package or directors & officers policy for several hundred dollars. A few are adding it for free. However, associations should be careful about relying on this as reporting a small claim can cause the premiums for all related coverages to skyrocket.

The third option is to do nothing. The number of residents is generally small and the chance of data loss is remote. However, the association should be prepared for the legal bills required to comply with the notification requirements in Illinois and other states.

The most important step is for an association to understand it’s risks and have a plan to manage them. Loss of data, whether electronically or in hard copy, has become a daily headline. No board member can claim they did not understand their responsibilities in protecting the unit owners information, whether it’s held personally or by a trusted third party management company. Contact our expert cyber liability brokers today.

Back to the Basics: Adequate Insurance for Your Condo

Owning a condominium has many benefits over owning a house, such as not having to shovel snow in the winter or cut grass in the summer. Further, some condos have amenities like a fitness center or swimming pool. On top of all this, buying a condo often provides similar investment benefits to buying a house that apartment renters not enjoy. And, as with home ownership, it is a good idea to obtain your own insurance to cover your unit and personal belongings in your condo as well as ensure the association itself is properly protected.

Condo Associations

When you purchase a condo, you will join something known as the Condo Association. You will be required to pay association fees that help pay for things like the upkeep of the common areas. Additionally, your association fees will go towards paying for insurance that covers some general risks to the building itself. The details of who is responsible for what can be found in something called the association bylaws and there can be two different types. Understanding what the master policy should cover and what is the responsibility of the unit owner is helpful in determining the level of coverage you will want to purchase.

Who is Responsible

The most common policy responsibility for a unit owner is called “walls in” coverage. This requires the owner to coverage damage to everything from the studs in including fixtures, floors, and cabinets, as well as all of your personal belongings. If a pipe breaks in the wall under this scenario the association’s insurance should coverage the repairs. Most bylaws are very explicit about where the association’s coverage stops – most generally either at the studs or the finished drywall surface.

Another less common form of responsibility is known as “all-in” coverage. This type of arrangement has the condo association cover everything but a unit owners personal belongings. For an individual unit owner, all-in coverage will mean needing less insurance. This type of insurance struture is extremely rare in Illinois and still requires the individual owner to secure their own liability coverage.

It is important to note that if a claim is made that the master policy does not completely cover, it is possible that unit owner’s individual coverage may be used to make up the difference. You should also be aware that some HOAs require unit owners to obtain a specified level of coverage or stipulate which insurance carrier must be used.

Having insurance can also provide you with personal liability coverage in case someone is hurt while inside of your unit. It can also protect you in case you are sued because you, your child, or your pet caused damage to property or injured someone. If the injury occurs in a common area, the association will be responsible for any claims made by the injured person.

Get Adequate Protection

If you are considering purchasing a condo (or already have), one consideration you will have is obtaining an appropriate level of insurance. While having insurance is not necessary in all situations, it is often advisable in order to avoid the risk of having to pay large sums of money out-of-pocket. Unit owners should work to with associations to ensure there are no gaps between where an association’s insurance ends and a unit owners begins. Contact a condo insurance broker today.

Condo Act Laws put Burden on Association to Properly Insure

An important Illinois Appellate Court Decision, Royal Glen Condominium Assn. v. S.T. Neswold and Associates, Inc., has brought increased risk to Condo Board members. The court ruling puts the burden to purchase proper insurance squarely on the association’s governing body.

In 2009 Royal Glen Condo Association bought a standard Travelers insurance policy, their “Condominium Pac Plus”, from local agent S.T Neswold. The policy contained a standard Ordinance or Law Coverage endorsement limiting coverage to $1M. Ordinance and Law limits the amount of money available to pay for additional costs required to make repairs compliant with current building codes. “Replacement Cost” insurance policies, like the one purchased from Travelers in this case, only pay to return a property to it’s pre-loss condition after a covered claim. Any additional costs to bring the property up to current codes is generally sub-limited in the policy.

The current Illinois Condominium Property Act requires “coverage for the increased cost of the construction due to building code requirements”, the new condo act that applies to renewals starting June 1st 2015  goes further in requiring a minimum Ordinance and Law limit of 10% of the building value, up to $500,000.

The Royal Glen association limit was above the new laws explicit requirement but was not enough to cover increased costs from newer building code requirements. When a fire substantially damaged the building the village required the association to comply with a 2004 code requiring sprinkler systems. This new system cost $1.3M to install.

When Travelers limited payment on the sprinkler system to $1M the association sued their insurance broker for not placing adequate insurance. The appellate court ruled in the agent’s favor and stated it was the boards responsibility to comply with the act.

The scenario brings up two important and commonly overlooked insurance issues – covering Ordinance & Law and Directors & Officers coverage for an allegation of failure to place adequate insurance. Building codes are constantly changing. For hundred year old associations it’s very apparent that rebuilding will require everything to be upgraded – from joists to wiring. For midcentury and newer buildings, it’s often not considered. Elevators, sprinkler systems and HVAC systems can be incredibly expensive to retrofit. Larger buildings should purchase guaranteed replacement cost coverage with full ordinance & law coverage or hire an experienced engineer to estimate the cost to comply with current codes.

Standard policies like the one from this case often include packaged Directors and Officers insurance. This coverage is there to protect the board members against an allegation that they breached their fiduciary duty. It’s not surprising but the cheaper the policy the more exclusions it contains. What is surprising is that a common exclusion cites “failure to purchase insurance” as an uncovered act. The board members could be sued by their fellow residents and have no coverage for legal costs and an ensuing verdicts or settlements.

In an effort to save money many associations purchase the cheapest insurance possible, assuming if an uncovered claim comes in they can sue their agent or broker for coverage. The case cited above means this is no longer a reliable option. There are cost effective policies with broad coverage available, contact an expert in covering condo property today to discuss your options.

3 Relationships a Condo Association Should Secure in 2015

As 2015 begins, many stop and pause to think on the year that passed and consider the year to come.  As a condo association, this can also be a great time to reflect on what needs to be done to ensure that 2015 is smooth in terms of operations, finances and policies.  For most, being on the board of a condo association is a part-time responsibility and not always an easy one.  Even if the operations are outsourced to a management firm, board members spend hours in meetings and preparing for those meetings.  That is why going into 2015, a condo association should have a team of players in their corner to help them navigate tricky situations.

The liability for running an association is not lessening, and board members need to remain diligent on their documentation and processes to avoid that liability coming back onto them.  That is why we recommend that each association maintains a relationship with at least the following three people.  These people are the most likely to be called on when a problem arises and the hardest people to search for in a time crunch.

Lawyer – Having a lawyer retained to handle the legal issues of a condo association can be pivotal to a healthy condominium complex.  2014 has brought some new and serious developments in the law, as well.  We are seeing lawsuits by tenants increase over the years.  Many of these stem from the board making changes to the by-laws or financial difficulty an association may face.  A lawyer to walk the board through these can help prevent difficult matters.  There are also a few key developments that boards should be aware of.  For starters, Illinois was the last state to allow concealed carry of firearms.  However, many condo developments want to restrict where they may be carried on premise.  There are also restriction built into the law when dealing with alcohol or events that the association may host.  These should be discussed with legal counsel.  Also, medical marijuana is making its slow debut across the country and buildings previously declared as “smoke free” may have to relax its rules when medicinal smoking is a legally protected act.

Accountant – As previously mentioned, financial difficulties are leading to lawsuits against boards.  An independent accountant who places proper scrutiny on the association’s books can help prevent a shortfall or assist in framing the problem properly.  They may be able to spot when theft of funds have been occurring as well.  Finally, they can give proper oversight to many of the board’s processes by tallying votes or acting as a secretary for meetings.  The role of an accountant specialized in condo associations is expanding.

Insurance Broker – Insurance is often taken for granted and renewed year over year without much thought.  The process of submitting the necessary information to obtain a quote has also been daunting for many boards.  However, the last three years has brought a lot of changes to the insurance market for condo associations.  We have seen prices increase and new laws passed that impact the coverage an association needs.  The underwriting process has also been streamlined for all but the largest condo buildings – making the quote process much easier.    The revised Illinois Condo act also takes effect in 2015 – changing slightly the requirements a board must take into consideration.  Finally, with the emerging topics previously discussed, a board should seek an experienced insurance broker to perform an assessment on whether their coverage is adequate given the new legal environment.  It is important for associations to consider whether they are adequately protected for financial loss and lawsuits against the board.

If you do not have one of these relationships noted above, 2015 is a great year to make those connections.  If you are looking for a review of the insurance policies your condo association now carries, be sure to reach out to us for a complimentary review.

Landmark NY Decision on Withholding Ammenities

The recent ruling in The Columbia Condominium v. Ullah upholds an association’s ability to withhold amenities from a unit owner when assessments have not been paid. This New York specific case law should not be held on it’s own and associations should consult legal counsel before taking actions against a delinquent owner.

The case surrounded a divorce situation where the assessments had not been paid for years by the spouse living in the unit. The association filed a lein and shut off access to amenities, which the unit owner used as justification for continuing to not pay assessments. The court upheld the right to withhold services – so long as the rules passed applied to the entire building and were not punitive to a single unit owner.

The legal costs in this case are unknown but likely catastrophic, as litigation is not only time consuming but very expensive. Retaining counsel early to take the steps necessary to avoid a drawn out fight is recommended. Simple mistakes are often spun as allegations of discrimination or unfair treatment, which causes costs to spiral out of control.

Contact an expert condo insurance broker to discuss better protecting your board against allegations of mismanagement, discrimination and other breaches of fiduciary duty. No matter how cautious a board is in writing and enforcing it’s bylaws, lawsuits happen and litigation is expensive.

Association Sues over Building Valuation

Whitehouse Condominium Group purchased an insurance policy from Cincinnati Insurance Company before a fire in 2010. The policy was written on an “Actual Cash Value” basis, which is cheaper than the standard “Replacement Cost”. Under a replacement cost policy the insurance company pays to rebuild the damaged or destroyed building to it’s prior state. Under actual cash value, the insurer cuts a check for the building that includes deductions for depreciation, age, condition and obsolescence.

After the fire Cincinnati sent a check for $1.2M, to which Whitehouse claimed was less than half the value of the building. Whitehouse sued, which is often the only recourse when disputing an insurance company, and won a summary judgement in their favor. Cincinnati appealed but the 6th Circuit upheld the lower court’s ruling. The complete ruling can be found here.

The case illustrates the need to understand insurance terms and to fully understand the ramifications of the coverage being purchased. When a building is properly insured for replacement cost (which is legally required of associations in Illinois) the damaged portion of the building is rebuilt. Both owner and insurance company have incentive to get the property fixed as quickly and inexpensively as possible. When insuring a building for actual cash value, the settlement can be tied up in court for years and require a tremendous amount of legal fees.

If a building cannot be insured for replacement cost, “agreed value” is a smart way to go. Both the insurer and the insured agree on a building value when the policy is put in place. If there is a fire or other catastrophic damage both sides have already agreed to the payment that should be made. This process can save years of aggravation and prevent settling for less than a building is worth to speed up payement.

Contact an expert condo insurance broker to discuss better protecting your association against property damage and legal fees. As the insurance market continues to get more competitive many carriers will continue to cut coverage to offer the lowest price. As the old saying goes – you get what you pay for.

How to Save Money on Condo Association Insurance

A common question from clients is how to save money on condo association insurance. With insurance costs being the largest expense for most small self managed building this is not surprising. We always remind clients that there is no free lunch, the only easy way to save premium is to retain more risk – whether through higher deductibles or less coverage.

The list below highlights the common discussion points boards consider when exploring ways to lower costs. The two main constraints are state laws and condo board bylaws. Many states and some local municipalities require certain coverage levels. Also, modern bylaws often also contain requirements the board should be cognizant of.

Retentions – Many small buildings carry $500 or $1,000 property deductible, raising this can decrease the your annual premium. Most liability coverages for small buildings are written without deductibles and no savings can generally be had by adding one. The best way to look at this is to look at a scenario where moving from a $1,000 deductible to a $5,000 would save $400 in annual premium. The payback is $4,000/$400 or 10 years. The condo would have to be loss free for a decade years before they would really see a cost savings – as they should be banking the deductible savings for an eventual claim. A eight unit building with these numbers would be looking at a little over $4M per month per unit in savings.

Hired and Non-owned Auto – Many bylaws and state regulations do not require hired and non-owned auto, a small condo can save $100-150 annually by dropping. The risk of a resident getting in an accident is slim, but the potential outcome is catastrophic. Auto accidents are one of the highest severity claims an association can face.

Umbrella – Lowering or dropping umbrella coverage is a quick way to save money. However, when looking at larger limits many board members do not realize there are economies of scale in the pricing. Many small condos will pay $400-500 for the first $1M of umbrella coverage but $150-200 for each million after. Also, many carriers only offer round number umbrellas of $1M or $5M. Dropping an umbrella limit from several million dollars may not show the savings expected.

Directors and Officers – A bare bones association D&O policy can cost less than half of one with better coverage. However, after 7/1/15 it will be illegal to purchased scaled back coverage in Illinois. An association would also have no coverage for most suits from owners – including the common claim of a suit against an officer for not recognizing a minority interest when changing the bylaws to limit renters/investors/pets/other perceived nuisances or for costly allegations of discrimination. Directors and Officers can have personal liability and the legal bills that go along with an allegation of mismanagement, we strongly suggest purchasing the broadest Condo D&O insurance possible.

Better Claim Documentation – If your association has had a claim thoroughly documenting what happened and what was done to prevent a re-occurrence can go a long way in secure more competitive insurance proposals. Insurance underwriters are required to keep thorough notes of their thought process – by helping them document their files you make their job easier. Happy underwriters give lower pricing.

Work with an Expert – The more often a broker places insurance for a specific class the better they understand the market. Choosing an independent insurance intermediary can ensure the best condo association cost protection for years to come.

Lower Replacement Cost – A building insured for $2M will pay roughly half of what a similar $4M building will pay. Lowering the replacement cost of your building is the quickest and easiest way to lower cost. However, there are pitfalls. Many insurers utilize “coinsurance” to punish building owners who underinsure. Coinsurance allows the carrier to prorate any premiums for lower valued claims if they can prove the building is undervalued. In addition, insuring below full replacement cost is illegal in Illinois and outlawed in many condo bylaws.

To discuss options specific to your situation contact an expert broker for a free analysis.

Association Forces Couple to Sell Condo after having Second Child

Mr. and Mrs. Cairn were overjoyed to learn of their pregnancy with their second child.  But when the delivery happened and the baby was brought home from the hospital, the neighborhood reception was less than joyful.  As condo owners at Grosse Pointe Estate Condominiums in Michigan, the Cairns enjoyed the property and safety of the premise.  However, the by-laws stated that their particular unit – a three bedroom unit with two levels – could only house 3 residents.  And baby made 4.

The lawsuit alleges that the neighbors repeatedly asked them what the couple was going to do for housing, insinuating that they had to move.  The lawsuit further states that the association board members approached the family and explained that they were now in violation of association rules and had to move.  The Cairns even state that the property management company confirmed that the association rules said they were now obligated to sell their unit.

The couple did sell, but then sued.  They based their lawsuit on the board’s violation of the Fair Housing Act which prohibits discrimination based on familial status.  They also cited additional laws that ban the restriction on number of occupants in various housing situations.

The matter even got the attention of Elizabeth Stoddard who is a director in the East Michigan Fair Housing Center.  She explained that fair housing violations is “one of the largest issues we’re trying to address.”

While most people would find these actions surprising and unbelievable, many do not realize they are also against federal law.  Fair housing laws regulate how housing can be used and restricted – or NOT restricted.  Gender, age, familial status, disability, and many other classes are protected under this law.

It is important for condo associations to realize the risks and liability they face for their actions.  It is also important to stay on top of laws that impact their association and how to best protect the association from lawsuits, missteps and errors.

An actual violation of fair housing laws are typically uninsurable but the defense of such allegations can be.  Because not all insurance policies are written the same, it is important to check with an experienced broker what coverage your association may have.  If it is discovered that your condo association Director’s & Officer’s insurance policy does not provide any protection for this, it may be time to switch policies.

Contact us for a free consultation and policy review on your condo association’s insurance program.

$132,000 Pet Discrimination Judgement

The newest judgement in a string of condo associations to be sued over pet policies comes in Florida where the lawsuit Ajit Bhogaita v Appellant Altamonte Heights
Condominium Association, Inc. resulted in a verdict of $132,000. $5,000 was for direct damages and $127,000 was reimbursement of attorney fees, the ruling can be viewed here.

The unit owner was an Air Force veteran with PTSD who had been living in the condo complex since 2001, in 2008 he purchased his dog who was over the association’s 25 pound weight limit rule. No physician prescribed the dog as treatment but the PTSD improved with the dog’s presence.

When Bhogaita was asked to remove the dog in 2010 he produced two letters from his physician prescribing the dog, the association then came back with a series of invasive questions over the treatment he was receiving and the specifics of his need for a dog. A third letter from his physician was provided at this point with more specific justification of the therapeutic need for the pet.

At this point the association sent an even more invasive questionnaire asking questioning the PTSD diagnosis and requesting additional information on the residents disability, when a response was not received the association sent a third letter requesting the physician provide a sworn statement with the same details of Bhogaita’s disability.

Rather than continue to respond a complaint was filed with the United States Department of Housing and Urban Development (HUB) and the Florida Commission on Human Relations for violations of the Federal and Florida Fair Housing Acts. Both departments ruled for the condo owner and he was allowed to keep his large dog. In the following civil suit the jury decided not to award punitive damages, instead only award $5,000 plus attorneys fees.

The case highlights that lawyers should be engaged early during any of allegations of discrimination or an assertion that a person requires a special accommodation for a disability. My Condo Association Directors & Officers insurers offer pre-claim assistance to help the board manage costs. Once a claim is filed it quickly becomes very expensive and time consuming to defend. In the case cited the legal costs from defending two regulatory investigations and a civil suit would be catastrophic and likely exceeded the $132,000 judgement. Schedule a time to discuss insurance for condo board members to learn about cost effective ways to reduce your association’s cost and risk.