Multi-Family Complexes: (Apartment and Condo)

ADJUSTING TODAY

Adjusters International Disaster Recovery Consulting

EDITOR’S NOTE

For millions around the world, apartment or condominium living brings a dimension of simplicity and freedom to their lives not typically found in traditional home ownership. Maintenance issues, and the desire and ability to enjoy flexible, mobile lifestyles—including having a dwelling in more than one location—continue to make apartment and condo living more popular than ever.

But while simplicity may be one of the benefits of this lifestyle, another aspect that must not be oversimplified is the insurance program that protects the parties and properties involved. In fact, given the myriad conditions, relationships and exposures that can exist with multi-family complexes, making sure the right insurance program is in place merits even more foresight Multi-Family Complexes: and planning than arranging a conventional homeowners policy. (Apartment and Condo) In this issue of Adjusting Today, insurance expert Paul O. Dudey An In-Depth Look at Insuring the takes an in‑depth look at this important but often inadequately Many Exposures and Losses addressed subject, including the insurance risks and needs that should be considered by those By Paul O. Dudey, CPCU who own, manage or reside in cooperative or rental apartments, There are three common types This article will describe several of or condominiums. He discusses the differences between the three, of apartment complexes: rental these important differences, the various risks to which they apartments, condominiums and and will discuss in considerable are exposed, and the coverages available to protect them. cooperative apartments. As to depth how the three types of risk and insurance matters, all apartment complexes should be In addition to Mr. Dudey’s article, veteran public adjuster Scott three have many characteristics insured, as well as what kinds of Davidson draws on his extensive in common, but there are also losses may be encountered. We background to offer a companion piece focusing more closely on one important individual differences will also offer some helpful advice of the most difficult types of losses in the precise details of ownership, on loss prevention or control. to detect and settle, but one to which many multi-family complexes owner’s and resident’s ownership are exposed—hail storm damage. interest and legal rights and Rental Apartments This is important and informative reading for anyone with an interest responsibilities, and the way they These are defined as multi-resident in these types of properties. are insured for property loss, legal buildings owned by an individual, —Sheila E. Salvatore, Editor liability, and other loss exposures. partnership or corporation, with

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all or most of the apartment units ownership by many years, and rented to others. The rental usually was and still is found principally involves a lease of the premises, in large urban areas such as spelling out the conditions, New York City and Chicago. privileges, and responsibilities of The individual residents of the the owner and the residents. “co-op” hold life tenancy to their apartments and own stock in the Condominiums corporation that owns the Condominiums are a relatively property, usually in the same new form of apartment ownership, proportion to the total value of having been created by the the project that their unit’s value passage of condominium laws or area bears in relationship to the in various states in the 1960s total value or area of the complex. and having gained prominence Management of the property is as a preferred type of apartment usually handled by a management ownership in the 1970s and 1980s. firm hired by the co-op owners or Two kinds of ownership are by an association elected by the involved—individual unit owners owners. As with condominiums, hold title to the space in which the individual owners may lease they live, and unit owners in out or sell their unit, but in some common—usually as compulsory cases only with approval of the members of a condominium association. association—own the common property, often including the entire Insurable Property Exposures shell of the apartments with the Each of these three types of individual unit owner owning apartments have many insurable only the interior of the unit up to property exposures, but with some the interior of the exterior “bare important differences that must be walls,” usually including the floor considered in arranging insurance. and ceiling as well. All call for building management to purchase insurance on the The details of ownership, resident occupied buildings as well privileges and responsibilities of as any other property such as a the unit owner and the association clubhouse, swimming pool, health of unit owners are described in facility, tennis court, golf course a document in most states called and related personal property, etc., the condominium declarations, or that may require insurance. in a companion document—the condominium bylaws. The unit Personal property owned owners have the right to rent out by residents is usually the or sell their units to someone else, responsibility of the residents although the association may in to insure, but there may also be some cases screen the rental or sale personal property owned by the and hold the right of first refusal apartment building owners—and if the prospective renter or buyer this should be included with the does not meet their standard of building insurance. Standard ownership. building coverages (such as provided by the Insurance Services Cooperative Apartment Office [ISO]) will include a This type of common ownership of description of personal property apartments predates condominium items that may be included

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Additional Coverages– coinsurance applying, but applies Coverage Extensions only when 80 percent or higher In addition to the basic buildings coinsurance or equivalent is used and personal property coverages, on the basic property insurance. most forms also provide a number of additional coverages and Covered Causes of Loss coverage extensions. Below is a Three levels of choice of covered summary of these as provided by causes of loss (formerly referred the ISO form: (Refer to the form to as “perils insured against”) are itself for various limitations and generally available, although there exclusions found in these sections.) are considerable variations in the details of coverage from one 4a) Debris removal, pays up to insurer to another. Care should 25 percent of the amount of the be taken to compare the list loss (not exceeding the limit of of covered and excluded or insurance for the combined unmentioned causes of loss when loss) plus $10,000 (can be comparing coverage choices. increased); 4b) Preservation of property Basic coverage includes only a removed to protect it from loss limited group of covered causes or threatened loss for up to of loss—fire, lightning, wind and 30 days; hail (excluded in some hurricane- 4c) Fire department services prone areas), explosion, damage by charges, up to $1,000 with no aircraft or vehicles, and riot or civil deductible; commotion, and usually vandalism 4d) Pollutant clean-up and or malicious damage, along with removal, up to $10,000 sprinkler leakage for buildings (can be increased); with automatic sprinklers, sinkhole as building at the usually lower 5a) Newly acquired or constructed collapse (but not mine subsidence), building insurance rate. Other property, for 30 days or until and volcanic action. Although the personal property not so listed policy expires if earlier, least expensive form, this form must be covered, either specifically $250,000 buildings, $100,000 should be avoided as there are or under blanket coverage with business personal property; too many other perils not covered the buildings, using the personal 5b) Personal effects and property here that can also produce severe property insurance rate. of others, up to $2,500; loss. Its most common use is as a 5c) Cost of research, valuable means for underwriters to provide Generally, insurance with at least papers and records, up to minimal coverage for substandard an 80 percent coinsurance clause $2,500 (can be increased); properties. (unless replaced by an agreed 5d) Property off premises (except value clause) is required, or if in or on a vehicle, in custody Broad Form coverage expands multiple buildings are involved, of insured’s salespeople, or the list of causes of loss to include blanket insurance for 90 percent at a fair or exhibition), up to falling objects, weight of snow, ice of current value is suggested. Also $10,000; or sleet, and water damage (but recommended—especially with 5e) Outdoor property, as listed, not flood or overflow of natural buildings more than one or two against limited listed causes of bodies of water, or sewer backup) years old—is replacement cost loss for no more than $1,000 and, as “additional coverages,” coverage, which covers the cost ($250 per tree, shrub, or plant) glass breakage and a limited form of replacing new for old, with per occurrence. of collapse. no deduction for depreciation as would be the case with actual cash Each of items 5a through 5e is Special Form coverage applies to value (ACV) coverage. additional insurance with no any risk of direct physical loss not

ADJUSTERSINTERNATIONAL.COM 3 ADJUSTING TODAY otherwise excluded or limited. specifically name individual 3) Flood While theoretically the broadest causes of loss, except for a list of Coverage is available only coverage available and the most “specified causes of loss.” through a separate federally expensive, this form can be a sponsored flood insurance trap for the unwary. There are a If you are considering use of the program or by a few specialty number of versions of this form Special Form, be sure to make a underwriters, mainly in the with substantial variation in the line-by-line comparison of the surplus lines markets. wording of the exclusions—some Special Form exclusions with the 4) Wind and Hail of them even taking away coverage coverage offered under the Broad As noted earlier in this article, in that would be provided under the Form. Excluded from all three a few hurricane-prone areas Broad Form. Covered Causes of Loss forms along the Atlantic and Gulf are each of the following which, coasts, underwriters have This is particularly true following to be covered, require separate imposed a mandatory wind and the addition of the “concurrent insurance: hail exclusion under the causation” language several property insurance and instead, years ago, which excludes loss by 1) Equipment Breakdown offer separate wind and hail any excluded cause “regardless Insurable under equipment coverage through a joint of any other cause or event that breakdown forms, which can underwriting pool. contributes concurrently or in any be covered separately or 5) Ordinance or Law sequence to the loss.” Interpretation included under the package (loss or increased cost due to of this language is still up in the policy as a separate item enforcement of any ordinance air, as in some cases it seems of coverage. or law involving repair or to work an undue hardship on 2) Earthquake construction) insureds. While all three Causes (as opposed to “volcanic action” This important topic is also of Loss forms have this language, which is covered) discussed later in this article. losses involving a named cause Insurable under separate 6) Motor Vehicles (other than and an exclusion seem more likely earthquake insurance. A brief vehicles not licensed for to be resolved in favor of coverage discussion of this important and highway use), Aircraft and for the insured than under the rather complex coverage is Marine Property Exposures Special Form, which does not included later in this article. These are also excluded and are the subject of separate forms of coverage. For motor vehicles, if a broad enough spread of risk exists (unlikely for most apartment risks) and the loss experience has been satisfactory, self-assumption of all but perhaps the most expensive vehicles or a high deductible overall can be considered. 7) Accounts Receivable and Records and Valuable Papers Only limited coverage (usually insufficient for the insured’s needs) is provided for these types of losses. Again, separate insurance is available here. 8) Crime Burglary, robbery and theft, as well as employee dishonesty

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require separate coverage, Deductibles with payment of frequent although limited coverage is Most insurers insist on a claims, irrespective of their sometimes offered. mandatory deductible clause size, so for an account that applying per occurrence to all tends to generate frequent Also excluded from Covered or most of the insured causes of small losses, rather than Causes of Loss forms, but loss. A $100 or $500 minimum attempt to collect on all of them generally not insurable, are deductible is common, but from the insurer, an insured loss by wear and tear, gradual higher optional deductibles at might be well-advised to select deterioration, rust, corrosion, latent progressively reduced premiums a higher deductible at a defect, insect or animal damage, are generally also available. In reduced premium and instead etc. The question is still open as to deciding what level of deductible absorb these small losses. what, if any, effect the “concurrent to choose, several factors should be C) Spread of risk—where there causation” exclusionary language considered: is a large enough spread of has on losses in these categories risk to give some credibility to when damage due to any of these A) Available premium savings in past loss experience and high produces other not-excluded dollars compared with the enough premium overall to damage. Previously, only the insured’s probable increased offer sufficient premium excluded damage, i.e., the rust participation in any future loss savings with a higher damage requiring repair, would payments. deductible, an intelligent not be covered—but resulting B) Past loss history—the choice of what deductible level damage to other property would frequency and severity of past to purchase can be made. If this be covered. In considering what losses as a measure of the analysis is accompanied by a coverage to purchase, comparison savings or increased cost with well-designed safety and loss of exclusions from form to form is various deductible levels. Keep control program (discussed most important. in mind here that underwriters later in this article) so that tend to become disenchanted frequency and severity of

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losses are reduced, the higher writing who should insure what deductible will very likely be and set up the insurance to fit. more beneficial. Where spread of risk is lacking, the same But beyond these two, there are opportunity for savings does a wide variety of condominium not exist, and choosing a declaration or bylaw provisions higher deductible becomes in this area, so in arranging the more of a gamble. association’s coverage, these must be analyzed and appropriate Special Condominium insurance arranged to reflect the Insurance Problems actual value of the property to be For condominiums, a further insured by the association. problem must be considered: And the individual unit owners How much of the building must should be alerted to these be insured by the condominium provisions as well so they can association and how much of arrange for proper coverage under each unit by the unit owner? their individual condominium unit Here it is necessary to look to the owner’s policies. condominium declarations and bylaws to see who is to insure Also important is the unit owner what. Under the “bare walls” assessment feature of most provision referred to earlier, the condominium declarations, which unit owner covers the interior of can mandate that the unit owners the unit up to the bare floor, ceiling make up for deficiency of income (or roof) and exterior walls of the to the association, especially unit and the association insures the following an uninsured or only remainder of the building. Interior partially insured loss. Individual paint, wallpaper, floor coverings, unit owners usually have a small or other interior decor is the unit amount of assessment liability owner’s responsibility, and should coverage in their unit owner’s be covered under the unit owner’s policy ($5,000 or $10,000 is condominium policy along with common) and can purchase higher the unit owner’s personal property. insurance limits if desired.

The “bare walls” concept was A further problem with most widely used during the condominiums is how to proceed early days of condominium if, after a major loss, it is deemed development, but now has largely for whatever reason impossible or been superseded by a provision undesirable to rebuild, or a major calling for the association to insure number of unit owners prefer all property originally included to abandon the property and in the unit, but the unit owner to take their share of the insurance insure additions made by the unit proceeds as cash. The condo owner. This can present problems declarations will usually provide when a unit is sold to a new owner for this, stating what proportion after a previous owner has made of the unit owners (usually a substantial improvements and substantial majority—such as additions. Where this situation 75 percent or 80 percent) must applies, the new owner should agree to the abandonment. The clarify with the association in same often applies to cooperatives.

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Special Cooperative and if the assessment is due to Three coverages are available: Rental Insurance Problems inadequacy of a covered cause Cooperative apartments and rental of loss. 1) Contingent Liability for apartments have similar insurance Operation of Building Laws needs (not nearly as complex as Ordinance or Law Exposure coverage, which covers the loss condominiums) and with only a Municipal building and zoning of the undamaged part of a few differences. In both cases, the ordinances, along with county, damaged building that must be residents insure only their own state, and federal regulations, demolished due to the personal property and personal have proliferated in recent years, requirement of a building liability, and the apartment owners creating a potentially severe ordinance or law (the basic insure the buildings and any exposure for apartment complexes property coverage applies only personal property belonging to the covered only by basic property to the portion damaged by the apartment owners—furnishings in insurance. covered cause of loss); a clubhouse, exercise facility, etc. If there have been any significant 2) Demolition insurance, covering The major problem in both cases changes in building or zoning laws the cost of demolition of is in identifying the respective since the units were built undamaged portions of such a responsibilities of landlord and that would: building and the cost of site resident in such areas as damage clearance; and to the premises, repair and a) require demolition before maintenance, and cancellation or reconstruction; or 3) Increased Cost of Construction continuation of the lease after loss. b) substantially increase insurance, covering the reconstruction cost or, as was additional cost of rebuilding to Co-op owners also usually discovered frequently in the comply with current law. An have the same potential as aftermath of Hurricane example of the impact that condominium unit owners for Andrew in Florida, if the application of building or individual assessment to make construction was not up to zoning laws can have is a claim up for deficient income by the code at the time it was built, for a condominium loss arising association. As with unit owners, then ordinance or law out of Hurricane Andrew. this can be covered by insurance coverage should be added. Fortunately the condominium

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association had purchased ordinance or law coverage as a part of their property insurance program.

The insurance company adjuster’s initial estimate of $825,000 quickly was revised upward to $10.5 million. Moreover, there was another $6.5 million for increased cost of construction due to ordinance or law requirements. Items covered under the ordinance or law provisions included the cost of such things as:

• Fire stops between units, originally designed with a suspended ceiling system to serve as an open return air plenum; • Exterior curtain wall not secured up to current code; • Black iron used instead of more fire-resistive materials; • Removal of asbestos insulation in the suspended ceiling cavity; • High-wind-load windows able to sustain the impact of a two- and with most building or zoning officials in charge of enforcing by-four board moving at laws, existing properties are the building or zoning laws 35 mph and only break like “grandfathered” when the law to determine what changes in auto windshield safety glass; changes and property owners construction methods or materials • Balconies had 8-inch spacing need not comply until such time would be required following a between railing balusters as new building permits are loss and what degree of damage instead of the 6-inch maximum required, when major changes (frequently 50 percent or spacing required by code; in construction are planned, or 75 percent) would call for • Fire sprinkler system with when the property is significantly demolition of existing property in complete plumbing and head damaged as by fire, wind, order to rebuild. Also, the question installation to each town home explosion, flood, earthquake or of whether the property would be and common areas was the like. rebuilt—on the same or perhaps required; on another site—should be • Elevators had to be brought up There are exceptions—where addressed and taken into account to current code; and changes require immediate in arranging the insurance. • Emergency generator had to compliance, but these are rare be moved from first to second and are usually accompanied by When answers to these questions floor to avoid exposure to flood sufficient publicity to alert owners have been found, the risk manager damage. to the need to comply. can then proceed to arrange adequate ordinance or law How do you know whether Persons charged with the risk coverage. (For an in-depth study ordinance or law coverage is management function should of this coverage, refer to Adjusting needed? In most jurisdictions consult with the government Today Ordinance or Law edition.)

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Lease/Declaration Provisions allow immediate termination of leases will generally contain an Most important in arranging rent if the premises clearly cannot insurance clause spelling out insurance for apartments or be restored to occupancy within who—condominium unit owner condominiums is a study of the the stated period of time. The or unit owners in common (or pertinent provisions of the leases effect of the cancellation-by-loss the association); co-op resident or condominium declarations provision (assume a 60-day clause) or residents in common (or being used. may be to cost the resident two association); or resident or months rent (recoverable under the owners—will carry what kinds of Lease Cancellation Clause For resident’s policy Item D, additional insurance and generally for what rental apartments other than living expense coverage) after minimum amounts. cooperatives, a major provision which time, the resident having is the lease cancellation clause. It moved elsewhere, the lease can These provisions can vary widely will tell under what circumstances be cancelled. If the owners intend and should be clarified for anyone the lease may or must be cancelled to repair or rebuild but cannot do charged with responsibility for by the owner or the resident. so within the 60 days, they can arranging the insurance. Also, their Particularly important is the negotiate with the present resident sufficiency or lack thereof should provision relating to inability to to resume occupancy at the same be analyzed and recommendations occupy the premises following or perhaps higher rent, or can find made to correct any deficiencies damage by fire, wind or other new residents. in amounts or limits of coverage loss. These provisions vary widely or omissions of any important from lease to lease, and with each For the landlord, the loss of rents coverages. It is relatively simple variation a different approach to can be covered by rental value to bring the actual insurance up to insurance needs may be required. insurance, a form of business the requirements spelled out in the income coverage which can be condo declarations or lease. But In one typical provision, rent added to the property or package where the stated requirements are continues for a stated time (60 insurance program. If the property inadequate, making changes can days is common) after which, if the is not rebuilt, the rental value be a major undertaking. Also, the premises have not been repaired coverage would still apply, purchase of insurance not required sufficiently for reoccupancy, covering the rental loss for the time by the declarations or lease can the lease may be cancelled at it would have taken to rebuild. give rise to criticism by some the option of the resident or the condominium or co-op occupants landlord, or in some cases by either Another provision sometimes and possibly even suit against the one. Alternatively, the lease may used in leases is a rental abatement managers, officers or board for clause which, instead of allowing allegedly wasting assets intended cancellation of the lease, permits for other purposes. abatement of the rent until the premises are again habitable. This Conflict Over Coverage has the advantage for the resident Interpretations of preventing the landlord’s Insurance language is general in cancellation of a lease favorable nature and often quite vague as to the resident and gives a further to its intended application to a incentive (along with a similar particular set of circumstances. It requirement of the rental value should be kept in mind that in the insurance) to the landlord to absence of clear evidence of the proceed quickly on repairs in order intent of the parties in negotiation to begin collecting rent again as of the details of coverage, an soon as possible. ambiguity may be found to exist. In most cases involving insurance Insurance Provisions on apartments, the insurance Both the condominium policies are drafted by the insurers declarations and the apartment or their representatives and

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simply offered to the insured drawn and sometimes even closer to other major with little room for modification. appears to allow the owner to properties, or the more This being so, the general rule is pocket the insurance money while children present, the greater that the benefit of any reasonable requiring the resident to pay for the liability exposure. In interpretation of the intent of the the repairs. today’s climate of mega-million coverage lies with the insured. dollar liability judgments, high In drawing up new leases or liability insurance limits are Repair and Maintenance condo declarations or, given the clearly needed. The problem is Provisions opportunity, modifying existing made worse by the fact that Apartment leases will usually have ones, care should be taken once the liability limits are a repair and maintenance provision especially with the insurance and exhausted, claim can still be which, depending on the exact repair and maintenance clauses. made against the remaining wording, can prove troublesome assets. for the resident. While intended Liability Exposures to spell out who—landlord or Significant liability exposures also A common practice is the resident—is responsible for routine present a number of problems that purchase of several layers of repairs and maintenance, painting, apartment managers and residents liability insurance; a primary minor plumbing repairs, etc., the must address: layer above whatever language is often so broad that deductible seems feasible, a it also appears to transfer to the 1) How much is enough liability $1 million to $5 million resident the responsibility for insurance? This is one of the umbrella layer above that— repairs following a major loss. most difficult questions to perhaps broader than the This is especially possible if the answer. The larger the general liability coverage— insurance clause isn’t clearly apartment complex and the and, if affordable, one or more

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layers of excess coverage of apartment owners. Note that both the professional persons $1 million or more over that. motor vehicles not used off individually and the apartment premises and not licensed for owners. Generally included in the highway use (lawn mowers, umbrella layers are such added golf carts, etc.) are exempt, as 2c) Pollution liability as a major coverages as automobile their use is generally covered exposure is relatively new, liability and professional under the CGL insurance. being in large part a creature liability. Some umbrella created by government policies provide almost the Substantial limits of pollution laws. This is a equivalent of “all risk” liability automobile liability should complex subject, too involved insurance, being excess over be purchased as well. If for adequate treatment here. It any primary liability insurance umbrella coverage is sufficient to say here that if with a “drop-down” coverage is used and includes the auto any pollution exposure is even over a large uninsured liability, the umbrella remotely suspected, call in deductible for liability underwriters may well set experts in pollution insurance, exposures not covered by mandatory minimum primary pollution control and legal primary insurance. auto liability limits which must interpretations. be carried to avoid a gap 2) Coverage beyond the in coverage. 2d) Liquor liability—If liquor is commercial general liability served, as at apartment (CGL) policy will often also be 2b) Professional liability exposures sponsored parties, picnics, or needed. Among the liability may be encountered if anyone the like, separate liquor liability exposures likely to be found associated with the apartments insurance should be provided. by apartment owners but is engaged in professional excluded from the CGL are: activities—law, architecture, 2e) Directors and officers liability a) ownership or use of etc.—on behalf of the owners. —Condominium and automobiles; Separate professional liability cooperative apartment b) professional liability; insurance is needed for this directors and officers can be c) pollution liability; exposure, preferably naming sued by residents, unit owners d) liquor liability; e) directors and officers liability insurance; f) workers compensation and employers liability.

2a) If motor vehicles are owned, leased, or rented by the apartment owners, or used by the owners or their employees or by residents or unit owners on apartment business, auto liability insurance is needed.

Even if there are no owned or leased vehicles, non-ownership coverage should be obtained covering the apartment owner’s liability when employees, residents or unit owners, or others operate motor vehicles on behalf of the

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or outsiders for various alleged A possible pitfall here is the Coverage for this exposure is offenses. Many of these use of contract labor somewhat expensive; an offenses are outside the CGL rather than employees. In alternative solution could be a coverage but can be covered by certain circumstances, they reciprocal waiver of separate directors and officers may fall within the meaning subrogation agreement liability insurance. Also, the of “employee” to bring the between owners and residents, contract with the directors and employee exclusion of the CGL so the resident or unit owner’s officers may allow the owners into effect. Unless at least insurer, having paid their or association to be joined in employers liability insurance is insured for the loss, cannot the suit or may require them to carried, an uninsured sue (“subrogate” against) the provide this insurance on catastrophic loss could result. apartment owners for their behalf of the directors or negligence or vice versa. officers. 3) Care, custody, and control—A major problem for residents 4) Among other CGL exclusions 2f) Workers compensation and or unit owners, probably in are expected or intended injury employers liability—If the most cases less so for owners and war risks, neither of which apartment complex has and landlords, is the care, is generally insurable (with employees, workers custody and control exclusion some notable exceptions: compensation insurance may of the CGL and the residents’ marine war risks may be be required, depending on or unit owners’ policies. covered under some marine the number of employees and This excludes coverage for forms and personal injury the workers compensation damage to property in the coverage of the CGL will pick laws of the state where the care, custody or control of the up some liability exposures apartments are located. Even insured (except loss involving such as libel, slander, malicious when workers compensation fire, smoke or explosion). If the prosecution, etc.) that fall insurance is not required, apartment owners allow outside of bodily injury or employers liability insurance residents to use a common property damage liability and may be in order as employee area for storage, this exclusion might be construed as injury is excluded from the could also be a problem for the “expected or intended.” CGL. apartment owners.

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Criminal Exposures large brokerage houses and even the appropriate places and Two major crime exposures face many smaller agencies offer these numbers to receive fire apartment owners: services, often at modest cost or insurance rate credit. Residents even free to their clients. should be instructed in their 1) Burglary, robbery, or theft by proper use. Standpipe and hose outsiders; and Consider such features as: strategically placed may also 2) Dishonesty and embezzlement be useful and may also by officers, board members a) Adequate exits designed for produce insurance premium and employees. simple, quick egress but savings. secure against unauthorized As noted earlier in this article, entry. e) Fire-resistive construction some crime coverage as to (masonry walls and concrete outsiders is sometimes offered b) Smoke and carbon monoxide or, less desirable, metal roof) under the basic property detectors in appropriate though more costly initially, insurance, but dishonesty and locations—in hallways, will pay for itself in premium embezzlement by insiders requires stairwells, garage areas and savings over the years. separate coverage. the apartments themselves. Lacking that, an older frame or masonry wood-joist roof Loss Control and c) Automatic sprinklers— structure can be made safer Safety Measures Installing automatic sprinklers by installing fire stops in the A major opportunity for dollar throughout, including attic between the units to savings for apartment complexes, in the apartments, may be prevent lateral spread of fire, as well as optimizing residents’ impractical, but their use may which can quickly involve the safety, lies in attention to loss be desirable in hallways, entire building in a fire starting control and safety measures—the stairwells, meeting rooms and in one of the units. larger the premium outlay, the lounges. greater the chance for premium f) Swimming pools can be a savings; and the greater the d) UL-labeled fire extinguishers source of multiple problems. number of residents, the more suitable for fighting all types They should be adequately important the adequate safety of fires should be installed in fenced with gates that lock to precautions.

A great opportunity for premium savings exists in new apartment construction which, if ignored initially, may be very costly to correct later. Even if not incorporated in the original construction, savings may still be realized later for many of these items.

Take advantage of the advice offered by fire protection engineers and safety personnel to obtain minimum fire insurance rates commensurate with building construction considerations, and the lowest possible liability and workers compensation costs. Most

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prevent easy access for toddlers. Pool rules should be prominently posted and enforced. The rules should be reasonable to discourage users from flouting or ignoring them, but should make clear that certain practices are hazardous and at user’s risk. Lifeguards may be called for and their hours clearly posted. Adequate pool maintenance should be provided to avoid exposure to possible disease or contamination. g) As liability (and workers compensation, though probably not a significant factor for this coverage for most apartments) insurance premiums get larger, competent safety engineer can will have non-residential opportunities for premium recommend. exposures not considered in savings increase as well. But detail above. Among them are unlike property insurance If security personnel are used, parking garages, sometimes for which is schedule-rated, these be sure that they are properly residents’ and visitors’ use only, coverages are experience-rated, trained and supervised. Be wary sometimes public garages; retail with debits or credits offered of overselling the value of such stores where housekeeping can from the “manual” rates for services to the residents. There are present problems; restaurants with each business category based numerous cases of assault, rape or cooking and exhaust vent hazards; on the losses paid measured robbery of residents by outsiders and dry cleaners with potentially against premiums earned over where the residents were able to hazardous or flammable materials the previous rating period recover from the apartment in use. Space does not permit a (usually either three or five owners for failure to maintain detailed examination of these years prior to the last year). adequate security promised by the exposures here, but they should be So the best way to control this owners. Nor are condo or co-op taken into account and analyzed cost is through vigorous safety apartment management immune for their possible impact on the practices. from such exposures. It has long apartment ownership, whenever been established in courts that unit encountered. Attend promptly to such things owners or co-op residents, even as adequate lighting both inside though co-owners of the apartment Common Apartment in the hallways and stairwells and complex, have the right to sue Loss Problems outside around parking lots and the owners in common and their Among the many problems entrances; repair of deteriorated association or management for in loss adjustment commonly carpets, sidewalks, and driveways; bodily injury or property damage encountered in apartment losses installation of anti-slip materials due to their alleged negligence. are the following: on stairs, in lobbies, hallways, and showers or bathtubs; effective Additional Occupancies a) Insufficient limits of property elevator, fire protection equipment Sometimes Encountered insurance to: and alarm maintenance; and Many apartment complexes, 1) cover the amount of the the many other things that a especially in central city locations, loss; or

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2) satisfy the coinsurance insufficient premium credit or workers compensation requirement of the too low when attractive credit may not be required. policy. A common for a higher deductible is failing among insurance available and the insured’s loss j) Failure to safeguard accounts buyers is underestimating history is excellent. receivables and other valuable the current value of their records and documents and property, especially its f) Failure to carry, or carrying to provide adequate insurance cost to replace new for an inadequate amount of, on them. Premium savings are old, as well as the amount flood or earthquake insurance available when adequate safe of loss that might be where the flood or earthquake record storage is provided. sustained. Often the exposure exists even remotely. amount of insurance is tied k) Failure to guard against to the current amount of g) Failure to provide time and provide insurance on the mortgage, which element coverage such as crime exposures—both usually does not include business income, rental value external and internal—from any owner’s equity or and extra-expense insurance dishonesty of employees. increase in value through to protect the increased cost inflation in construction and loss of income following a Just as the nature of multi-family costs, leaving the insured major property loss. complexes has evolved to meet vulnerable to coinsurance contemporary lifestyles and living penalty on even a moderate h) Failure to insure against off- needs, so must the insurance loss and woeful premises utilities interruption, program that protects these underinsurance on a a secondary business income properties respond to the specific major loss. loss exposure not covered by exposures that owners, managers the time element coverages in and occupants of these dwellings b) Failure to replace the “g” above but potentially face. Designing, implementing coinsurance clause with severe, especially in hurricane, and maintaining such a program an agreed value clause or, tornado, forest or brush-fire, is an effort to be taken every bit as having adopted the agreed earthquake or flood-prone seriously as that which went into value clause, not keeping it up areas, even when no direct creating the complex in the first to date as required annually, damage to the insured’s own place. It is essential to guarding allowing coinsurance again property is involved. the property’s value—and to to apply. optimizing and preserving the i) Inadequate or nonexistent safety, security and overall quality c) Not providing ordinance coverage against a variety of life that the facility offers. or law coverage or, if included, of liability exposures, not carrying the appropriate especially where the exposure kinds and amount of insurance is remote or not readily to provide full recovery in recognized. Among these are compliance with current architects or engineers building or zoning ordinances professional liability, motor or laws. vehicle non-ownership or hired car coverage when there d) On multiple buildings are no owned vehicles, liquor or locations, using a schedule liability, insurance for loss of individual amounts per or damage to property in building rather than blanket the care, custody, or control coverage overall. of the insured, directors and Paul O. Dudey, CPCU officers liability coverage, e) Poor choice of deductibles, and employers liability for either too high with employee injury even where

ADJUSTERSINTERNATIONAL.COM 1 5 ADJUSTING TODAY Hail Damage Can Create Difficult Losses One potentially serious, yet difficult-to-detect, type of loss that can strike an apartment or condo complex is hail storm damage. Scott Davidson, a public adjuster affiliated with the Texas and Colorado offices of Adjusters International— whose extensive background in dealing with claims of this type includes working with major property management firms and REITS (real estate investment trusts) across the country—has found that on-site managers often don’t even realize that their property has suffered hail damage.

As clues to that possibility he advises that following a hail storm, a determination be made as to whether trees or flowers on the property have been damaged, if cars parked in the open were dented or building windows have been broken. Equally important, the many portions of the building not commonly considered subject to damage— An example of hail strike assessment. such as window and door screens, siding, and air conditioners—may also have suffered hail damage and Mr. Davidson also supplied the following hail loss example, should be closely inspected. Perhaps the most costly and from his experience with such claims: least recognized is hail damage to roofs. A condominium association faced a compounded problem Hail damage to asphalt shingle roofs is often not when the foam roof of the condominium was extensively immediately recognized. It may take up to two or three years damaged by hail. Under the foam roof were popcorn after one or more hail storms for the roof to begin to leak. asbestos ceilings in each unit. While the roof was being On a flat roof, unless the hail is quite large (baseball size or removed, the asbestos shook loose from the ceilings more), it is also hard to detect hail damage until much later. into each of the units. Air monitoring equipment was There are three types of roofs commonly found in multi- immediately employed and the family housing, each with its own hail damage problems. potential asbestos hazard was A built-up tar and gravel roof requires that the gravel be avoided. The insurer wanted brushed back and a core sample be removed and sent to the insured to simply plug the a building forensic lab for analysis to discover possible holes in the roof; but to repair hail damage. It is easier to see hail damage on a modified this kind of damage, the roof bitumen roof, as the hail usually leaves a star shape or circles must be scarified, the process around the point of impact. Rubber roofs constructed of of taking off the first inch or Ethylene Propylene Diene Monomer—or EPDM roofs as two of foam and reapplying it. they are commonly called—are unique in the way hail affects Coverage for this damage was them. Although the rubber or membrane may not have been found under the debris removal Contributing: cut, the styrofoam insulation board under the rubber may section of the policy. Scott Davidson have been damaged and ponding may result. Adjusters International

CORPORATE OFFICE PUBLISHER 126 Business Park Drive Ronald A. Cuccaro, SPPA Utica, New York 13502 ADJUSTING TODAY is published as a public EDITOR 1.800.382.2468 service by Adjusters International, Inc. It is provided Sheila E. Salvatore Outside U.S. (315) 797.3035 for general information and is not intended to replace FAX: (315) 272.2054 WEB ADDRESSES professional insurance, legal and/or financial advice www.adjustersinternational.com [email protected] for specific cases. www.adjustingtoday.com AT99-1R 3015