The COVID-19 pandemic and the 2021 collapse of Champlain Towers South in Surfside, Florida have placed greater scrutiny on the activities of condominium associations and their boards. One of the ramifications of this increased scrutiny has been an increase in the rates of all insurance policies, with a major impact on property, general liability and directors and officers (D&O) insurance policies. While current economic factors are having an impact on the rates, this article will examine three recent trends that have resulted in insurance carriers increasing their rates for condominium associations.
1. Increase in Claims
The main driving factor in the rate increase of D&O insurance has been the vast rate of claims filed over the last few years. These claims are a result of a growing number of lawsuits against associations and their boards. The number of lawsuits has increased to the level that there are now attorneys concentrating on specific types of lawsuits against condominium associations.
One of the forces driving the increase in lawsuits and resulting claims against associations’ D&O policies has been a side-effect of the COVID-19 pandemic. The prolonged lockdowns, newly established permanent remote or hybrid positions and the resulting economic conditions have caused owners to spend more time in and around their condominium and community over the past two years. This has resulted in a greater awareness of issues that bother owners as well as owners increasing their knowledge and understanding of the association process. Unfortunately, this has also led to an increase in complaints about the association and its board members. The increases as to property and general liability have stemmed from the fear of claims from aging buildings in light of the Champlain Towers collapse. All condominium associations should be evaluating not only reserve studies and funding but should also consider engineering studies as to the integrity of the structures.
While many owners are respectful of the association’s process and understand the laws and requirements the board members are required to abide by when running the corporate side of the association, there are owners who are unsatisfied with the responses they are given. Oftentimes, these owners will turn to their unofficial Facebook and Nextdoor pages for their community and share their complaints with other owners and the community at large. This has led to an increase in misinformation about actions boards have taken or supposedly can take. In addition to the misinformation, societal pressures impacting the daily lives of owners are causing more members of the community to take an active role in the cause they support, which they feel their association should also support. All of this combined has led, in some associations, to an increase in hostilities directed by owners towards boards and vice versa and is resulting in an increase in lawsuits against associations.
2. Greater Scrutiny of Association Maintenance and Financial Practices
Along with homeowners giving greater scrutiny to association activities, following the collapse of Champlain Towers South, mortgage lenders and insurance carriers are giving greater scrutiny to association maintenance and business practices.
In the year since the collapse, the buzzwords for those in and around the condominium association industry have been deferred maintenance, reserve study and engineering study. Fannie Mae and Freddie Mac, are now requiring buyers to seek greater information on the deferred maintenance, reserve studies and/or engineering studies of the association they are moving into before approving a loan. The questionnaires that are required for these types of loans could create additional liability for associations, as answering correctly could cause the loss of a sale of a unit or send a signal about future special assessments due to deferred maintenance. Owners and prospective purchasers are also asking more questions on these topics following the Surfside collapse, and it is not a leap to think other vendors, such as insurance carriers, will be far behind.
For many associations, their deferred maintenance issues come from a lack of financial health with many condominium associations not increasing their assessments (or increasing them high enough) for upwards of 10 years or more. The lack of periodic increases has led to an inability to fund maintenance projects and reserves as service and material prices continue to rise due to supply chain issues, labor shortages and inflation.
When an association conducts periodic engineering and reserve studies, as well as funding the future needs of the association demonstrated by the studies, the association has the potential of keeping claims down by ensuring the appropriate funds are available in reserve to address the needed repairs that, if left untouched, result in damages to units and claims filed against the association.
3. Fewer Available Policies
Following the Surfside collapse, many insurance carriers have been considering further limitations and exclusions to insurance policies. Industry wide, for both single-family and condominium associations, the number of insurers and available policy limits has been trending down in the last few years. The policies that remain are charged at a higher rate and with lower policy limits that may not truly be sufficient for the association’s needs. In order to combat this trend, associations need to be diligent in educating themselves and their owners to the trends in the insurance industry.
As more claims are filed against associations, the results are higher insurance rates that affect all owners because of the need to raise assessments to cover the cost of the rate increase. In addition, as available policy limits continue to shrink, the association is at greater risk of paying larger amounts out of pocket, which could have lasting, damaging effects on an association. These increased fees need to come from higher assessments and potentially reduced contributions to reserve accounts exasperating the financial situation. These facts can also lead to special assessments to cover the deficits and potentially pressure the current and future boards to increase the levels of deferred maintenance, which inevitably leads to more claims.
The increasing premiums of insurance policies means condominium association boards and managers should work closely with their insurance broker to determine the best policies available to the association. Association boards and their professional team need to shop for good policies and not price, as cheaper policies may result in less coverage. During the process, the board and manager should also consult with their legal counsel to ensure they are meeting all requirements of the law with their policy choices and have a sufficient amount of coverage in the event a claim is filed.
