Unintended Consequences: What the Surfside Condo Collapse Means to Agents and Underwriters, Plus Some Lessons Learned
by Bill Wilson, CPCU, ARM, AIM, AAM
Last week, I blogged about some of the initial commercial property insurance issues involving the Surfside, Florida condo collapse. Below are a few more observations regarding D&O, E&O, and homeowners insurance claim issues.
However, an email I received from a Tennessee agent last Friday represents a development I think is going to dramatically impact agents and underwriters on a daily basis. So, I’d like to address that first.
The agent for an HoA received a request/demand from a condo unit owner’s lender for information on the association’s insurance program. The lender wanted detailed information on policy coverages such as the property deductible amount, Ordinance Or Law coverage, how the replacement cost limit was calculated, separation of insureds/severability of interest clause, proof and details of liability coverage, etc.
The unit owner’s lender also wanted to be added to the policy as an additional insured and information regarding the loan number, unit owner, etc. added to the master policy. In particular, the lender wanted a copy of the replacement cost calculation on the building(s).
The questions are, can or should the agent or underwriter provide this information? Is it legal to ask for it? Is it legal to provide it? To the best of my knowledge, the only law specifically addressing any of these issues in the state in question is a law prohibiting the lender from requiring an insurance amount in excess of the replacement cost of the property. Many states have such laws and the Big “I” Virtual University includes a chart of these states (access to the chart may be restricted).
In addition, Florida just recently enacted a law that governs providing replacement cost calculations to lenders:
626.9551 Favored agent or insurer; coercion of debtors.
(1) No person may:
(e) Require an insurance agent or agency to directly or indirectly provide the replacement cost estimator or other underwriting information of an insurer underwriting an insurance policy covering real property, as a condition precedent or condition subsequent to the lending of money or extension of credit to be secured by real property, when such information is the proprietary business information of an insurer, as defined in s. 624.4212(1), nor many an agent or agency provide this information.
There may be other states with laws like this or laws addressing other aspects of lender requests. However, in this case, most of the information requested is not governed by any laws or regulations. The question is, with the insured’s permission of course, how much information is the agency or insurer willing and able to provide to a lender interested in gauging the risk in issuing a loan and in protecting that loan?
I know agents who write thousands of condo policies, some writing tens of thousands of condo units. Imagine if every lender of every unit owner wanted detailed information about the coverages, limits, values, etc. on an HoA’s entire insurance package. What agency is staffed to provide this level of service to a third party? In addition, consider the fact that lenders often sell huge blocks of loans to other lenders…will this process be repeated every time a unit owner’s loan is sold?
Most underwriters will not want to add a unit owner’s lender to any policy as an additional insured, if only due to the questionable issue of insurable interest. For property insurance, ISO has Additional Interest endorsements that may provide notice of cancellation, but even without extending insured status, are carriers willing to incur this additional processing expense, not to mention the potential complications at claim time?
So, whether an agency or insurer elects to provide this information or not is, for the most part, a business decision. It’s likely that most agency E&O insurers would advise against this practice. If an agency chooses to provide, again with the association’s permission, detailed policy information to unit owner lenders, they would be well advised to up their E&O limits tenfold at least.
If you are experiencing an uptick in such requests from condo unit owner lenders, feel free to share your experiences in the Comments section below.
Oher issues…
D&O Coverage. Assuming the condo association has Directors & Officers insurance, according to D&O expert Dick Clarke, CPCU, CIC, RPLU, “Most HoA D&O policies contain a blatant Bi/PD exclusion, along with several other eliminations of coverage for construction defects, violation of any construction-related inspection/maintenance situations, etc. Most of these policies are REALLY restrictive and, with the passage of time (several renewals), more and more exclusions are added.”
Lawsuits have reportedly already been filed against the officers and directors of the Surfside HoA. So, IF there is an exclusion for BI and PD that’s applicable to this claim, these individuals may find themselves with no indemnification or defense. Some homeowners and personal umbrella policies may provide coverage, but given the likely amounts of the lawsuits, the greatest value of such coverage could be in funding a legal defense.
E&O Coverage. There may be many insurance agents involved in the Surfside collapse. Do they have an Errors & Omissions exposure? Almost certainly they have an exposure that may require legal defense, but the issue is whether they have liability that requires indemnification of the insured for uncovered losses. The first question is, what exactly were the agents’ errors or omissions? How were they allegedly negligent? Did they hold themselves out to be condo experts? Did they make promises (e.g., “full coverage”) that they allegedly didn’t fulfill?
What is an agent’s legal duty to advise with regard to coverage and limits in Florida? In most states, the agent’s duty is largely limited to complying with requests, not advising beyond that, but there are exceptions based on “special relationships” or assertions of particular expertise. If a duty exists, did they fail to recommend coverages or higher limits available to them in what is one of the most restrictive marketplaces in the country? Did they fail to explore the E&S marketplace for DIC coverage for collapse, if such markets even existed? If the markets did exist, would the available DIC forms have covered this particular collapse based on cause(s) yet to be determined?
Association Property Policy Exclusions. In my earlier article, I discussed the possibility that an “ISO-like” property form might not provide collapse coverage if the cause of the collapse was not a specified peril for collapse coverage. In an online discussion, someone raised the question of whether there might also be grounds for denial based on the failure of the association to act promptly to repair allegedly known structural problems.
Absent demonstrable fraud, concealment or misrepresentation, negligence in addressing corrective maintenance or construction issues is unlikely to be a basis for denial, though an “acts or decisions” exclusion similar to that in the ISO CP 10 30 could be material.
Another issue is the adequacy of coverage for costs that are limited in policies. Most property forms provide some measure of coverage for debris removal and Ordinance Or Law expenses. It’s quite possible that the cost of debris removal in the Surfside collapse will be vastly more than the likely limited additional amount provided by the property policy. (Needless to say, without examining the policy in question, this and other coverage issues involve conjecture not facts.)
Likewise, the cost to tear down the ‘undamaged’ portion of the building and rebuild in compliance with codes and ordinances would likely exceed any built-in coverage for this expense. A further complication is how such coverage reads in the policy if codes or ordinances are updated and more restrictive in the time between loss and reconstruction (if there is reconstruction).
For years, insurance experts such as Jim Mahurin, CPCU, ARM have strongly asserted, based on their consulting and expert witness experience, that debris removal and Ordinance Or Law policy limits are often grossly inadequate. Perhaps the Surfside collapse will result in a lesson learned in this area.
HO-6 Condo Unit Owner Policies. Most condo homeowners forms contain the same limitations as commercial property forms with regard to collapse coverage. In addition, while it’s not a primary focus of the Surfside tragedy, condo unit owners are well advised to make sure they maximize their coverage for association loss assessments. This is particularly important where a unit owner’s potential liability for such assessments is joint and several.
Most HO-6 condo policies include separate loss assessment Additional Coverages for both property and liability assessments. However, these amounts are usually very low, in the range of perhaps $1,500. Condo unit owners should consider purchasing the maximum possible loss assessment coverage. Most insurers can provide $50,000 or more and the coverage is usually relatively inexpensive.
Condo unit owners that serve as directors and officers should question the coverage and limits of association D&O policies. They should also do the same with regard to coverage under their own homeowners and, especially, umbrella policies.
General Observations and Suggestions. My son bought a condo in a high rise building several years ago. From a market value standpoint, it has proved to be a very lucrative purchase given the development of the area surrounding the building. However, my first recommendation to him was…don’t buy a condo. It’s a personal preference dating back to a bad experience when my first home was a condo, but it’s also based on decades of observations of insurance issues with condos.
I believe any time you enter into collective ownership of property with dozens or hundreds of individuals you don’t know, you can expect problems and conflicts. Association “leadership” is usually populated by individuals who know little or nothing about risk management and insurance. My son elected to buy the condo anyway, though he has followed my advice to not serve in any capacity as a director or officer, but to attend meetings and ask questions dealing with insurance and other issues.
If you are considering buying a condo, I strongly recommend that you place the insurance through an experienced and highly qualified insurance agent with expertise in condo insurance. When my son bought his insurance, such an agent was kind enough to review both the condo association bylaws and the master policy and make recommendations for his insurance program based on those documents. That kind of advice is priceless.
In addition, I would also consider consulting with an attorney with regard to means to limit your liability, especially where unit owners have joint and several liability. That might mean forming an LLC for the purchase in an attempt to expose only the LLC’s limited assets to claims. The “corporate veil” likely won’t insulate you from direct liability for your personal negligence, but it might for other liabilities like loss assessments and other debts or financial obligations. I’m not an attorney or legal expert, so I offer this suggestion only as a legal layman. Many residential properties today are purchased under trust or LLC arrangements. Again, if you do this, be sure the agent you select is knowledgeable about insuring trusts or LLCs and what are the proper forms to use.
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Bill Wilson, CPCU, ARM, AIM, AAM is the former Assoc. VP of Education and Research for the IIABA National. Since retiring from the Big “I” in 2016, he has published six books and blogs regularly from his web site at www.InsuranceCommentary.com. In his spare time, he plays lead guitar with his band The Spyders.
Independent Insurance Agents of Virginia