Be Prepared - You Can't Avoid Disasters
By: Nena Groskind
“The worst mistake a condominium association can make in dealing with a disaster is failing to plan for one.” That advice, worth heeding from any source, is particularly noteworthy coming as it does from Houston attorney Marc Markel. His Houston-based firm, Roberts Markel Weinberg Butler Hailey, represents more than 1,000 condo associations in the Houston area, most of which were affected, some of them disastrously, by Hurricane Harvey, a category 5 storm that struck the city in September, causing billions of dollars in damage, from which the city and its residents are still recovering.
The increasing frequency of intense weather events like Harvey (and the two hurricanes that followed swiftly on its heels) should have convinced anyone who still needs convincing that disasters don’t just happen to someone else. They can hit anyone, anytime, anywhere – hence Markel’s emphasis on the importance of disaster planning for condominium associations, and his awareness that too many condo boards ignore the advice.
“It is human nature not to plan in advance,” he notes, adding, “There were a lot of things we have advised [our condominium association clients] to do that were on their to-do lists [before Harvey] but hadn’t yet been done.”
Essential Building Blocks
A disaster plan has many components – building blocks that form a comprehensive strategy for dealing with a disaster and recovering from it. The most important of those building blocks is insurance. You want to make sure the association’s insurance will cover the cost of repairing or replacing buildings and building components that are damaged or destroyed. And the time to ask those critical questions is long before a disaster has struck or is expected. “When they know tropical storms are forming,” Gregory Pierce, vice president and director of business development for NorthStar Insurance Services, Inc., cautions, “many insurance carriers will put a binding moratorium on new coverage.” So, don’t expect to acquire insurance or expand existing coverage when you know a hurricane is heading your way.
When reviewing the association’s master policy, Pierce suggests, coverage limits are key. “Having the right coverage isn’t helpful if you don’t have enough of it to cover your damages.” Construction costs increase over time; you want to adjust your estimated replacement costs to reflect that trend.
Having the right kind of coverage is also critical, and this is an area in which boards often err, rejecting insurance they should have because they think it is unnecessary or too expensive. Flood insurance is a prime example, highlighted by the recent devastating flooding in Houston, Florida and other hurricane battered locales.
Flood Insurance Basics
The first thing to know about flood insurance, Pierce says, is that it is almost always excluded from standard property insurance policies; the second point is that the coverage is required for some property owners, but not all. Condo associations located in designated flood risk areas are required to have flood insurance; without it, lenders won’t approve mortgages to finance homes in those communities. But the coverage isn’t required for condo associations not located in flood zones (unless their documents require it) and most don’t have it.
According to some estimates, between 70 percent and 80 percent of the damage from Hurricane Harvey in Houston – somewhere between $18 and $27 billion – wasn’t covered by insurance of any kind. Associations without flood coverage “have ended up self-insuring for multi-million dollar losses,” Pierce notes.
Stephen Marcus, a partner in Marcus, Errico, Emmer & Brooks, emphasizes that risk when clients tell him they are not buying the coverage or have decided to drop it because of the cost. “You have to consider how much uninsured flood damage your community can sustain,” he advises. The comparison they should make: $50,000 or more for a flood policy, vs. $500,000 (or much more) for an uninsured claim.
The Federal Emergency Management Association (FEMA) provides some disaster recovery assistance, Marcus notes, but it is limited (to a maximum of about $33,000 for households). It also comes in the form of a loan, which has to be repaid with interest, Marcus points out, and condominium associations aren’t eligible for the assistance; only individual homeowners can qualify for funds to repair the damage to their residences. This underscores the need for individuals and associations to obtain flood coverage, he says, even if it isn’t required, and even if their property isn’t in a designated flood hazard area.
Flood premiums have been rising as the National Flood Insurance Program (NFIP) (a federal program that provides most flood coverage) has struggled to cope with soaring claims. But there are ways to reduce the costs, Pierce notes. He advises condo associations to obtain an ‘elevation certificate,’ which may reduce their risk profile. Buildings at higher elevations may qualify for lower rates, even if they are located in flood zones, Pierce explains.
The NFIP may not be the only option. Some private carriers are now offering flood insurance, and associations in low-risk areas “have a decent chance of obtaining at least some coverage,” from private carriers, Pierce notes, although the deductibles will be higher than on standard policies. For communities with multiple buildings, he says larger carriers may offer lower premium rates on buildings at higher elevations. “They will look at the location, construction and elevation for the buildings, and then offer different coverage limits and different deductibles” based on those variables, Pierce explains.
Earthquakes in New England?
The arguments for obtaining flood coverage, strong before the hurricane trifecta (Harvey in Houston, Irma in Florida and Maria in Puerto Rico) have increased to irrefutable in its wake. The photos of communities under water, littered with debris and lacking in power are persuasive, to say the least.
There are no comparable photos of earthquake damage in New England (fortunately), so it’s harder to make the case for that insurance, but the risks, though largely unrecognized, are high. Massachusetts sits on the second-worst fault line in the country, behind California’s much better-known San Andreas Fault, Marcus notes, making insurance essential for high-risk buildings (structures built on fill in downtown Boston would certainly qualify) and a good idea, in his view, for almost all multi-story structures in the state.
Boards assessing insurance coverage for disaster-related damage should make sure their policies include ‘Ordinance or Law” endorsements, to cover the cost of complying with “governmental orders,” which would include requirements adopted since the buildings were constructed. Without this coverage, your policy would pay to restore a damaged building to its original condition, but it would not cover the cost of installing sprinklers, creating parking spaces, increasing setbacks, or making other changes an updated building code may require.
Ordinance or law coverage would also kick in if your insurer is willing to repair a damaged structure, but the municipality says it must be demolished. Without that endorsement, Pierce explains, if half a building is damaged by a fire and the insurer doesn’t agree with local officials that it’s a total loss, your policy will pay only to repair the damaged portion; it won’t pay for the cost of demolishing the entire structure and rebuilding it.
Repairing the physical damage will be an obvious priority following a disaster, but boards will also have to manage the financial damage to their communities and to its residents. The ability of owners to pay their common area fees will be a major concern.
That has certainly been the case in Houston, where mortgage lenders predicted that more than 25 percent of the homeowners affected by Harvey may miss at least one mortgage payment; condominium owners struggling with their mortgage payments will almost certainly struggle with their association dues as well.
This is another area in which adequate insurance can help, Pierce notes. Business interruption insurance, often part of a standard master policy, will ensure the uninterrupted cash flow associations need to cover their ongoing expenses.
Business interruption insurance will give boards some financial flexibility, but they will still have to decide how to handle collections following a disaster. Markel advised his association clients to approach collection issues on a case by case basis, reflecting the damage they had experienced and the association’s financial condition. “You have to balance compassion for owners with the viability of the association. You have to triage it,” he notes.
Many of his association clients developed a two-pronged collection policy: For owners who were already delinquent before the storm, but not yet facing foreclosure action, boards deferred collection for a month “unless the community or the individual was totally devastated.” For owners who were already subject to foreclosure, however, many boards decided to defer those actions, Markel says, “because they knew that many judges would be reluctant to approve foreclosures against owners affected by the storm.”
Faced with judges who are inclined to help struggling storm victims, Marcus suggests, boards should emphasize that it is both unfair and counterproductive to shift the burden of unpaid fees to other owners. “If 25 percent of owners don’t pay their share, fees for the other 75 percent will increase,” he notes, “and some of them won’t be able to afford the higher payments,” increasing the delinquency rate and exacerbating the association’s financial problems.
“The humanitarian instinct to help owners in need is understandable,” Marcus says. “But boards also have to consider the financial impact on the association. If owners don’t pay their fees, the association won’t be able to pay its bills –and ensuring the financial viability of the organization is the board’s primary obligation.”