Seven High-Rise Insurance Tips for Associations and Unit Owners
Many people who live in cities like Phoenix and Scottsdale appreciate the rewards that come with living in a high-rise building. Some of the unique advantages include great amenities, security and even concierge services.
High-rise buildings are also unique when it comes to insurance coverage. Besides the individual policies that unit owners need to have, the building and common areas must be covered as well.
“We find that high-rise association board members and residents alike can sometimes be unaware of the specific kinds of insurance coverage they need to stay protected,” says Andrew Lester, president of FirstService Financial, an organization that offers best-in-class banking and insurance solutions exclusively to properties that are managed by FirstService Residential. “When a loss occurs and you are not covered properly, it can have a financial impact on the association and unit owners.”
Whether you are on the board of a high-rise association or simply a unit owner, it is crucial that you understand how high-rise insurance works so that you are adequately covered. Here are seven things to keep in mind when it comes to high-rise insurance.
1. Mind the gaps.
In a high-rise community, both the association and the unit owners need to purchase insurance policies. The association purchases the property and liability policies that apply to common areas—such as the lobby, gym and pool—as well as the structure of the property, In most cases, this covers everything from the “perimeter boundary walls out” of the individual units. The unit owners are responsible for covering everything from the finished surface of the “perimeter walls in.” Although specifics may vary from community to community, typically a unit owner will need to purchase insurance to cover upgrades beyond what constitutes a “standard unit,” as defined by your association’s governing documents, along with any personal items.
“The specifics of an association’s policy vary,” says Jamie George, insurance product manager for the West and Texas regions at FirstService Financial. “Owners should know what the association covers so they can get a corresponding policy that ensures complete protection without any gaps in coverage. It should be a dynamic relationship.”
2. Find an expert.
If you are a board member seeking to insure your community, going to just any insurance broker is not a good idea. “Time and again, we see agents who do not have experience in the high-rise condominium world make big—and often potentially costly—mistakes,” says Lester. “An insurance agent who is familiar with the construction industry for example, is not necessarily an expert in high-rise buildings.”
The reason? There are unique requirements, laws, regulations and required coverages that apply to condominiums in Arizona and which may vary among local areas. Only agents with specific knowledge of the condominium industry in your area will have the expertise to take these requirements into account and insure your building correctly.
That is why it is best to partner with an experienced insurance brokerage firm that can draw on an extensive network of proven insurance carriers specialized in high-rise buildings. These firms will be able to find the product that provides the right coverage for you (at a competitive premium, too).
3. Consider value, not just savings.
Experts caution against making insurance decisions based upon premium alone. Even though it may be possible for your association to find a low-cost policy, you may not realize that the coverage is inadequate—until it’s too late. Does the policy have gaps that expose you to risk? Is the deductible onerous? Is the policy even the right fit? These are the types of questions your association should be asking.
Rather than looking at the bottom line alone, it’s important to consider value—whether you are getting the most coverage at the best possible rate. After all, insurance is meant to provide peace of mind, and if your policy does not give you that, even paying the lowest dollar amount is too much.
4. Be informed about the different types of coverage.
The needs of unit owners and associations are vastly different with regard to insurance. Nevertheless, board members and unit owners should understand the various types of building insurance, how they differ and what they cover.
HO-6
As a unit owner, you should purchase an insurance policy called an “HO-6.” An HO-6 policy packages property and liability coverage together. Primarily, this covers the “walls-in” contents of an individual unit, including upgrades beyond what is defined in your association’s governing documents as the “standard unit.”
An HO-6 policy also provides “loss assessment coverage,” which comes into play if a significant out-of-pocket expense remains after the association’s insurance covers a loss. The association may need to collect a special assessment from individual owners to cover the expense. If this occurs, your HO-6 policy would cover a certain amount of your special assessment.
Directors and officers liability
Directors and officers (D&O) liability insurance protects your board and building staff from legal damages. Common D&O claims include a board’s failure to adhere to bylaws, disputes on architectural changes or vendor contract breaches. This coverage can also be combined with employment practices liability, which provides coverage for claims by employees and third parties from wrongful termination, harassment and discrimination.
Workers compensation and fidelity
With workers compensation, you can opt not only to cover employees and contractors, but also volunteers by adding a volunteer compensation endorsement. Fidelity insurance covers losses due to theft.
Your board should also consider purchasing crime coverage, which protects the association from certain occurrences of theft. Limits vary, and since bank account holdings can be significant, it is important to check carefully that it provides adequate coverage for all association assets.
Building ordinance and law
If your building was not built recently, it is likely that your city’s building codes have changed significantly since its original construction. If the building sustains any damage due to an insurable loss, your policy will only cover repairs to the structure’s original standards. In most cases, that means you will be left with a shortfall to bring the repairs up to code, and those costs can be surprisingly expensive. Building ordinance and law insurance specifically covers these required upgrades.
5. Do not put renewals on autopilot.
Insurance policies for both the association and individual unit owners should be reviewed annually. In the same way you would seek expert advice on a tax return or a legal issue, you need to make sure the policy review is conducted by a qualified expert. Check your governing documents as there may be provisions that require periodic audits.
6. Minimize your risk.
The cost of insurance is based on two things: the value of what is insured and the risk involved. The value of the insured property is based upon the estimated cost of reconstruction. That leaves you with only one option for controlling your costs: minimizing risk.
7. Hire a good community management company.
The right community management company can help make all the difference. An organization with a national presence has the depth of capabilities to offer risk management insight, along with larger buying power, so it can negotiate lower rates on your behalf. It can also put you in touch with the right insurance brokerage firm—one with extensive knowledge of the Arizona statutes and your association’s regulations, which can have a significant impact on the insurance products that will work best for you.
Nobody can anticipate disaster or loss, especially with all the complexities of living in a high-rise building. But the right insurance coverage—for both unit owners and associations—can help you sleep better at night, knowing you are prepared. For more on how to find that kind of peace of mind, reach out to FirstService Residential, North America’s leading community management company.