 Welcome to Kondo Insider, it's Thursday, it's our weekly show about association living. We have about 38% of our population lives in a Kondo in Hawaii and this show is for board members and owners and interested people alike in Kondo living and I have a little reprieve for you today because for the last couple, three or four weeks, we've been emphasizing the legislature. So the next show is coming up, we're going to be on new topics and one of my pet peeves has always been, I've harped in this over and over again, is who is responsible for what in the Kondo when it comes to insurance. So I've invited a good friend of mine, Tom Roselli, who's the property manager, property claim supervisor for First Insurance here and we're going to get to the bottom line on this. So Tom, welcome to the show. Thank you for having me, Richard. Tell us a little bit about you, your background and your company and briefly for our topic today. Sure, my name is Tom Roselli. I've been in the insurance industry for 20 years, 15 as an adjuster, 5 as a producer selling policies. I moved to Hawaii in 2005 and I started First Insurance in 2011. First Insurance, we have our name because we were the first insurance company in Hawaii. We've been around since 1911, the oldest carrier in the state, but also the largest carrier in the state. Well, I get about this, like we don't have any Kondo claims, do we? Do we have claims? No, my entire staff is just waiting at the phone for something to happen. You know, but the truth is how about how many claims a year do you process? Our department usually handles around 4,000 claims a year and that's first party property damage. So that's quite a few. It's a lot. And so what is the average value of a claim? So the claims, the majority of the claims that are filed, about 68% of the claims we handle are water losses. And then depending on the year, it could be wind or tough claims. Fires also are not as frequent as water, but obviously they have a lot more severity and are impactful. The average severity for sale and average water loss is anywhere from $8,000 to $10,000. Oh, here's a trick question. Are there more fire claims a year or more sprinkler heads that break water claims a year? There are a lot of sprinklers that cause damages, whether it's somebody trying to hang a code on a sprinkler head or the actual plumbing failing in some way. And that can be pretty expensive, right? It's very expensive. And if an elevator got involved, what's that worth in general terms? We're having to pump out the pit and deal with all of the electronics and things like that anywhere from $150,000 to $300,000. Well, anyway, let's talk about my pet peeve. I hear it all the time where a board member says, oh, there's a water leak in the unit. Tell the owner to go file with her HO6 policy. Sure. Is that the right answer? Well, the master policy or the associations are bound to carry insurance to cover the building. So every association has a master policy which covers the building. And in the conditions of that policy, that states that that policy is primary over any other insurance. Conversely, individual unit owners who have what are called an HO6 or a condominium unit owner's policy, the conditions of their policy specifically state that that policy is excess over any insurance in the name of an association or corporation. The bottom line is if you have water damage or you have damage to a condominium, the master policy is primary for that damage. And then the unit owners is secondary or excess over the AOAO's policy for dwelling coverage. Now, obviously the HO6 or the unit owner's policy is going to be primary for their loss of use or for their personal property, which the association has no insurable interest in. But if you're talking about building or building damage, yes, the AOAO policy is primary. What happens if an owner, for example, decided to replace their kitchen and put all new COA cabinets in and sub-zero appliances and upgraded their kitchen? Is that covered under the master or is that the HO6? So the master policy, again, how you settle the claim is defined by the policy itself. And most policies are a standard ISO policy that covers the building. The bylaws also then kind of dictate what is covered under the master policy. And the bylaws in most cases are going to state that the association policy must bring the building back to its original conveyance or as plan. So basically what it is is commonly referred to as as built. So if the building was built in 1971 with plywood box cabinets for mica countertops, shag carpet, VCT tiles, popcorn ceilings, and if you have direct physical damage to the unit, the association policy is required to indemnify, meaning monetarily compensate the AOAO for plywood boxes for mica countertops, the as built. Now if somewhere along the line it's been upgraded to granite, COA, wallpaper, wall to wall mirrors, those would be considered upgrades or improvements. And that would be then the responsibility of the individual unit owner's policy. Walk me through, let's say give it to a simple claim. Sure. So you have a pipe that breaks in an inner unit and the pipe happens to service only that unit. What should owners and property managers do? Now they have a water claim. You're going to have the mitigation issue of getting the water cleaned up, you're going to have the claim issue. What steps should they take once they see they have a potential claim? As soon as a claim happens, immediately you should notify your property manager or your resident manager, make them aware of what's going on. The resident manager, property manager, again, because the master policy is primary, they should take steps to mitigate the damages, bring in a company to dry it out, get rid of the water, prohibit any kind of mold growth or some issues from that unit spreading into common areas or the neighbors. And then notify your insurance company. And after the mitigation is complete, you get an estimate for the repairs. If the loss is below the association's deductible, as a result of 514B, which is a statute regarding the condominium regimes, associations now have the ability of either assessing what they're paying for those damages that are below their deductible, or they can assess the deductible to the unit of origin regardless of fault, or they can prorate it amongst all of the other units that were affected. In your scenario, a pipe leaks. It doesn't matter whether it services one unit, multiple units. It could be somebody tipped over a garbage can. You have water damage. Water damage is covered under a master policy. So you would have a claim under your AOAO policy. And just because it may not exceed the deductible, doesn't mean it's not covered. But the unit owner should notify the resident manager and the building so that they can go ahead and either take steps to hire somebody or bring in in-house guys to dry it. Put together an estimate for the repairs. And then if the total damages are less than the deductible, then they can either AOAO pay it out of their general fund or they can use the avenues within 514B to assess the deductible to the unit affected, in which case, since the AOAO policy is not paying anything, now the HO6 becomes excess, and their policy should take care of the damages. My recollection of this, and I'm not an insurance guy, so I may not say it accurately, is that I've been around a long time. Sure. When I go back and I look at originally condos, they all had like $1,000, $1,500 deductibles. And when you think about it practically, that means the insurer for the building, the master policy, was taking the risk of all these water claims. So what we saw happen over time is the deductibles are going to $5,000, $10,000, $20,000 to keep the premiums low, because certainly the insurer, he was taking all that risk of $1,000, and he knew the buildings were getting older and really bumped the policy. And associations took the, or the industry took the position. We're better off having that deductible, let's say $10,000, being insured by the unit owner, because typically in a building, you have a whole bunch of different insurers, so not one insurer is taking the risk for the whole building. You've kind of mitigated and spread the risk. Sure. Is there any truth to my thinking? Well, I think there's a lot of truth to it. I think that when associations were doing reserve studies and they needed to figure out how much money they were going to set aside for claims, because again, the traditional way was the deductible is the amount that you self-insure. And as these buildings became into deferred maintenance or issues started coming up with as the buildings were aging out, you could assume that you were going to have, say, five claims a year, and suddenly you had buildings that were having five claims in the first quarter. And so now you're tapping into your reserves for all these deductibles. So yeah, you raised the deductible. The AOA assumes more of the risk to help keep the premiums down and the higher the deductible than more of these smaller claims were being pushed back on the unit owners. Now, the unintended consequences are it's getting harder and harder to get a unit owner policy, because they've always been priced that, well, the guy upstairs leaks, you can just go after him for the damages, or you're only going to be on the hook for improvements. Those policies were never really priced to assume the full risk of the damages within your unit, both for the as-build and the potential of upgrades. So you're saying their rates are rising, or they're not issuing those policies anymore? Well, it's a combination of both. They're becoming much underwritten, much more strictly. So you'll see that there's a lot of people who, if you have two claims within three years, it's difficult to get insurance. The rates are coming up to reflect the fact that H06 policies are no longer just for improvements. They're now expected to assume both the as-build and the improvements, if the claim is below $15 or $10 or $25,000, as these deductibles on the AOA has continued to go up. But going back to this initial comment I made, that primary policy, the master, is the association. The excess is the unit owner. So as soon as you have a claim, the property manager, the board, should report the claim to their agent. And in the meantime, the owner should also report their claim to the excess carrier, and you guys will sort out who's responsible for what. Correct. And in most cases, again, the AOA adjuster is going to determine what the as-built was. And then, so again, to your point, pipe versus very common people of somewhere along the line. It may not even be the owner who owns it now, but somewhere along the line, laminate wood flooring was put in. So the AOA policy, at least for first insurance, if carpet was originally there, we're going to pay for the cost of replacing carpet. And then the difference of the carpet and the laminate wood floor would fall into the 806 for the improvement. Now, some carriers will say that if the carpet is gone, the as-built is no longer there. They won't even pay for carpet, because the carpet's not there. It's only laminate wood flooring. So but one thing boards should not do is shine on the owner and say, is your problem and not report it to their carrier? No, because again, they have a fiduciary responsibility to maintain the building. And as you get into a back and forth, the unit owner is adamant that it's not their fault. The AOA is adamant that it's not their fault. All this does is just make the situation fester. And what may have been a $4,000 or $5,000 claim now becomes something much more serious because you start getting mold growth, you start getting things that are migrating, and now you've got multiple units that are affected as opposed to just getting in some fans and dehumidifiers. After this question, we're going to take a break, but what if the unit owner doesn't have an HO6 policy? Well, again, my understanding is with 514B, associations can vote to make it mandatory for HO6s to have insurance and provide proof of insurance otherwise they can purchase it and assess it to the unit owner for not having insurance. And you're correct that the 514B allows the board to purchase on behalf of the owner, the HO6 policy, if they haven't provided proof of insurance and charge it back to the owners because associations rely on the owner having the HO6 policy in part to cover the deductible as well as some other incidental type claims that are there. So on that note, we're going to take a one minute break. We'll be right back with Tom and talk about some more on insurance. Aloha, this is Scott Perry and I'm the host of Let's Talk Hawaii at ThinkTech Hawaii. In this show, we're going to be speaking in English and Japanese and I'm going to use my 30 years of experience to help many Japanese viewers improve their English skills as well as learning many interesting things about Hawaii. You can catch my show every other Tuesday, 3 p.m. Hawaii time. See you then. Aloha, my name is Mark Shklav. I am the host of ThinkTech Hawaii's Law Across the Sea. Law Across the Sea is on ThinkTech Hawaii every other Monday at 11 a.m. Please join me where my guests talk about law topics and ideas and music and Hawaiiana all across the sea from Hawaii and back again. Aloha. Welcome back to Condo Insider with Tom Roselli, Property Claim Supervisor for First Insurance and before the break, we were talking briefly about HO6 policies and the master policy and I asked him the question, what if the owner doesn't have an HO6 policy? What if the owner has a tenant? I think it's very important that an owner, if it is an investment property and they are renting it out, they should make the tenant have renters insurance and again, protect the owner against any liability that arises out of their unit. If the tenant lets the tub overflow, in many cases they'll go after the owner because they own the building or they own the unit when it's actually the tenant who caused the damage and both renters insurance and condominium, the HO6 policies are very competitively priced. I mean, you can get a renter's policy for less than $100 a year and condo policies are anywhere from two to $300 a year. So an owner or landlord could put in his lease, provide proof of insurance for a tenant policy and make that a obligation of the lease. I'm not an attorney so I can't say that but I think that it would be a good idea to make sure that they have renters insurance, especially if they have pets. Well, I'm not an attorney either but I am a real estate broker. All right. And I can tell you that they certainly have the right to put within the lease a special condition requiring them to provide a reasonable tenant policy and to provide proof of insurance. I think that that would be very appropriate. I'll premitigate that. You know what, sometimes people talk to me about this they get confused between what I'm gonna call the deductible and a loss assessment. Sure. Tell us the difference. Well, there's several assessments that an association can levy against or on the community. So you have coverage and most HO6 policies for loss assessment coverage and the intent of the loss assessment coverage is if there's an assessment made against the entire community for property owned by the entire community as a result of a covered cause of loss. So an example of that would be if for some reason the building isn't insured 80% of value so there's some uninsured exposure or there's a lawsuit in which the association loses and the judgment isn't covered by insurance and so there's an assessment for the balance of the uninsured and every member gets assessed that would be a loss assessment. There's assessments where hey, the building's 20 years old and we're gonna paint it and now everybody's gonna get assessed $1,000. That's not a loss assessment. That's a special assessment for maintenance reasons and it's not as a result of a covered cause of loss. And the assessment of a deductible as a result of 514B kind of falls within that guidelines of a special assessment. It's being made directly to an owner or owners that are affected, not the general community at large. So some carriers will not honor loss assessment coverage under their policy for the assessment of a deductible but they will take care of it for, if you are assessed the deductible which creates a shortage for the damages in your unit you have coverage under your own policy for the dwelling and if the assessment is made for a shortage created to others, let's say you have no damage to your unit but you flood everybody below you and there's a $50,000 deductible and nobody gets paid down below, you get assessed the deductible, you could file a general liability claim under your policy to pay the AO to make the people whole because of contractual liability. Another word I hear all the time when talking to owners or policy holders that they I think are confused on is we know that the primary insurance is the association and the excess is the unit owner. We hear this word subrogation all the time. What does that mean and how does that work? The subrogation is the going after the legally responsible party for reimbursement of funds, right? And a major misconception is just because you own the unit, the water came from above, they're obviously responsible, there should pay for everything, right? General liability, rules of general liability are you either set in motion an unbroken chain of events that results in somebody's property damage or bodily injury or your negligence results in property damage or bodily injury. If you're lying in bed at two o'clock in the morning or this is a vacation rental and you're not even at the unit, you can't be held liable for the damages that arise out of your unit just because a pipe burst in the wall, right? The other thing about subrogation is a lot of associations have adopted in their bylaws what are called waivers of subrogation meaning that the AOAO cannot go after unit owners and unit owners cannot go after the AOAO or each other in the event of a loss. Again, the intent being everybody has their own insurance, you just file a claim through your own carrier or the AOAO take care of it under their master policy but subrogation, you know, going after somebody for being liable for your damages is very difficult in a condominium environment but that's different than reimbursement. So if you have a situation where you're not the unit of origin you've been leaked upon, you file a claim through your own carrier and the carrier pays for some damages that fall under the as-built portion. Well, that still is primary to the AOAO. So that carrier can seek reimbursement from the AOAO carrier or from the AOAO saying, hey, we paid for these damages that you were primary for and the AOAO can come back and say, well, it doesn't exceed the deductible but we're not gonna file a claim and that's not what we're asking, we're just saying, okay, well then follow your bylaws, assess the as-built to the unit of origin and then get that money and then reimburse us for paying for, you know, the as-built or that which is the responsibility of the AOAO. One of the things you mentioned I want to emphasize and correct me if I'm wrong is that people misunderstand sometimes that when you have property insurance, it's for perils, fire, wind, you know, depending whether you're in a flood zone you might have national flood insurance. It isn't for poor maintenance. Well, to hear your point, yes. Most policies or in some cases the HO6 policies are named perils meaning that it has to be one of these name things that happen, fire, lightning, theft, overflow or discharge of water but most policies nowadays are what are called special form policies meaning anything that happens is specific or is covered unless it's specifically excluded. So instead of trying to define everything that could be covered, they basically now said everything is covered, we're gonna define the exclusions. Well, we don't want to cover and you're correct. One of the exclusions in all policies refer to age, wear and tear, deterioration, maintenance. So yes, the intent is is that your window is 70 years old. So if they failed to maintain the roof, for example and the roof leaked, it's not probably covered then. The roof may not be, but the leak probably would. Okay, that's interesting. So let's look very briefly at again reviewing the claims handling and what to do if you have a claim. Who can you talk to? Who can't you talk to? How do you expedite a claim? If you're a unit owner and remember it's under the master's policy and they're not the owner of the policy, the association is, how does that all fit together? So the number one myth is that if it happened in the unit it's the unit owner's responsibility. No, the AOAO policy and the first party claims is not about fault, it's about what is covered and the building is covered and you have water damage which is not specifically excluded, the AOAO policy is primary. So it doesn't matter, like I said, it could be an overflow of a tub, it could be a pipe that burst, it could be somebody that filled up a 50 gallon trash can and leaned it against the door and knocked and it was a prank, right? That's all still gonna be primary under the AOAO and you need to file it through the AOAO. The worst thing that an AOAO can do is when somebody reports a claim, say well it's not above the deductible, we're not gonna do anything about it and then they let it fester and they don't bring in mitigation companies to go ahead and dry it out. Another mistake that a lot of AOAOs do is you know who your insurance carrier is. Your carrier is gonna work with specific vendors or may have agreements with certain vendors, find out who they are and those are the guys that you should bring in and then you basically now are expediting the claim because you have a vendor that your insurance company is comfortable with and is vetted and you're not gonna have to worry about you get a big bill or an invoice for the repairs and then the insurance company's only willing to pay a certain amount. But as you said earlier, I think, you have that claim, they bring in the mitigation company and it's a small claim. So the total is 4,000. The board can assess the owner for that $4,000. If it's below the deductible and that is the unit of origin, yes. So you can't stick your head in the sand on these things. You've gotta be notifying your agent, personal as well as the association and boards should not just be saying, it's not my problem that happened in your unit because under the statute and under the insurance policy, these are covered claims and owners pay maintenance fees and they're entitled to all the benefits of that policy by the fact they're paying for their share by paying their maintenance fees in that. We're getting close to the end of our show. You and I talked about the four myths of insurance. So myth number one was unit plumbing. Let's go through them real quickly. Sure, so actually, common myths are, if a loss comes from a unit plumbing source, it is not the AO's responsibility, that's false. Unit owners need to contact the adjuster to find out what's going on. No, if I insure the AOAO, the AOAO is my client. I cannot give out information to parties who are not involved with the claim. It's also a condition of a policy that the insured, in this case, the association must provide access so that we can do inspections, right? If the damages are below the deductible, the loss is not covered, false. It is covered, it just doesn't exceed what self-insuring responsibility is or what the self-insured amount, the deductible that the association. And then finally, the repairs must be done by a licensed contractor. While we fully encourage that you use somebody who's licensed and bonded and it may be in the bylaws that you have to use a licensed and bonded contractor, it is not a stipulation of an insurance policy. Our obligation to our insured is to monetarily compensate them for the value of the damages. What you do with the money is up to you. It's interesting, I was attending the train-to-trainer course for the real estate commission today and one of the things that came up was aiding and abetting on licensed contractors and management companies can very easily be fined as well as forced to reimburse the association if they use an unlicensed contractor. And as we've discussed in the show, that law is changing if the governor signs it on what those limits are for handyman. But you gotta use licensed people, particularly with electrical plumbing. Absolutely. There's no excuse not to do it and you expose yourself to a lot of risk if you don't do it. I agree. Do you have any final thoughts? No, just, you know, the best thing that you can do is continue to maintain your buildings. You know, paint them when they need to be painted, replace the windows as they need to be replaced. I know that a lot of associations are being proactive and they're finally getting around to replacing vent stacks and drain lines, which has been a huge deal. You know, I know that fire suppression, you know, alarms and sprinklers have been in the news. And so I think, you know, we'll start seeing what happens as these buildings become sprinkled. Well, I want to thank you for being here today. Next week our show is going to be property manager versus managing agent. I get all the time people saying, well, we have a property manager, we have a property manager. Well, you probably have a managing agent and there are big differences between the responsibilities. And oftentimes it's dictated by a specific scope of work under contract with the association. You may have a managing agent that only has collecting and paying the bills, for example, collecting the maintenance fees and paying the bills. We have a excellent association industry representative talking about managing agent versus property managers. I want to thank Tom and First Insurance for all they do in the community. And we thank you all for watching Condo Insider and we will see you again next Thursday at three o'clock. Aloha.