 Good afternoon and thank you for joining us for another episode of Kondo Insider. My name is Jane Sugimura and I'm going to be your host for today's show. And today we're going to be talking about a real timely subject. And it should be of interest to anybody who lives and works in a condominium. And the topic is how Kondo disputes can affect your maintenance fees. And especially how they affect your insurance premiums, which is something you pay for in your maintenance fees. And my guest today is Sue Savio from Insurance Associates Hawaii. Thank you, Sue, for joining me. Thank you for having me. Okay. And so let's just hit the road running. Okay. We're talking about Kondo disputes and how they affect maintenance fees. And so what kind of disputes? What kind of disputes, you know, are covered by insurance, you know, when it happens? Okay. Well, we're talking here about the directors and officers policy, mainly, because that's the policy that this covers when there is an owner who's upset about something and decides us to the board. We have such things as discrimination, breach of contract. These are some very hot items, especially for Hawaii. We have, we're a very small state when it comes to premium volume. We have more claims than any other state, and I mean California, who has a slew of land and condos. We have more claims than they do. Florida, New York were the largest in claims, but yet a small state. We have the highest payout on claims because they're, when it's a breach of contract claim, obviously the cost of building is much more expensive here. So the payout on the claim is a lot more. So insurance companies, DNO insurance companies, directors and officers insurance companies don't like Hawaii. So we have a small marketplace. So I mean, can you give us an idea of how many insurance companies we have who are offering their coverage to associations in the state? We have about five that do 99% of the directors and officers. And of course we have those that start off with a very clean record, brand new condo. We try to keep them with the broadest policy, but as claims develop, you know, you go into maybe a less broad policy, a more expensive one, higher deductible. I have a company that makes all the bad people and, you know, your deductible could be $100,000, $150,000. Your premium instead of being $6,000 a year is probably $50,000, $60,000, $70,000 a year. It looks more like a premium for an auto, I mean for the building policy as opposed to the directors and officers, but it's because they've had so many claims. And so when you say deductible, that means that the first, if it's a $10,000 deductible, the first 10,000, the association pays it. That's right. And you and your owner cost part of their maintenance fees, money they have to be put aside to cover deductibles. Okay. And so we're also, I mean, when we're talking about claims and we're talking about lawsuits, I mean the big thing that comes to mind is attorney's fees and costs. Right. I mean that's the big thing that makes it very expensive, right? And so why don't we just go through this, a D&O, what kind of insurance is that? Okay, directors and officers is called D&O insurances, insurance that covers the board for good, bad, or indifferent decisions that they make, that somebody in the complex feels that they made a wrong decision or feels it was inappropriate, will sue for, or somebody that they feels that they were not being treated as fairly as the next person will sue the board because they're not following the rules or the bylaws or the decks, whatever the case may be. And so they go ahead and sue the board. Well then the directors and officers' policy, as long as there's no bodily injury or property damage, is the policy that defends the board. When it defends the board, it has a deductible and most condos start off with a $1,000 deductible and most condos go many, many years with no problems so they always stay at that $1,000 deductible. So let's say you have a claim and it settles for $15,000, $20,000, that's not bad. But we have claims that settle for millions and when you have a claim that settles for millions, it affects your policy. The current carrier says thank you, adios, goodbye, we're not renewing. So then we have to take you to the next level, which is a much higher deductible. You're going to go to a $25,000 or a $50,000 deductible, but you have another claim or you're setting your owners and you're not communicating with them and that's a big lack that we find with boards. They're not communicating with their owners and owners are thinking things are going wrong and maybe they're not but they're suing to find out. So as you have more and more claims like this, your deductible is increasing. I have condos that have a $100,000 deductible and one with a $150,000 deductible for each claim. Wow. So let's say you have a board and they get sued and it's a claim, let's say it's a discrimination claim, somebody asks the board for a reasonable accommodation because they have a disability. Maybe they have visual impairments and they want a wood floor so that they can feel their way around their unit and still be able to enjoy that unit. And the board says, hell, we don't think he's got a disability so we're not going to allow it. And they get sued. OK. For something like that, when they get the complaint, what do they do? They just turn it over to the insurance company? Correct. When you get the complaint, it has to go to the insurance company. We usually have to get an extension because usually the attorney gives you 20 days to respond. Well, there's no way the insurance company is going to respond in 20 days. They have to search out all the background information, what the board knew, didn't know. And then, of course, they try to defend the board. And in the case that you're mentioning, because that is a true case, they're sometimes not successful. And it can be a multimillion dollar claim settlement. But because the insurance company, I mean, good, bad, or indifferent, they don't have a whole lot of information in the beginning. So they usually send a letter to the board saying, we accept your tender with a reservation of rights. And so explain what that means. So does that mean that you're covered or you're not covered? Or what does it mean when you get that letter from the insurance company? It means that we're reserving the right to maybe not cover you. We think we're covering you in the beginning here. But we're going to check out all the past emails. We're going to see when this claim really was, because directors and officers' policies are claims made. So did you know about it during the term of our policy, or did you know about it two years ago that you were going to get sued on this? And it just didn't come through until two years later. So there's a lot of research the insurance company has to do. So they say, we're going to go ahead and defend you now under this reservation of rights letter. They assign you attorney. He gets the information. They ask him to get more information. As they find out information, you may get a letter that says, whoops, we're not going to defend you. Because this happened two years ago. You knew you were going to get sued. You received an email to it, and you did not report it to the carrier at that time. Because it's not like an occurrence policy where I slip, and then two years later I sue and we go back to the carrier who had it. No. The directors and officers' claim is when you were notified of the claim. And it doesn't have to be a lawsuit that notifies you. It can be an email from an owner that says, I'm going to sue you. You're doing this wrong, and I'm going to get you. At that point in time, it needs to be reported to that current D&O carrier. So when the lawsuit comes three years later, we can go back and report it to the correct D&O carrier. Because if you don't tell us about it, and three years later you get sued, and the insurance company finds that email from the guy that says I was going to sue you two years ago or three years ago, the current carrier is not covering. And so the reservation of rights letter basically is saying we have a contract to defend you. And so yeah, because we have this contract, good, bad, or ugly, we're going to defend you. But in the meantime, we're going to do our due diligence to find out if we really have to defend you. And we can change our mind halfway into the lawsuit. That is exactly right. And that's because during the lawsuit, both parties do something called discovery where they ask each other for documents and for information. And they do depositions. And everything that they find in discovery, the insurance company reviews. And so they're looking at emails, and they're looking at board minutes, and they're looking at deposition transcripts. And finally, one day it dawns on the insurance company's attorney who's reviewing, oh my god, we shouldn't be defending this because there was a time lag or it belongs to the previous carrier. Or they really did breach their fiduciary duty. So we can defend, but we're not going to pay because they're bad. But you mentioned something too before we started the show. Is that the insurance claim, it covers stupidity? As I was saying, there's no exclusion in any insurance policy for stupidity. So yes, boards make mistakes. Sometimes they make them on purpose, I swear, because no one can be that stupid. But I'm a board member myself, so I can say this. There are times when you're upset, and you say something in a board meeting, and people act on it, and it results in a claim. So I mean, I do understand that. But yes, exclusion for just stupidity, no. We cover stupidity. OK, but that's kind of like the unfortunate part. And so when this happens, and you get through the lawsuit, and you've maybe spent hundreds of thousands, maybe even millions of dollars in litigation, especially if you go to trial. If you go to trial, and you spend all this money, and then the association loses. And that's what happened in Maui. It was a $2.9 million lawsuit. And the insurance company paid it. Yes, because they lost. And so all of us who are sitting back and reading about it, should we say, well, that doesn't affect us? Is that a true statement? No, that's not a true statement. You have to remember now, we're in an insurance pool, especially what we are. We all want to keep our premiums down. So that means everybody in this insurance pool, or these companies, needs to make sure that they keep their premiums down by keeping their lawsuits down. When somebody has a huge claim against them, it affects everybody who buys D&O insurance from that company. Because they're going to say, gee, $2 million here, $3 million there, $100,000 there. They add this all up, and they say, Hawaii's a bad risk. We're going to raise our rates. And it's nothing, as you know, from your own condominium. Your rates went up, I think, 58%. Right, the D&O went up 58%. The premium went up 58%. And our NOLA went up almost 50%. And no claims. Right, we have no claims. Right, doesn't matter. You were, fortunately, your health pain for everybody else who blows it, as my condo is to. I would always want to be the person that pays the premium, because I don't want to have that lawsuit. It's very stressful. It's hard on the owners. I would rather have my premium go up knowing I didn't cause this claim. But you can't sit back and say, well, they were stupid. That's their fault. Well, I'm not worrying about it. It affects us all. So we as owners, no matter what condo we own, we need to make sure that we're commutative with our board, with our other owners. And we need to make sure that when something does go wrong, or it appears it's going wrong, that we try to take the bull by the horn, hit the person down, explain, ask what's going on. How can we help you? What's causing your problem? Why are you upset with us? And try to explain. Because it's sometimes when you put that owner on the board who is just a pain in the, you know where, and you put them on the board, which I've done in one of my condos, it took a while, but all of a sudden he understood how condos operate. And he said, oh, now I understand, because he was threatening to sue us. And I kept on telling him, what are you suing us for? What do you think you have against us? Come, you know, when we had it open on the board, I said, we're going to nominate you for the board. He almost died, but he had trouble at first, but he then understood. And he turned out to be a good board member. Because he finally understood what condo life is about. Right, and you know, and I think what most people, and you know, what I'm concerned about is because this is a recent case, and it was kind of unsettled during the, you know, the 2019 session, is that the legislature is always beating us up. You know, me and other people who go and advocate for condo, condominium legislation, they're always beating us up about the complaints they get about board members. And now they're going to hear about this Maui lawsuit where the association, I mean, where the insurance company paid $2.9 million, and everybody else's insurance premiums went up, which means that the maintenance fees, it affects the maintenance fees for all these other condos that had no claims. And so I know we're going to get, you know, the grumbling from the legislature. We need to mandate board education. I mean, that's what we always, it's like a mantra with Senator Baker. I mean, she just, you know, really believes that unless you mandate it, make it mandatory for board members to be educated, that, you know, these things will continue to happen. And I'm all for board education, but I also think we have to include owner education. Owners do not understand when they buy in a condo what they're buying. They think they can do what they want, just like they did in their single family home. And you can't, there's rules, regulations, there's certain things you can and cannot do. And when you have a question, you need to go to the board, not mad, not upset, but go to the board and say, I need to understand what, this seems like a crazy rule. Can we change it? You need to work with the board and the owners. And that's where I think a lot of the problems come because the owners don't feel that they can't talk to anybody on the board. The board thinks, oh God, here comes Mary again. She jumbles at every condo board meeting. She has the same thing she's upset about. You know, but she's upset about them. Nobody takes her aside and say, look, we can't do this, but we can do this. No one sits down with people anymore and tries to talk it through. They just say, well, let's ignore it. Maybe she'll go away. They don't go away. They turn around and sue you. And that's the crux of what we're talking about today. When you, once they sue, it's not like you can turn the clock back. No. And so with that comment, we're gonna take a break and then we're gonna come back and talk about what can we do to maybe change the trend. So please come back after the one minute recess and we'll continue our conversation with Sue Savio. Thank you. Thank you. Aloha. My name is Duretian. You are watching Think Tech Hawaii. I will be hosting a show here every other Wednesday at 1 p.m. and we will be talking to a lot of experts and guests around sustainability, social justice, the future here in Hawaii, progressive politics and a whole lot more. So please tune in and thank you for watching Think Tech Hawaii. Hi, I'm Rusty Komori, host of Beyond the Lines. I was the head coach for the Punahou Boys varsity tennis team for 22 years and we're fortunate to win 22 consecutive state championship. This show is based on my book which is also titled Beyond the Lines and it's about leadership, creating a superior culture of excellence, achieving and sustaining success and finding greatness. If you're a student, parent, sports or business person and want to improve your life and the lives of people around you, tune in and join me on Mondays at 11 a.m. as we go Beyond the Lines on Think Tech Hawaii. Aloha. Okay, welcome back to the second part of our program about how cultural disputes can increase your maintenance fees and my guest today is Sue Savio from Insurance Associates Hawaii. Thank you, Sue. And we were talking about basically how lawsuits, generate increased costs that affect the insurance premiums and then the cost of the litigation and maybe the payments that have to be made after the lawsuit and the insurance premium, they all have this effect of raising the maintenance fees. Correct. Right? Because the payments are going up and there's a settlement of a couple of million dollars or maybe it's even only $100,000. There's still a settlement and sometimes it's a small settlement just to get rid of the claim, even though the board may be right, which of course irritates a lot of boards. We did nothing wrong and you're going to give somebody $10,000. Sometimes that's cheaper to do that than to take them to court and go that route. So the insurance company does make that decision. But you're right. The cost of claims, the defend them, the pay out on them affects us all, even if you have no claim. And even if you're, let's say you mentioned too when we were on the break that if a condo is involved in litigation, it affects the ability of the owners in that unit to sell. Correct. And so why does, so if I live in a unit and let's say they're doing this lawsuit like the one in Maui, the discrimination, and that lawsuit went on for like four years. Right. And so I own a unit in that condo. Why is it that it's going to affect my ability to sell my unit? Because when you go to get a loan, mortgage company is going, or when you're going to sell, your new owner's going to pay you, not to have cash, they're going to get a loan. And the mortgage company is going to find out that there's this lawsuit. And the biggest fear to the mortgage company is that there's not enough insurance dollars to cover the lawsuit if it's against the association. And if there's not enough money in insurance dollars, that means every owner is going to be assessed. So if it was a million dollars short and you got 50 owners and you're going to divide that amongst them because you didn't have a million dollars worth of insurance money, that puts a huge burden on the owners. And the mortgage company is afraid that people will walk. And then they're stuck with these units. And that's not how they're going to do it. So they're very, very careful when you have a claim and you're trying to get a loan. Very careful. And so that means that if I want to sell my unit and my purchaser wanted to go out and borrow money, I mean their lender would then be asking questions. And one of the questions would be, and how would they make that request? Do they call the association or do they call the property manager? I mean, how does the lender find out that the association's got a lawsuit? Well, don't forget there's that RR105 form that the property management firms fill out. And one of the questions is, are there any lawsuits against the association? And the minute they answer yes, and they want to know who the attorney is, who the insurance agent is, I got a call just yesterday from a bank that wanted to know about a law condo that has a lawsuit against it. Did how much money do they have in insurance dollars? You know, how much are they suing for? Do I have a copy of the lawsuit? Then they were going to make a decision whether they're going to loan or not. And sometimes they want a letter from the attorney. They'll go call the attorney as well. So it's a process. And so it's not like they can't get this information. Easiest pie. And so there are lots of resources and it's because of that form that has to be filled out when you sell a condo. Exactly. And so that's one of the negatives, right? Does that affect a lawsuit and how it can impact owners? Correct. And even the owner that's suing is impacted because if they wanted to sell and get out, they're not going to. Because the mortgage companies are extremely careful because, you know, our units are not cheap in Hawaii. They're loaning you lots of dollars. They're assuming you're going to have a job and you're able to cover it. They see that you qualify. Then they find out there could possibly this unfunded claim that maybe is going to be funded by taking money out of owner's pockets. And that's the big fear. And this would involve too, and in the case of Maui, I mean, that's the discrimination claim. But I mean, there are buildings that have foreclosure lawsuits. Yes, plenty. Foreclosure lawsuits. And even then, if you have a foreclosure lawsuit, that's because somebody in the building is not paying their maintenance fee, right? Correct. That affects the ability of other people in that building to sell. And there are some buildings that don't just have one foreclosure law, non-judicial foreclosure lawsuit. They have one has 10. Now every time somebody in that building tries to sell, the mortgage companies get hysterical. Because there's 10 lawsuits, you have enough money, is it covered? And even though we may be defending the board, we don't know what the payout will be. If they're against the association and the judge says, well, this unit is now worth half a million dollars, and you got 10 of them, and you have to either give them the money or the unit back, how do you do that? That's with insurance money. Is there really enough? It's a concern. And I can understand the mortgage company's concern. And owners don't understand that every time you sue, you have to think twice. Because you're not only suing a board that you may not get along with right now, but you're suing yourself and all your neighbors. And one of the things that you want to look for when you buy a unit is whether you have units that are in foreclosure, because that affects the cash flow. And if it affects the cash flow, and you're buying into the project, you may be specially assessed for additional funds. Even on the form that the banks get, they ask, how many people are in arrears? How many are in 30 days arrears, 60 day arrears, 90 day arrears? The mortgage company knows. They're looking at it to see how these people pay their main fees, or there's so many people not paying it that it's going to affect the others. Yes, all of that is given to the mortgage companies. And so do you have any suggestions how people can? I mean, I know we all probably have suggestions on how if you could just talk to all of the board members. And that's the key. We go, you and I, we go to these seminars. And we had one Saturday that had 150 people there. Mainly board members. Mainly board members. This is a good thing. But you're talking about there are thousands of condos in the state of Hawaii, so there's got to be tens of thousands of board members. So there are a substantial number of board members that probably never see the inside of a condo or board training or seminar. I agree. So what would you, if you had the opportunity to talk to these people, I mean, what would you tell them? I think I would tell them the most important thing is communication. And you can't ignore someone who's upset. You know, the easiest thing to do is they're upset. I'm not going to call them back. I don't want to deal with them. It's more important to deal with that person than it is to deal with a nice person. Because a person who is upset, you need to calm them down. You need to find out what's upsetting them. You need to make it work. Because if you don't calm them down, you don't take care of what's upsetting them. They will sue because they're upset already and they're being ignored on top of that. It just adds grief. I really feel the communication is important. And then, of course, board members, I mean, it's a volunteer job. They're tired at the board meeting. They work all day long. Some of them have two jobs. And then they got to go to this board meeting. And they really don't want to be there. But nobody else will do it, right? Isn't that the typical board member? I feel for that person. I go to lots of board meetings for the condos that I insure, besides my own boards that I sit on. And I can see it. You know, there's always somebody there that's just kind of not falling asleep, but just kind of going along with what everybody else is doing because, what the heck? But it's important to tell yourself, wait a minute. I don't think that's right. I need to speak up. And that's really hard for a lot of people in Hawaii to go against what everybody else is saying at the board meeting and say, no, I disagree. Because that's just not in our, you know, five people out of seven are agreeing to something. Well, I must be wrong if I'm not disagreeing. But I always say you need to speak up. If you don't think something is right, say so at the board meeting before it's too late. And there's already a lawsuit over the issue. So it's a little bit of our personalities in Hawaii where let's go along with the norm. And it's a little bit of lack of communication or wanting to deal with the irritant owner. Yeah, so it's communication. Communication and to go along with insurance. I mean, we were talking about construction claims. Oh, yes. And there's something called an H-06 policy. And I know the Y-14B, the cattle statute was amended a few years ago to allow boards to actually go out and force place these policies. Why would you do that? And how does that help an association deal with their claims? OK, an H-06 is a policy designed for homeowners or who own a condo. You don't have to live in it. Whether you live in it or rent it out, you should have an H-06. It's a very comprehensive policy. It covers not only your rental income or your loss of use, your content, your liability as a unit owner. It covers the association's deductible. If you get charged it for a claim, it has loss assessment. So if there is a claim that was short on money, your H-06 policy can be there to help you pay it. So if you did get assessed the loss, that has to be a loss, not a maintenance fee assessment, but a loss because there was a claim and it's sold for more money than the association had and everybody's going to have to pay $5,000, you can take that letter to your H-06 carrier if you have a loss assessment and they'll pay it. So it's a good little policy. It costs $300, $400 max, depending upon how gusty it up your unit is. And Y-14B did allow the board, if the association agreed, to charge to actually ask owners to show proof of their H-06. And if they don't show proof to actually buy a policy for them. The reason being, it protects the unit owner. It protects them on a water claim, a fire claim. It protects them in a lawsuit where they're being assessed. And I did have a condo that everybody had to be assessed $1,300 because the judge, even though there was insurance money, he said, no, I want everybody in your complex to know how bad this board was and everybody's going to pay $1,300. And they got their assessment letter and many of them were able to turn it into their insurance company and the insurance company paid it. No deductible, no nothing. So that's how important this H-06 is. But again, the insurance industry estimates that only about 60% of people who live in condos carry an H-06. So it really is a good thing to force place it. The owners are going to be upset with you. How dare the board think they can do this? Where are they getting all this power from? I hear it all the time. Prove to me that the board has this right. Then I have to send them off 5-14B, the insurance section that says they do. And it's not done to be nasty or mean. It's done to, hey, if you have a claim, you're going to be thrilled we made you have insurance. Right, especially since the cost is very minimal. Exactly. I was talking to, we just had a fire at a condo and the man's unit that burnt, he started the fire, was a rental unit. He didn't have an H-06. Oh, I had it for 30, 40 years, Sue. But a couple of years ago I asked my friend, do I really need this? And his friend said, nah, you don't need the H-06. You've got the master policy. Well, you know what? He's now without rent, he used to rent it. He now has to pay the maintenance fees himself. He gets stuck with the association and is deductible. And when I was talking to him, he felt so bad because he shouldn't have done it. He didn't, I said, well, you can't always trust your friends to tell you what you need medically or insurance-wise or lawyer-wise or self. We learned, but he wishes the association enforced place the H-06 on them, but they weren't at that stage yet. And for associations who haven't done it yet, and we have just a few more minutes, but the condo statute has a process by which you go to your general counsel, your association general counsel, he drafts a resolution, and you take it to your board meeting, your annual meeting, your annual meeting, and you get a majority of people to vote for it. And that allows the association to force place insurance. In other words, everybody gets the H-06, and you turn in that information to your association or proof of insurance coverage. And if you don't have it, the board can then buy the policy and charge the unit owner. And that way, everybody has got an H-06 policy, an H-06 coverage, and that helps because then you're not all, you do make a claim against the master policy, but there are some, and there's been so, in the past there have been so many disputes as to what the master policy doesn't cover. And then you're, so if you all had H-06 policies, that's one area that the dispute with the board would go away. Exactly, because what the master policy doesn't cover, the H-06 should pick up. It's an extension of that, because your bylaws tell us what we have to insure, and it says as originally built, and in the meantime, you've put contents in, you've made beautiful upgrades. We don't cover that, we don't cover your loss of use. You gotta move out for a year, you gotta, you lose the rent for a year or whatever. You've gotta pay the maintenance fees, you gotta pay your mortgage, and you don't have the rent coming in. Right, and so anyway, we run out of time, and you know, we're gonna have to have Sue back, and she's been our guest many times before, but she will have to come back and speak to us on the insurance issue. Thank you very much for joining us today, and please join us next week for another episode of Kondo Insider. Aloha and Mahalo. Thank you for having me.