 Aloha and welcome again to another edition of Condo Insider. As I've said several times, about 37% of our population lives in some form of an association. That's a homeowner association, condo association, co-op, whatever it may be, which is a large part of our population. We recently saw a hurricane, a tropical storm, Darby coming through Hawaii. And that created a lot of issues for homeowners and associations alike. It made me think I have to sing all the claims and phone calls and email that people were getting. Maybe a review of insurance claims, how insurance works for associations. It might be a good time to talk about that. So I've invited back again, Sue Savio, who with insurance associates is a long time industry veteran, well known for insurance. And I want to welcome you back and ask you again this brief review of you and your background. Well thank you for having me. I've been in the insurance industry for a very long time. I specialize in condominiums. And so needless to say we had a lot of claims from the last tropical storm, mainly water claims. Because it wasn't high winds, but there was a lot of water claims from streams overflowing to roofs leaking and windows and lanais and just a lot of water claims. So the association's master policy cover water claims? Yes. The master policy covers water claims. Let's differentiate between water claims and flood claims. We're going to talk water claims first. This would be domestic plumbing systems overflowing. This would be rainwater entering because the roof gets blown off or a window gets blown out or gets damaged. Those types of things are under the property policy with the standard, usually 5,000 deductible for most condominiums. Flood claims, on the other hand, where we have ocean water, streams overflowing, a tsunami. Those things are a flood policy and those are covered in usually a FEMA flood policy. And those are a little different. So it's not a standard policy. So if you have, for example, some storm back up from a stream or the sewer system backs up. So it's rising water or not, you know, rain driven water. And you don't have a flood policy. What happens? Then you don't have coverage because the standard homeowner's policy that an individual unit owner would buy and the master policy that the association buys as a whole does not cover flood. So flooding is actually a separate policy that you have to purchase. So how would a board decide whether or not they should buy flood insurance? Because it's very expensive. It's not cheap. I won't say it's very expensive. If you're in a flood zone, you'd be surprised when you have that first flood. You'll say, oh, my premium is not so bad. It's deep turned by the Corps of Engineers. They have certain flood zones throughout our state. There are some things that are mandated to have flood insurance because you're in a flood zone and no mortgage company would give you a loan without purchasing flood insurance. So it's basically where you are located that determines whether you're in a mandated flood zone or you're not in a flood zone. You're on a hillside and nobody's even checked that area so you're not required to carry it. Some people still do. But homeowners, they themselves should also consider purchasing flood insurance if there are properties in a flood zone. If your property is in a flood zone, whether it's a condo or a single-family home, you would probably want to purchase flood insurance for your contents because what happens is the flood master policy will take care of the building, cabinets, tubs, the toilets, the sinks, everything that's part of the building, but it's not going to take care of your personal property. And I don't know if anybody saw in the news recently about that Halihumi where the flood came in and there was like four or five feet of water in a unit. And of course, your contents is completely gone. It's all trashed with mud and what have you. So if you don't have flood insurance, you have nothing to protect you, your contents, your personal property. Well, I know that you'll know better than I do, but I know that when you look at a condo in a flood zone, even though it's, let's say, 20 stories, they have to cover the entire value of the building even though it's, you might need to build an arc if you're in the 20th floor, you know. Right. But isn't that true they have to cover the value of the entire property? That is correct. FEMA's rules state, with the mortgage companies, they state that a condo has to ensure, it used to be 80% of the value several years ago. And I think just because they needed more money, because FEMA had so many, it was in debt, you know, millions that they said you had to ensure for the 100% value. You want to say going broke? I did want to say going broke, but that's not nice. I know. Yeah, that's not nice. Let's just say they're in debt because they're government agencies, so they're not going to go broke, they're going to rely on you and I and the population to pay for it. But yeah. So let's look at that again from another practical example. I know of properties that maybe are two or three buildings, but only one of the buildings is in a flood zone. What happens in that case? Do they ensure all three buildings are just the one building in the flood zone? You don't have to ensure the other two buildings that aren't in the flood zone, but you do have to ensure the one that is with flood, and we will have to show the mortgage companies that we do have flood on the building that's in the flood zone. A lot of condos though will say the flooding, the tsunami doesn't mean the map that says it can only flood this one building, so they will buy insurance at a lower rate for the buildings that aren't in the mandated flood zone. So a lot of condos will take it for all the buildings. And I know, and for condos, let's take a high-rise condo again by 20-story building example. Yes. They have to ensure that 80% of the entire building value... 100% now. 100% of the entire building value now. Yes. Whether they like it or not, if they want flood insurance. Of course, the risks are very high if they don't have flood insurance. How about the owner on the 20th floor? Does he have to buy flood insurance? Would his mortgage company make him buy flood insurance? No, he doesn't have to buy flood insurance because we show the 20th floor unit owner's mortgage company that the building has flood insurance. And then they'll let him go by without any flood insurance. And he's not going to want it for his contents because if he has to buy flood insurance for his contents, forget that nobody's around to even... Back to building an arc. Exactly. And nobody's around to cover his claim. We're all dead. You know. Yeah. So, all right. Well, I'm going to just kind of discover a couple of insurances in general. Maybe we can just take a moment and briefly review the types of policies that associations have. Then in a moment, we'll talk about homeowners. Okay. Association, their biggest asset is their building. Whether it's a low-rise with lots of buildings or a high-rise. So that first thing they have is a property policy. And it covers all the standard perils, fire, lightning, windstorm, smoke damage, vehicle damage, hurricane. Those are the things we cover under a property policy. And because it's the building's policy, and the bylaws state it, we have to cover the building as originally built inside and out. So, a homeowner knows that there's going to be some coverage if he had a fire to his unit for his cabinets, his tubs, his toilets, his sinks, his walls, his flooring, because it came with that. Now, there are condos that comes with nothing on the inside. So we just are covering the structure there. And, of course, that owner would not have coverage for cabinets, tubs, toilets, and sinks, because they didn't come with it. But those are far and few between. Most condos come with everything. So that's what the property policy does. Property policy usually has a standard $5,000 deductible, though there are some condos because of so many claims that are carrying 25 or 50,000. Under the property, though, typically in a hurricane it's a percent of the value. Right. And I want to say that probably the average is 2%. Average is 2%. That's correct. And I guess you can buy 1% for more money. Yes. And what are the risk if you buy 5% or 10%? Well, the mortgage companies won't have to have more than 5%. So you can buy up to 5%, but there's usually not much of a savings from the standard markets between 2% to 5%. Some will, a standard market, maybe if you're building something quite all-concrete, but there's a lot of maybe holotile or there's some frame in it, then they'll want to go to that 5%. But for the most part, you can get it at 2%. And just generally right now, I'm going to come back to this in much more detail. My recollection is the statute mandates that they have to cover water claims in the master policy. That is to say that toilet overflow, that sink overflow, that broken ice maker line or the problem with the washer dryer, probably not the dryer, but the washer is covered under the master policy. Right, the damage done by the water to the building as built walls, floors, ceiling is under the master policy. So you live on the 10th floor, your ice maker leaks, and there are great claims. Great claims with ice makers because you can't realize it's leaking. It goes down five, six floors. The master policy has to step in for the building as built. So the cost of extracting and drying the walls and the ceiling, the damage to all those things are covered under the master policy. And you said it's basically as built. So if I'm an owner and I put in my COA cabinets and my golden laid floor and my sterling silver faucets, that wouldn't be covered under the policy unless I purchased it under my own homeowner policy. Correct. All your upgrades and improvements have to be purchased under a homeowner's form six if you're in a condominium. And we would give you some money for what used to be there, the typical cabinet, the typical rug, the typical flooring, but not the value of what you've replaced it with. Now, beside property insurance, what other types of insurance does an association have? Okay, well, they have to have liability for all the limited in common areas, whether you have a swimming pool, you've got parking garages, you've got walkways. All of that has to be insured because if someone gets hurt on property, they're going to sue the owner of the property who happens to be the association, who happens to be 100 owners and you want to protect the assets of the owner so you buy a general liability policy for all the common and limited common areas. And other policies beside liability? Sure. There's directors and officers, which is a liability policy for the people who serve for free, because after all, they're working, doing a job, not getting paid for it, putting their best effort forward, but sometimes things go wrong and they get sued, so you need to have a directors and officers policy. You also may have an umbrella policy just like you might have a personal umbrella above your home and your car. The association buys an umbrella above their general liability, their directors and officers policy, and if they have employees above their workers comp or if they have an auto above their auto because something sometimes does go wrong and you don't want to have to assess your owners because you didn't have enough coverage so you buy an umbrella policy that provides this additional liability. So there's quite a few policies that associations have to have by law or just a matter of good business judgment to protect it. So you take an umbrella policy, which is kind of like a policy above the other policies. Right. So does that cover property? No. An umbrella policy is liability. It doesn't cover property. So basically you have property policies and then you have your liability and the umbrella is strictly liability. And how about this form that you can, I guess, purchase, which is a building code and... Oh, building ordinance coverage. Building ordinance coverage, yeah. Right. Okay, what that does is because many of our buildings are old and also because building codes change all the time, you might have a claim that happens 20 years after you're building and you cannot rebuild it the way it is because of building codes. So there's insurance that gives you extra money to rebuild because you're going to need it because of these code changes. Now, one of the things that's been a real common issue in the industry of recent is what I'm going to call iron pipe failures. And iron pipe failures are the wastewater lines, you know, which are environmental issues, you know, the black water they call it that could create problems. That would be a valid water claim. But the fact that the pipes are old doesn't mean you're going to get all new free pipes from your insurance company. No, you have to understand the insurance company covers the damage done by the water or what the ice maker, the water that was in that appliance. So when a common element pipe breaks, the water that comes out and damages the floor in the walls, that's what's covered under the master policy. The association still has to pay to repair their own pipes. We're not a maintenance policy. So plumbing bills are not covered under insurance. So it's probably important when they choose their limits of liability in these policies, what's the best thing? Talk to the insurance agent, have a discussion about it? Oh, always. Always have a discussion with the professional, the person who knows what they're doing about your building. And on property insurance, for example, your building is worth $50 million. For a board to say, well, we're only going to insure it for $25 million. There's some potential penalty for co-insurance, I think it's called, is that right? That is correct. I mean, when you think of a concrete high rise, you say whether chances of it being destroyed in its entirety, and it's pretty slow. So what people do is they say, well, let's not insure for $50 million, we'll go for $25 million, that's plenty that'll cover all claims. I say, well, that's true, it will cover all claims, but there's a co-insurance clause in the policy that says, if you are only at the time of the loss, if you're insured for 50%, and the loss is 100,000, we'll give you 50% of that loss, which is 50,000. Then we're going to subtract our $5,000 deductible. Now you're left with $45,000, and you have $100,000 loss. Because it doesn't mean that half the building has to go before you're going to lose it, even on a $50,000 claim, or a $10,000 claim. If you're only insured for 50%, that's all you're going to get 50% of the claim. Can you mitigate that to some degree by letting the insurance company set the value? Yes, and when you do that, which we do, you have something called agreed amount, and that means the co-insurance goes away, and the insurance company says, yes, board, we agree with you that 50 million is the right value. So let's say at the time of loss, it's really 55 million. Because of that agreed amount on your policy, you will not be penalized for being less than 100%. Well, that's a great short review of the policies. We're going to take a little one-minute break and come back to Sioux and get into detail on actual claims and common problems in the industry. We'll be right back in a moment. Aloha, I'm Kaui Lucas, host of Hawaii Is My Mainland every Friday here on Think Tech Hawaii. I also have a blog of the same game at kauilukas.com where you can see all of my past shows. Join me this Friday and every Friday at 3 p.m. Aloha. Aloha, I'm State Senator Russell Ruderman. I represent the Pune and Kaui District on the Big Island and the host of Ruderman Roundtable. We're here on Think Tech Hawaii every other Tuesday at 2 p.m. You can join us at thinktechhawaii.com. You can find a link there to a page where you can see past episodes. And we talk here about good government, environmental issues, and issues of the day facing the state of Hawaii. I'm Russell Ruderman. Please join us for the Ruderman Roundtable. Mahalo. Welcome back to Kondo Insider. We're here with Sue Savio talking about insurance and we're going to start talking about claims and those issues here in a moment. We just suffered from tropical storm Darby and I guess I should ask you, Sue, did you have a lot of claims to Darby? Yes, we had a little bit over 100 claims that we filed within two and a half days. People are still calling, but it's minor ones now. Wow. Oh, yeah, wow. Behind of my emails. So you're burning the midnight oil? Yes, and also the morning oil. I understand we were talking before the show. You were saying you had to come at 4 a.m. this morning and handle the claims. Yes, I did. I was behind and I didn't like being behind, so I came in this morning early. Well, let's talk about now something's gone wrong. Okay. And you think it's covered by your insurance. What should the Association Board of Directors do or they're appointed general manager or manager coming? We now have a water claim, a pipe broke. What should they do? First thing they should do is fill out an incident report. The who, what, when, where, and why. Then the best thing to do is to send it to your insurance agent and say, we think we need to file a claim. Is this something that we should be filing a claim for? We can then review it and state, yes, it appears it's going to be over the association's deductible. Yes, it's a covered peril. Then we can go ahead and file a claim. Of course, once they file a claim, then the insurance adjuster will take over. But even before we filed the claim, the most important thing to do is to stop the water that's causing the claim. Call in the plumber, call in the extractors. Don't wait to say, to get hold of somebody and say, should I do this? It should be automatic. Stop the water, call the plumber. Just like if you have a fire. You don't call up and say, we have a fire. What should we do about it? You know to call the fire department. Same thing here. Call the extractors, call the plumber. So the board of that resident manager could call the plumber and have him shut off the water and get the fans and start drying out the space without getting the insurance company's approval and getting bids and things like that. They have the ability to act right away and that still would be covered by the policy to mitigate the damage so it doesn't get worse. Exactly. They not only have that power, they should use it. But you'll always hear people say, well I didn't want to call the extractor because then I'll be stuck with the bill. The extraction bill is part of the insurance claim. And even though you call the extractor, whether you're the resident manager, the site manager, or the unit owner, doesn't mean you're going to get stuck with that bill. So go ahead and call. Try to mitigate the damage. Call the plumber if it's your pipe. And maybe it's not your pipe and it's a common element pipe we don't know yet until the plumber gets there. If it's a common element pipe, the association's going to pay the plumbing bill. But if nobody calls the plumber, it's going to continue to leak. If nobody calls the extractor, we're going to end up with mold. And mold is very limited coverage under most policies. Some policies have no coverage for mold. So we need to get the extractors in. We need to get it dried. Sometimes I find a manager's and or board members are afraid to notify the insurance agent because they are fear of the simple notification might cause their premiums to go up. You know, it's kind of like, is it below the deductible or not deductible? Are there penalties for noticing of a potential claim when in essence at the end of the day there is no claim because it didn't meet the deductible? Is there some kind of penalty just for notifying you? No, there isn't. Especially for notifying me. I'll make that decision. Sometimes I always report all claims because the carrier doesn't act on them unless we tell them to go ahead. We'll put it for records only. We don't think this is above the deductible, but we're notifying you just in case so that if it is above the deductible, you're ready to go. Okay, so we can do that. Other times I can tell somebody, oh, I just have a little mark on my ceiling. I said, well, send it over. I'll just keep it in my files and I won't bother to file the claim because it's going to be a couple hundred dollars. Let's take an allied voting claim for a second. So someone gets hurt on the property. And you're not sure how bad or good it is, but usually you hear from the attorney months later. So they have the incident report that Sally tripped in a hole in the parking lot and she on her own said, I'm going to go take care of it. I'll go see my doctor. Obviously you do the incident report. Should you report those to the insurance agent even though you have no demand letter or whatever? Yes, you should because under the policy and the liability policy there is something called medical payments regardless of fault. It might be easier to say Sally, we understand you slipped and fell, we understand you with the doctor. Oh, you're out of pocket, $500 for your medical. Let us take care of that. That's just the gratis payment regardless of fault. Now if Sally's seriously hurt and she's going to sue, well, obviously she's not going to accept the gratis payment of $500. But you'll at least know the adjuster can go out and take pictures of the space as what happened as opposed to five years later trying to figure out where she even slipped. So yes, we should be notifying insurance company of those types of claims. So the same course of action is filled in this report. Make sure it's detailed. The date, the time, the who, the contact information, what happened. So you have a complete record and submit that to the agent. Then the agent will kind of filter that to some degree based on their experience whether we'll report it out to the insurance company itself now or later depending on what happens based on your decades of experience. And there's a lot of condos that have cameras and so if you see a slip and fall on your camera please save that. Don't run over it three days later because it's one of these continual loop type. Do go ahead and save that so we have that in case the claim does go into a lawsuit. So following my example, we now go back to the water claim. There's a water claim. Somebody's ice maker broke on the 10th floor. It's now gone into the 9th, 8th and 7th floor. My experience has been most deductibles are higher today. And that has to do with the change in the law that allows the boards to assess the owner for the deductible. That is correct. Just briefly, what was the background that caused that change in the law where they wanted to allow the association to have a larger deductible and kind of put the responsibility of the deductible on the homeowners? Is there kind of an insurance history on that that created that? Well, I don't think it was really the insurance industry that created it. I think what happened was when they were working on identifying the bylaws and they came out with 514b, they wanted to put something in that would force owners to have interns because under 514a, there was nothing that says you had to have a policy and a lot of owners just assumed because they lived in a condo, everything was taken care of. And then, of course, if something happened and their dog bit somebody and they realized they had no coverage under the master policy, they could lose their unit, and there was a lot of, if you had a fire or a big loss, people didn't realize the master policy wasn't going to protect them. So under 514b, I think, when they were recodifying them, they wanted to put in some muscle to it for the association to say, look, you need to have a policy. And in so doing, because the condos were getting older and there were more and more claims, to charge everybody the deductible for somebody who doesn't take care of their appliances, this way we put it back on the owner. So in other words, if I'm a good owner and I have the plumber come in every seven years and change my water heater and I have them check my valves to make sure they turn and my icemakers working, et cetera, I'm considered a good owner. I should probably not have a water loss, but maybe above me there's somebody that doesn't do anything and their water heater is 20 years old and it's all rusting out and maybe they have some leaks and they're just putting towels down to wipe it up. Eventually something's going to break big time and I'm going to, and everyone else below me is going to have problems with water. So I think by increasing the deductible on the master policy, it forces owners not only to buy an HO6 to protect themselves, but also to get their deductible, the association deductible covered because they are going to be charged it. Well, who asked me about that? Here's another way of explaining it to them. Okay. When you look at, if you had a low deductible of $1,000 with your insurance company, those underwriters who set the premiums know they're going to have claims. Yes. And they're going to build it into the rates that they're covering all these units and they know the chance of the claims is high. So it affects the rate of the master policy to the association where if the deductible's higher, all those owners under the HO6 have multiple insurance companies. So it's not one insurance company is taking this risk. It's kind of divided by the number of different individual HO6 insurers out there. The risk seems to be lower for the master policy writer when you have a larger deductible that they'll have claims by having that put on to the HO6 policy, the homeowner. HO6 policies are a couple hundred bucks a year or so. It's cheaper. So it's actually cheaper for the association to have the homeowner insure it to their HO6 than for them to try to, for the whole association, buy a very low deductible. Right. I mean, I don't know if it actually would save money when you say a hundred owners have to pay $2,000 for, because we went up, the deductible between five and ten maybe only saved $1,600 on the master policy, but it saves the claims and the experience for the future because there are, there have been condos in our state that have not been able to get insurance in the standard market though they should have, but because they had so many claims you had to put them in what I call the secondary market which charges a higher price because they don't take care of their water claims. So by upping the deductible so that if you see that there's 20 claims at $15,000, so I'm going to give this condo a $25,000 deductible, I can maybe keep it in the standard market, keep the price down for all members but make sure the members have an HO6. I know the answer to this, but I'm going to ask it anyway. Of all the claims you get for associations what is the number one claim type? Water. Water overflow. Water overflow. From a domestic plumbing system, washing machines, ice makers, all what we've been talking about. And that affects the premiums the most then probably because that's the number one claim. Are there illegal things the board can do to mitigate that by taking some kind of constructive action to try to mitigate water claims without the owner's approval? Well, yeah. There's the high risk component in 514B which actually allows the board to determine which appliances are high risk and I say anything that has water is a high risk and actually hire a plumber to go in and inspect everyone's appliances to actually tell people you've got to repair it and prove to us you repair it and if you don't fix up what the plumber said was wrong we can actually hire a plumber and charge it to you back. So this is a way to prevent that 20-year-old water heater from leaking and throwing 60 gallons of water down on everybody. So yes, there are things in 514B that allow that. So boards can consider, I know we've had many clients that have set up a high risk component policy and they hire a plumber and they go in and have all the units inspected and typically with those plumbers they've made agreements with them if it's a line and a washer for example they replace them right there for some reasonable costs that are on the premises already to fix it and they build the owner back for it. And if they've adapted that high risk component policy they can do that and they can force the owner to take corrective action. So if in that plumbing inspection they find a really old rusty water heater they can say you need to replace this immediately and if they don't they can hire a plumber go in and replace it and send them a bill. Correct. And if they don't pay the bill they can... Well it's on their maintenance fees so when they start to pay their maintenance fees they can go to it if they have priority of payment it's going to go to pay the assessments first. And what are the two quickly recommendations you make to avoid it? One is obviously the high risk component to find those and set up an inspection policy. Would the other be use professionals because you look at the liability claims and the director also liability claims using professionals to... and reporting to them and getting advice as soon as you get notices of an effort. So you've got to realize that most board members are just common everyday people who go to a job all day long and they're not experts in their field. I mean in the field of plumbing or structural problems your condo may have or the fact that you have to replace windows they're not experts at that. So you should always when you're going to do any type of thing around your project always have a professional come to tell you get bids do it right so that you don't get yourself into a director's and officer's problem with having a claim by the association or by members of your association. Well I guess in summary I can say it this way to everybody if you have a claim get a complete accurate detailed incident report and submit it to your insurance agent because you have an obligation to protect the association all the owners have paid for this insurance through their maintenance fees and allow the professionals to then work with you with respect to that claim. And in the meantime if you have some need to mitigate something mop up the water, extract the water hire fans to clean it out do whatever it may be do it right away because you're not only taking care of the property and protecting it but you're mitigating the size of the claim which will help your future premiums. Exactly. Well thank you for being here today. My pleasure. I love having you come back. Thank you. You know I've been in this industry way too long. Too long. You got that. Too long to mention. And to all of you thank you for watching Condo Insider. Our conversation is about association living and we look forward to seeing you next Thursday at 3 p.m. Aloha. Aloha.