 Good afternoon, and thank you for joining us for another episode of Kondo Insider. This is a show about Kondo living, for Kondo residents and owners and people who are associated with condominiums, and today I have as my guest, Sue Savio, who is a president of insurance associates of Hawaii, and we're so glad to have you with us. Well, thank you for having me. I'm glad to be here. And, Sue, does your company insure condominiums? That's our main book of business is condominium insurance. Okay, and besides insuring condominiums, how else are you involved with condominiums? Well, I happen to own a few. I have lived in them myself. I also sit on three boards, so I'm very much involved. And have you ever served as board president? Oh, yes. I am board president now of one, though I have been at one point in time, board president of three. Wow. And what about your involvement with Community Associations Institute? You've been a longtime member and a principal of that organization as well. Yes, I have. I've been a member since the 80s and also been their president and other officers held other positions on their board. Yeah. Okay. Well, you know, one of the big expenditures that all condominiums have to have is insurance. Yes. Right? Oh, yes. And so there are various policies that an insurance association would get. Today, we're going to be talking about D&O, and D&O is Directors and Officers Insurance Coverage. Correct. Okay, can you explain exactly what does that, what does, when we talk about coverage, what does, what kind of claims does this cover? Okay, so the Directors and Officers Policy is covering the people who serve on the board. It's also covering the employees of the association. It can also cover committee members, as long as it's a board committee, not somebody who decides to set up his own committee. And so these are residents of the project? Residents, it could be even an outsider who's not a resident, but could be on a committee. Okay, so as long as it's a committee of the board, we cover not only the members of the board, we cover the committees, we cover the employees, and we cover past, present and future board of directors, because you don't know when you're going to be sued, you may sell your unit and move on, but then something happened while you were on the board and you get sued. So it's a very broad policy as far as who we cover, all right? So that means that even if you're off the board and somebody files a lawsuit covering the period of time, let's say I was on the board for 10 years, and then I decided I didn't want to be on the board anymore, and then three years later somebody files a lawsuit and it relates back to the time when I was on the board, and I'm named in the lawsuit. Does that mean I'd be covered if the DNO was in place? Yes, the DNO will cover you for that lawsuit. Okay, so is it a good idea to stay with the same DNO carrier for as long as possible? I always try to start every condominium off with the broadest policy available, not the cheapest, the broadest in coverage terms, because being a board member myself, I don't want my personal assets to have to go to settle a claim for something I think I'm doing a good job on and accidentally made a mistake maybe. So I think it's very important that you get a broad policy and you stick with that company because it's a claims made policy, which you have to understand is the claim is made when somebody in writing threatens to sue you. So if you get an email today, great email, if you get an email that says I'm upset with the board, I'm going to sue them over this issue, at that point in time the claim is made, not two years later when the lawsuit is filed, but at that time and it needs to be reported. So who does the reporting? The insurance agent, so that email or whatever or letter, if they send you a letter, should be sent to the insurance agent at that time to file a potential claim. It's not a claim yet because it's only a threat, but it could turn into a claim. So when it turns into a claim two years later, let's say you've changed directors and officers policies and the current directors and officers policies says, okay, well, it appears we have coverage for this, we'll check it out. And in checking it out and getting all the old emails on it, they find this old email from two years ago and they're going to say, oh, not us, the claim was made back then. So you're going to have to go back to that carrier who had you two years ago because that's when the claim was made. Okay. So that's why it's important when you get something in writing to send it to the insurance agent. And you mentioned something very important too. The reason why you have this coverage is board members serve, they're volunteers. Volunteers. And they don't get paid. Don't get paid. But if they get sued, they could get hit with a judgment. They could get hit with a judgment and don't forget all the bylaws of the condo say because we serve without pay, because we're doing this as a volunteer, that the association has to indemnify us. So if you're going to get sued and there's no directors and officers coverage, it just basically means every owner is going to have to cough up dollars to cover this lawsuit, to pay the attorney fees, to pay any judgment. It is cheaper to buy a broad directors and officers policy, plus this way you can go to your owners and say how hard it is to get owners to serve to say, look, we have directors and officers, we're protecting you, we want you to serve on our board, as opposed to people who say, well, I don't want to serve, what if something goes wrong and I get sued, you have insurance. Okay. Well, let's talk about the claims. What kind of claims are typically made? When I first started this business many, many years ago, lucky if I filed two claims a year on directors and officers. Today, it's at least one or two a month. Oh my gosh. We have, Hawaii is terrible, really is for directors and officers claims. We have more claims than any other state. And you look at somebody as big as California, Florida, New York, you see all these condos and co-ops and you say, why are we so bad? Why do we have so many claims? We do. Most of our claims are discrimination claims, which blows my mind, because we can live nicely amongst each other. We have no problems, but somebody says, you picked on me or you didn't, because I'm howly, I'm not howly, I'm pregnant, I'm not pregnant. I'm gay, I'm not gay. Or you say, you let the board president park his car there, but you don't let me and he doesn't get fined. So that's all discrimination claims. And then of course, employees to sometimes feel that the board members were picking on them or owners in the project to say, well, you're working for the association and I don't like the way you're doing this landscape vendor and they harass them. So there are all these things present claims. And then of course, owners file claims for the fact that you're not maintaining your, you're not following your bylaws, you're not maintaining the building or whatever, you're going to foreclose on me, I'm going to sue you. I mean, there's a zillion reasons that people sue. Important thing is to make sure for those zillion reasons, you've got the best policy available. And Hawaii, unfortunately, as I said, not only has more claims than any others, they also are average claim. If you go through the mainland, then nationally, the average claim is $30,000. It sells for about $30,000. In Hawaii, the average is $50,000 to $60,000. Oh my goodness. And our premium is about 50, 60% of what the national average premium is. So needless to say, Hawaii's premiums are going up in directors and officers. They rate, which is interesting, I think for a lot of people to understand, is that they don't rate you by the number of directors. They rate you by the number of units, because the bigger the project, possibly the more problems, the more people who may be upset. They rate you by the number of employees, because a lot of employees will file discrimination claims or harassment claims. And so if you have a lot of employees, and we're going to defend that, they're going to charge you extra, they go by the number of units, your lost history. You know, how many claims have you had in the past? And somebody who has had a lot of claims is not going to be very pleased with their premium, instead of it being a couple of thousand dollars at some point in time, depending upon how many claims you've had and what they've paid out. You could be paying 30, 40, 50 thousand dollars for your directors and officers policy. And it looks more like your property premium than it should be your directors and officers premium. But that's what the company does. So those are the things they're rating it on. So it's very important, as I try to tell people, when somebody's upset, communicate with them. Sit down, tell us what the problem is. Why are you so upset? You know, did you understand what's going on? Because a lot of times, owners don't understand. And if you could sit down and before they get the attorneys involved, sit down and talk and communicate. I think we could solve a lot of these things before they go out and start feeling the need to hire an attorney. And then, of course, nobody will talk to anybody because we have attorneys involved. Right. And you have a lot of boards who are very antagonistic, you know, and they're very defensive. When somebody complains, I mean, they would prefer that nobody complain. And when somebody complains, I mean, they kind of group together and it's like, well, we can't talk to you. Or we're going to send it to our attorney. Our attorney will call you. Or our attorney will talk to your attorney. And then it escalates. Right. I mean, there are board members who don't understand their job. And there are owners who live in condominiums. And I've always said there should be a test that you have to take before you can buy a condo to make sure you can live in one because you have to live with other people. And you have to follow rules. And there are people who don't like to follow rules. But there should be a middle ground where we could get together and say, we have a problem. We need to solve it before it gets to the level of attorney. Some things you can't solve. And it has to go to the level of attorney. Other things, many things can be solved just by communicating. And this is a good message to the board members and the owners who are listening to the show, right? That really, people need to get together and talk before you get attorneys to try to resolve it. And nobody should be seeing an attorney unless one side decides they're not going to talk to the other, which is also not a good thing. That the board should continue to talk to their unit owners or their site manager should be communicating with the unit owners. But people should be talking to each other, now going into their corners and calling their attorneys and setting up for a fight. Because that's very unproductive. It is very unproductive. It's only going to lead to a claim, which is only going to cost the association a whole more money because we're going to defend it. We're going to win or we're going to lose, but there's money paid out. And then when we go to quote it next year, that company may say yay or nay. If that company says nay, we then have to go out to another carrier that's not going to be as broad, going to raise the deductible, going to raise the premium. Nobody wins. Right, because the insurance is an operating cost that gets passed on to all of the owners. Right. And even if your building has got no claims, because you said Hawaii's got so many claims, that means that the insurance, the cost of D&O is going to go up for everybody. Right. The insurance companies are going to spread out their damage, so to speak. We are anticipating that directors and officers coverage next year will probably go up somewhere between 20% to 25% on the average. Now there will be some people who will pay 50% or 100% because they've had a lot of claims, but a small condo that has no claims that is doing well probably will only see maybe a 15%, but the average person's going to see about a 20% to 25% increase in their directors and officers premium. Now, fortunately, directors and officers premium is very small in comparison to their property premium and their liability premium. But still, if you were only paying $2,000 and now we're going to be paying $3,000 or you had a claim and now you're going to pay $15,000 or if we're paying $15,000 and you have another two, three claims and you're now paying $75,000 with a $100,000 deductible, I have that at one of my buildings, that's not pleasant. Well, when you say deductible, that means, so you've got a $75,000 deductible. That means that the first $75,000 is paid for by the association. By the association. Out of pocket. Out of pocket, so not only are you paying this huge premium increase because you blew it, you've got this huge deductible. And so the insurance company is basically slapping the board's hand or the owner's hands and saying, look, you guys, the first $75,000 is out of your pocket. Sit down and discuss this. Solve your problems before you try to file a claim before you commit yourselves to suicide here by having huge deductibles and huge premiums. And so basically, you mentioned how a claim is made. If you get the note from the unit owner. Written, written. Right, right. That starts it. But what really formalizes is if they file a lawsuit. Well, yeah, but so when you usually, usually you'll get a letter, I'll get an email. So-and-so threatening to sue you at the board meeting last night and next morning he puts into his note, you know, I'm going to sue you and this is why. That is a time for me to report it to the carrier as a potential claim. It just sits, but it's been reported formally. Okay. Now a year later, two years later, the actual lawsuit arrives. We go back to that carrier and say we reported this to you, here is the lawsuit. Okay. So now we have the hiring attorney. Attorney's getting all the information on it, asking for all the back information from the day that first email was sent, what this was all about, what you've done to handle it, how you were taking care of this or how you weren't taking care of this, he's going to want all that information. And then we start. Okay. And right now what we're going to do is we're going to take a break and then when we come back, we will talk about what happens now that you've got the lawyer and the claim. Okay, in place. I'm Ethan Allen, your host on ThinkTech's likeable science show. Every Friday at 2 p.m., we delve in the magical, magical, fascinating world of science. How science applies to your life, why you should care about science, what impact science has on you and on those around you. Why you need to know some science. It's a fun, interesting, painless way to learn some good science that you can use. See you there. Hey, hello, everybody. Thanks for joining us on ThinkTech Hawaii. I'm your host, Andrew Lanning, the security guy. I host a program called Security Matters Hawaii. And I hope you'll join us on Fridays. We air at 10 a.m. And we're going to be talking about those security things that really should be important to you. And maybe get behind the scenes on some of the things that you may not know about the industry or about products or even about your habits. Security is all about people, processes and products. And we hope to bring that to you in an informative and hopefully a useful way. So again, 10 a.m. on Fridays, Security Matters Hawaii on ThinkTech Hawaii. Join me. Thank you. Okay. We're back talking to Sue Savio about D&O coverage. And before we took the break, we were talking about how does the claims start. And you talked about the complaint letter which now has become a formal lawsuit. Okay. Where the complaint has been filed and they've given it to you and you've contacted the attorney. The insurance company then sends a letter to the association and to people who've been sued, which means the board members and any employees who are, you know, defendants in the lawsuit. And this letter is very strange because if what it says is from the insurance company, we are your insurance company and we accept your tender, which means that, you know, the claim was given to them and they've accepted it. But we are accepting this with a reservation of rights. And it goes on to say that this means that if for some reason down the road we find out that, you know, you didn't do stuff right, that we can walk away and you may have to reimburse us. Okay. What is explained? What that means to me, that's like a happy letter with a punch. Okay. It's like, you know, what do they mean? Okay. A reservation of rights letters is just that they reserve the right. Okay. We are going to let you know that we've hired an attorney that we're going to handle this claim. That's what they're telling you to start off. But they are saying if by working through this claim and getting back all the information for the two years or whatever it's been going on, they find something that says, for example, the claim really was prior to their time of being writing the coverage, then they're pow because it should have been the prior carrier. So you always have to put the most important carrier, the carrier at that time on notice. So a lot of times we will file a claim because the exact date of loss is iffy. So we'll do it with maybe the current carrier and the past carrier. And then the current carrier may say, no, it is. We searched it all out. It does belong to that last carrier. And that's fine. So this reservation of right letter says, well, we thought we were going to defend you, but we're not. So because it's not our claim or it's not something we cover or whatever the case may be, there's reasons why they would not or it's not covered. I mean, it's not an insured peril there. So then the old, the prior carrier would have to take over. But the reservation of rights always I'd say 99% of the time used in a director's and officer's claim. Not so much on property or liability, but on directors and officers quite often because they just don't know what they're going to find when they start looking through all the back info. And when we're talking about the information that they would look at, during the course of a lawsuit, there's something called discovery. Each side asks each other questions and you get documents and you do depositions. And in the course of the lawsuit, you discover who said what and who did what or who didn't do what. Right. And you find out, oh my god, that the director who's named as a defendant, he didn't comply with his fiduciary duty and maybe he didn't follow the business judgment rule. And now the insurance company knows it because they've seen a deposition transcript. Right. And they can just say, write that personal letter saying, we sent you a letter with a reservation of rights two years ago when we started this lawsuit. But now because we've seen the deposition and we see that maybe you have some exposure. Well, because maybe this board member knew, let's say it was a contractor and it was his pal and his buddy and he's cheating to get him to job. At that point in time, the insurance company is going to say, hold on here. You know, we're not defending you, that type of situation, because you knew what you were doing. You did this on, you know, so or you committed fraud. I mean, we've had going through directors and office lawsuits, we found directors who have committed fraud. I mean, it's, so there's certain things that the insurance company just doesn't cover. Okay. And they can find this out in the course. And it may take them a year or six months or longer. They'll find it though, because they're going to ask for everything and your property management company or whoever has your, all your emails and things going on. It's going to come out. So you can't hide things. So it's just best to, I'm a board member. It's just best to do your best all the time. In other words, forget who you are and what you want, what is good for the whole. And if you do that, you shouldn't have as many claims because you're concerned not what you want or what a lot of times people will get on the board because they have a certain agenda they want. You know, that's not a good person to be on the board. You need somebody who has no agenda who says, I just want this project to run nicely. I want my building value to look nice. I want my building look nice. I want my value to increase. I want to maintain it. I'm not here for a personal reason. I'm here because I feel that if I don't do it, nobody else is going to do it. And you know, you have some board members who don't like to make hard decisions. Yes. And so like, let's say, because you have to kind of find fault with somebody else in order to make this hard decision, like a building that finds out that their pipes are failing. Right. They want to find out, why didn't you find out? Well, how come we're finding out now? Why didn't you know 10 years ago we could have saved up for it? And they want to blame somebody. Yeah. And so now you've got board members who are conflicted. They go out and hire an engineer. The engineer says, ah, you got to replace all your pipes. It's going to cost you a million, billion dollars. Right. And you say, oh my God, how am I going to do this? And so now you're stuck making this decision. And there is something under the condo statute called the business judgment rule. Right. And you're familiar with that? Yes, I am. And can you explain what that is? Okay. Well, basically the business judgment rule says when you have to make a decision about something you don't know, go to a professional. Ask the attorney. Ask your insurance agent. Ask your... Engineer. Engineers or a consultant, whoever the roofing consultant. And you have to pay for their... Yes, you have to pay for their services. But you're also buying you protection when you pay for their advice. So when you decide you're going to re-roof and you don't know what your roofs are like and you don't know what's the best thing to put on. And you don't know if you need two layers of this or whatever or if you have to go down all the way. Not the roofer. Have the consultant. The roofing consultant tell you, this is what I recommend for your roofs. Whether he says go all the way down, put two layers of this, whatever. Then you now have a piece of paper that you can send out to bid that you can now rely upon because this is what the roofing contractor said. I mean the roofing consultant said, you paid for his services. You're going to do pipes. Nobody in the right mind is going to do pipes in the condominium and do it on their own. Oh, let's just have a palmer come in and replace our pipes. It's not that simple. You have to hire the correct people to help you because if something goes wrong, it's 100% on your back if you didn't hire a consultant. And the consultants have their own errors on emissions. They have their own errors on emissions coverage. They have their own professional liability, just like attorneys do, just like insurance agents do. We're all human. We can make a mistake, you know. And with insurance, if you're a board member and you follow your fiduciary duty and you don't vote because the president is your best friend and you follow the business judgment rule and you hire an expert consultant to come in and tell you how to fix your pipe or how to fix the roof. And you follow that recommendation and it turns out to be wrong. And then the owners in the building sue you. Okay, so now you've been sued. And maybe when the dust settles, the court says, oh yeah, that was a wrong decision. Is the insurance company still going to defend you and pay? The insurance company is going to defend you. The insurance company is going to pay out if there is a judgment against the board. So if you follow the fiduciary duty and the business judgment rule and you're wrong, you're covered. You're covered. And that's what directors and officers should be doing. They should not be making decisions for things they don't know about. Okay. That's the message we want to get through to people, right? If you sit on a board, we kind of know you're clueless. And so you need to go out there and hire the best professionals you can find and get their advice and get it in writing and pay for it. I mean, everybody's interested in getting free advice, but no, they need to pay for this advice, right? Because you're going to be doing a project. Your job is to maintain the building. And that's one of... A lot of claims are bogged about because people feel they're not. They're not following your bylaws or you're not maintaining the building. And if I own in a building where it's not being maintained, then my value is going down. I can't get it rented as well, etc. So it's the board's job to make sure to maintain. So when you have to go and put a new roof on or you've got to go rip out all the old landscaping that's 50 years old and needs to be done or you're going to put siding on the building, I'm not an expert on that. I wouldn't even know where to begin. I don't even pound a nail straight. I want somebody to come in and tell me a consultant who's going to get paid for his advice, who's not going to put the roof on, who's not going to put the siding on, who's not going to dig up this landscaping, but who's just looking at it from a set of eyes that has no financial interest in it to say, this is what should be done for your complex. Then I know that this is what should be done. I know to send it out for bidding because these are the things I want. Now, when the bids come back, I'm not very good at looking at bids and making sure they're accurate because sometimes they're this thick, okay? So you need somebody, maybe, to look at the bids and say, yes, everybody quoted the bids. Like a project manager. Yeah, like a project. Everybody did it the same. So these are all the same bids except this guy's using this and this one's using that and here's the prices. And then you can go for it. And you hear, I mean, I sit on a board, you sit on a board. So you've heard this. Oh, but we don't want to pay for it. The project manager is so expensive. And if we go out and get an engineer's opinion, my god, he's going to charge us $1,000. And, you know, I mean, so you hear this constantly. No, you have board members who don't want to pay to get the expert report or to go out and hire a project manager who's going to be responsible for getting the specs and going, you know, supervising the bidding process. And then when the contractor is hired to oversee the job, I mean, and these people do not work for free. No, they don't work for free. They're making a living. And they have their own insurance. They have to pay for their insurance and their office space just like anybody else does. And so, yes, they need to charge for their services and we need to pay them to help us because we're not experts in that field. Right. Okay. So this is what we do. So they could either pay for the experts and pay for the consultants and for the project manager or they could end up with a lawsuit and end up paying attorneys and their increased premiums for their insurance. Well, I always tell people, so it's $1,000. You got 100 units divided by $1,000. How much is that per person? How much is that per month? Really? For this kind of manini money, you're not going to go out and get somebody to tell you how to put on your roofs or what to do for your roofs. You need somebody to tell you because anybody hear a roofer on your board? Anybody hear a landscape maintenance contractor? Anybody, you know, you don't have those kind of people on your board. Anybody an electrical engineer? How do I know if my electricity needs to be fixed or my wiring? So these are things you've got to maintain your building with and as our buildings are aging, we need more and more of these consultants to help us because we have no idea what's inside our walls and those pipes are not in good shape. Right. And all of these things, all of the consultants, and, you know, the professionals who are required to maintain and repair the buildings, I mean, they all cost money. Yes. So the board members have a choice. You can spend your money on these professionals to help you fix and repair and maintain the building or you could do nothing and try to wing it on your own and end up in a lawsuit years down the road, have a building that's a rack and, you know, be out of pocket a lot of money. Right. In other words, somebody will say, well, I'm not going to replace pipes. We're going to line them or we're going to do this or we're going to and is that really a good use of the money? You have to say, well, how long does lining last? Can we line all our pipes? Well, you can only line certain kind of pipes. Oh, gosh, we're not, you know, you got to look at the whole picture and yes, it's expensive money and it's who wants to spend money? They don't have to spend but this is the purpose of the board. The board is supposed to be saving money for these projects. Nobody knew probably in less than five, eight years ago that all these pipes someday were going to have to be replaced so soon. Nobody realized that. Nobody saved up for pipe replacement. You can't blame the passboard. You can't blame the current board. All you need to do is just somebody on the board has to say, I got to make this bad decision. I got to tell everybody we're going to go out and get a $2 million loan or whatever the case may be to do this. And if you're the board president at that point in time, you know, stand up, get your board to agree with you. As a board, you should be united and say, we have to do this. We're having way too many claims. The insurance company's not going to keep us. Our pipes are falling apart. You've got to do what you've got to do. Right. And it's not an easy job to be on the board. So one of the suggestions we're making today is know what fiduciary duty is all about and the business judgment role and comply because if you do that, you're going to have an insurance company who's going to back you up who will probably be very happy that you did what you did. Yeah. They would like to see that you follow the rules. You know, there's certain boards that will, oh, I don't like this guy's opinion. I'm going to go get another guy's opinion. They'll get another opinion. You know, you're not doing that. Your job is to get hire somebody who's well respected, get their opinion, and go with it. And don't look for the opinion that you're looking for somebody to say that no, you don't have to do this because more than likely you have to do something. Because that's just kicking the can down the road. And it only costs more money. And that's going to end up with more money. Right. And we're running out of time and we could probably go on for another another show on this topic. And thank you very much for joining us and please join us next week, Thursday at three o'clock for another episode of Condom Cider. Thank you.