 Welcome to Kondo Insider, our weekly show here on Kondo Living and Association Living, kind of designed for board members and for owners who live in Kondos to try to help you understand the industry. I think this show came about a couple years ago. We've done about 175 shows, I think. It came about a couple years ago because the legislature felt that there wasn't enough outreach to boards and owners on education. So we have a group of hosts. We have Jane Sugimura, the president of the Hawaii Council of Community Associations, myself, and Jonathan Billings, who take turns doing a show, trying to educate owners and board members in various parts of mostly condominium living. And today our show is about association insurance. I've been teaching some continuing education courses for real estate agents on a topic called Kondo Governance. And part of that is insurance. And it's probably in my three hour class the area that gets the most attention and the most questions. So I thought a nice review of the various types of policies, the things you should look for, and the things you should be concerned about might be a helpful reminder to all of you out there on how it works. That being said, I want to tell you that, you know, come 2021, everybody in these highway buildings over 10 stories are supposed to have completed their life safety evaluation, which may determine they need sprinklers and don't need sprinklers. There's a lot of TV commercials on both the radio and on television saying, please tell your board to prove sprinklers. And this life safety evaluation, which is mandated under the city ordinance, has to be completed by May of 2021. Otherwise, I don't know what they're going to do. I don't think there's much enforcement in the ordinance, but I guess they'll get mad at us one way or another. But the reality of it is that they're quickly approaching. But I want to share with you that obviously COVID has affected the ability to get engineers out there to do life safety evaluations. And the number of buildings makes it almost you have to stand in line to get it done. That there was a bill introduced by Carol Fukunaga last week extending all of the deadlines by one year. And it hasn't got a hearing yet, but when it does, we'll be notifying all of you asking you to send in testimony and support. We're just not ready to undertake that. I mean, to be honest with you, it's hard time getting people out there because of COVID. But then we don't really know the effect on maintenance fees and income and delinquent owners right now because we're still early in this COVID crisis. And so where's the money going to come from? They're saying go borrow the money. Well, if you're already struggling because you have people who can't pay because they can't afford to maintenance fees because they have out of work, for example, this may not be the best time to deal with that issue. I just want to let everybody know that bill was introduced and we'll be notifying all of you as time goes on that please send in written testimony to the city council in support of adding another year on all these deadlines. It only makes sense, but I'm not sure when I talk about making sense that government makes sense the same way I make sense. I have deep reservations that they think the same way normal people think. But either way, that's just a little notice for all of you to know. So let's talk about insurance for a second. You know, there's really basically five types of insurance associations have to have. And it's in the statute, the condominium 514B. There's some parts to that you may not be aware of. Now granted, there are other types of insurance to the extent that you can buy endorsements to include other acts and perils and losses. Example would be earthquake, you know, that's a property insurance, but it's not traditionally found in property insurance policies for condominiums, primarily because we're not deemed the earthquake threat. When they give you these numbers and data and statistics of your threat level, other than the big island, which has a low threat level, but has a higher threat level than all the other islands, you just don't see people buying earthquake insurance. It's very expensive. And we just aren't deemed to be a severe risk for a catastrophic event to an earthquake. So there are other types of insurance we're not going to talk about. But I'm going to talk about the five main types of insurance. And so let's begin with property insurance. And what I want to say about property insurance, one of the most misunderstood things is you buy property insurance to cover perils. What is apparel? Hurricanes apparel? Fires apparel? Floods apparel? Windstorms apparel? But poor maintenance is not apparel. You're not covered for you failing to maintain your roof in an adequate time and failure to just maintain your property. You don't buy insurance for maintenance. Well, I guess there's maintenance policies out there somewhere, but I haven't seen any for condos. You're covering perils when you buy a policy. And when you buy a policy, you're buying a policy for property, the building as built. So if you've made improvements to your and or your apartment, when the insurance policy evaluates your claim, they're going to look at the original as built conditions. So if, for example, an owner decided to put a luxurious co-acabinance in their kitchen or wood floors at more expense than the carpet they got when they bought there. Those upgrades are not included in your insurance unless you name them on your property policy, either the association's policy or in the case of it's a unit improvement on your H06 unit policy. Otherwise, you're only covered to the extent of as built. And by that, you know, you have to understand that when you buy your H06 policy, many people add on the various things that they need to have with respect to that. Now, I'm going to get more into H06 policies shortly. And the other thing the statute says two things, very misunderstood. The first is you must ensure for replacement costs. Well, by replacement costs, obviously it costs more to replace the building today or the parts of the building today than it did when you built the building. So replacement costs is what it costs in today's modern terms in 2020 to replace your building. But the question often comes up, what if the building code has changed and I can't replace what I had before? Well, hopefully your agent and you and the board were smart enough to buy building ordinance coverage so that you have coverage for having to repair or replace something due to apparel that is not available as originally built and you have to meet the current building code. A fire alarm system is an excellent example of that. You couldn't replace your current fire alarm system and the cost to replace a new fire alarm system with all the requirements for the new fire alarm system is substantially more than cost to replace just a panel and bell system which you couldn't replace anyway because it doesn't meet the building code. So you've got to make sure when you look at the coverage you should always meet with your insurance agent and go through all your coverages to make sure you understand but you're covered for perils and you have to ensure for replacement costs. So some of you may say, I know I'm going to beat that thing because insurance costs go up every year. I'm just going to say the building is only $20 million and I'm only going to ensure for $20 million and if we happen to have a major peril and the whole building is wiped out we'll just assess the owners. The problem with that is there's a provision in the policy called co-insurance. That is to say if you should have insured the building for $30 million but you only insured it to $20 million thinking the first $20 million would go to you and you'll deal with the amount extra necessary to fix it. You're going to find a provision in your policy called co-insurance. If you haven't insured the building for replacement costs to correct them out and so let's say it was $30 million you should have insured it for. You insured it for $20 million. You insured it for two thirds of the value. Your $20 million that you think you have coverage for you only have two thirds of that or about $14 million in coverage. They're going to penalize you for not insuring the building for the full amount that you should have under the statute replacement costs. That's important because if all of a sudden you insured for the wrong amount and you don't have enough money the owners are probably going to be who-who and they're probably going to sue the board for your breach of your duty, fiduciary duty for not insuring for replacement costs for the law. And I'm going to come back to that D&O issue when we talked about D&O insurance but you've got to make sure that you adequately insure the building for replacement costs. How do you get that number? Well, certainly you could go get an appraisal and that's one thing you could do and you could say this is what the appraiser said. But if you rely on your insurance agent and the insurance adjuster to set the values and they set the values and said the building is $20 million or $25 million, whatever it may be you're pretty safe because they've told you what to insure it for. So you can certainly ask questions and you certainly should ask questions but you want to be careful to intentionally under insure the building thinking that you're going to be safe because you're never going to have a full loss of the entire building so you're insuring it for the total loss. It's never going to happen so you're insured for less figuring the first money paid will cover the loss when in fact you may be under the co-insurance provision of the policy and you don't have the coverage you think you have. The second part of the statute which is unique and condo world is that that property insurance mandates that all water claims are covered under the master policy. Let me say that again. All water claims are covered under the master policy whether it's the unit owner's fault whether it's the unit owner's pipe regardless what it is the primary carrier the primary coverage will always be with the master policy the association subject to their deductibles which we'll get into in a minute. But you know I get these questions all the time I left from laundry in the sink left the water running and overflowed it's association claim. You know my ice maker broke or my line to my washer broke it's an association claim and you have to notify your insurance agent of that claim realizing the deductible will come into play realizing that your insurance company may subrogate against your H06 policy but either way you always want to put your association carrier on notice and what's interesting about that is that you have a deductible and because we're going into the break and I want to talk about this deductible more in detail I am going to take the break and come back to the deductibles in one minute so we'll be right back with condo insider talking about association insurance. Welcome back to condo insider we're talking about insurance we are on deductibles and what I was saying was that over time I remember the old I've been in the industry 25 years in the old days the association would have a $1,000 or $2,000 deductible for water claims but now they're running $20,000 and $30,000 for water claims because the insurance companies who ensure the building realize they're going to have water claims and the older the building the more claims are going to have so they've really jacked up the rates and so the only defense the board had or the association had was to increase the deductibles to $20,000, $30,000, $50,000 and so what happens is the boards require you to have an HO6 policy and the association's deductible is covered under the HO6 policy and believe it or not that's a lot cheaper than the association ensuring a low deductible because there's so many carriers out there servicing the HO6 market the risk is spread at a much larger number of insurers than on the property insurance so you want to have an HO6 policy because the board has a right under the statute to assess the deductible to whoever thinks appropriate maybe you because the damage came from you maybe three owners because they don't know which of the three owners is really responsible and it may be more than that but the board under the statute has the unilateral right to determine how the deductible is going to be assessed think of it this way you pay maintenance fees to have insurance so you're entitled because you pay maintenance fees to all the benefits of that policy which includes water claims so to the extent you have a major water claim you're going to be entitled to have that protection under the master policy but a lot of them do fall into the deductible so it's going to fall back on your HO6 policy flood insurance is like rising water wind driven rain like in a hurricane is a different type of water claim so if you have flood insurance you're in a flood zone you have rising tides you have to buy flood insurance through national flood as an additional policy you have to buy it for the full replacement value even though rising tides or rising water is unlikely to get to the 33rd story and if it does you better build an arc but the reality of it is you have to have flood insurance you have to insure the whole building and you have to be in a flood zone to have it but don't think you're doing yourself a favor if you don't have it because the insurance company won't cover they're able to tell whether it's a rising tide or a wind driven rain when they take care of a policy and a claim final comment on property insurance when people don't realize you take any insurance company first insurance you name it and they insure your building for $20 million of course they've insured lots of buildings they go to the market and they buy from another insurance company called reinsurance they'll take that $20 million risk and they buy $15 million of insurance from a reinsurance company saying that if we have a big $20 million claim I want you to insure me for $15 million well that reinsurance is a national program national companies, huge companies so you can bet that all these fires in California and Oregon all these water damage in hurricanes and in the Gulf are going to affect premiums in the future it's not just our experience in Hawaii you can bet that all those catastrophes we have currently on the mainland are going to ultimately affect your insurance premiums so let's move on to general liability someone gets hurt on the property you know and you have to have general liability insurance most people buy around $2 million for general liability insurance but that's just something you need to look at the size of your association it's fairly cheap insurance the big number, the big elephant in the room is the property insurance general liability insurances can be a couple to a few thousand dollars a year and you ought to look at how much general liability insurance you have and make a decision because everybody wants more so you don't see small claims anymore you see everybody wanting $5, $10, $20 million so you want to make sure you have adequate general liability insurance for injury the statute also requires you, the board, to buy something called a crime policy or a fidelity bond, about $1,000 a year what's interesting, that policy covers your association for any theft by an employee or the board of directors or committee of the board of directors someone using association funds and it's a very inexpensive policy it has limits so the amount of... you buy the policy and for a while have an effect on the premium but you have to have it by law but ask yourself this question what if someone breaks into my resident manager's computer is able to go to my online banking and steals $500,000 from our association account a cyber theft is that covered? no, it's not not unless you have bought the endorsement for cyber theft insurance you know, and that's to me a bigger risk than the board ceiling associations don't have much money anyway but someone being able to go in and tackle your reserves and steal your operating account money is a bigger threat to me and this world of cyber theft make sure you have the cyber theft coverage as a part of your endorsement on your crime policy it's about $200 a year by the way it's not exactly over the top but if you don't have it and there have been associations in a while that have lost $200,000 and yeah, they make a claim against the bank and say it's the bank's fault but wouldn't you rather for $200 know your association funds are safe and so you want to make sure you're covered on that now the next policy which you have to have is director, officer and liability and that's an interesting policy because you know Hawaii has the highest rate of claim in the United States you can bet that your D and O policy premiums will grow up over the next one or two years 20 to 50% we lead the nation on claims against directors and officers on liability claims and that includes everything from retaliation to civil rights commission you name it if an owner doesn't like what you did they follow a complaint against you or a lawsuit against you and the insurance company has to hire a lawyer to defend you now what's interesting about that policy you may think you're insured well you're insured for defense you may not be insured for the act itself if the act is for example willful intent on part of the board you intentionally ignored the condominium law 514b or gross negligence that it's not a simple negligence you can see that if the stairs aren't repaired they're going to collapse and kill someone and you do nothing about it and they collapse and kill someone so it's considered gross negligence you as a board member may not be covered for the actual peril itself the way you protect yourself is to do what the business judgment rule says which are fiduciary obligations are and don't commit gross negligence or willful intent I see that argument made all the time against boards with respect to these D&O claims which are just going over the top and through the roof the number of claims that I see and I saw a claim the other day where they said the board needed an owner approval to make a pool upgrade and they want the board itself to repay all the money back to the reserves because they didn't have an owner approval well I guess the easy thing to do is to go out and get an owner approval after the fact but the reality of it is there's an argument as far as the interpretation that the board has an obligation to repair the property if they need to repair it and they spend the money to repair it can they be held responsible well they've increased and put a better quality tile in then they get all these arguments by people and so one out of 56 owners are arguing that they want the board to refund $150,000 spent on repairing the pool and that's currently in litigation right now so I don't know the result what's going to happen but you want to be careful these D&O claims what I'd say to you up front is don't let the claim become a claim you have all sorts of opportunities of dispute resolution through the current law with regard to a value of mediation arbitration if you have a problem with an owner deal with a head on a $10 million real estate commission subsidized mediation program you know and try to avoid these claims becoming claims because if it goes the way we're going there's to be at some point in time carriers won't write insurance in Hawaii because of the fact there's just been way too many claims the fifth and final policy is called an umbrella an umbrella is kind of a policy that's over top your other policies you have a $10 million umbrella and you have a $2 million general liability policy you have $12 million in coverage $2 million from the primary carrier the general liability which is the most expensive and $10 million from the umbrella carrier which is the least expensive and so what I tell people all the time is don't put all your limited liability into general liability policy because it's going to go to that one carrier and the rates are going to be much higher so you split it and get the base core covered under the general liability policy and then what you do is buy an umbrella for the excess coverage on the rest of that policy and then you're in the best situation policy which leads me briefly into the H06 policy and the H06 policy is basically going to cover the deductibles and I want to remind you if you have fancy improvements in your unit that you have to add those and include those in your H06 policy now I do some rental property and I have an H06 policy and what was important to me to have lost income should we have a hurricane or whatever and I don't have the income anymore for my tenant and in some cases vacation rental property legal vacation rental property you're going to be lost of any income and not have any after the hurricane theoretically but business loss coverage and not all insurance companies write business interruption for vacation rentals some do some don't but you have to declare an amount of how much money a year you get in that and then you pay a premium for that but you know I have my H06 policies I have some enhancements where I had split air conditioning and think line that line I had to add to the policy and I have vacation rentals into our rentals well the cost for me to add 60,000 a year and lost rental income was about 200 bucks and I have five properties it's worth the thousand dollars a year to cover the five properties case something goes wrong because when you start looking at insurance you're going to get the coverage as written in the policy and that may not be everything you think is covered with regard to to insurance so I'm hoping that's helpful finally there's the H04 policy not required by anybody H06 should be required by the board for you to have one and the board can buy one if you don't buy one and charge you back for it is the H04 policy which is a tennis policy and some landlords require their tennis to have an H04 policy to cover liability and things most tennis I know don't require that but that's another form of policy so the bottom line in all of this is take insurance seriously make sure you understand what you have coverage for and you don't have coverage for and then decide if you're willing to spend the money to get the coverage for some of the areas you don't have coverage for and the best way to do that is annually meet with your insurance agent go through your policy have them explain what you have covered and not covered you know I know the one property I own has pays like $30 a year for terrorist coverage so if a terrorist crashes their plane into the building we have coverage where you don't have coverage if you don't have terrorist coverage you should know all these things as a board member and as an owner so you can properly protect your investment and that's kind of my short summary so I hope you learned something from it or got your little mind thinking about these things so when you annually renew your insurance policy it's just not a matter approve you ask questions and seek out what you have and don't have and same with the owners making sure if you have a policy it's protecting you for what the association doesn't have and in that note I'm going to say aloha and I hope you enjoyed condo insider and we look forward to seeing you next week and we'll be giving you another wonderful show on condo living in Hawaii aloha