NOTE: Johnson Strategies rarely publishes on matters relating to specific losses or disasters. But the Surfside Condo Collapse is an exception, not only due to the emotional nature of the event but also the unusual insurance implications. One of the most respected authorities on Property & Casualty matters in the US, Mr. Bill Wilson CPCU, ARM, AIM, AAM, has agreed to become a JS Contributor, and to share his thoughts. Please learn more about Bill’s amazing and storied career, how to order his books or subscribe to his services, via the JS Contributors listed on the side bar.
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Unintended Consequences–What the Surfside Condo Collapse Means to Agents and Underwriters,
Plus Some Lessons Learned
by Bill Wilson, CPCU, ARM, AIM, AAM
Last week, I blogged about some of the initial commercial property insurance issues involving the Surfside, Florida condo collapse. Following are a few more observations regarding D&O, E&O, and homeowners insurance claim issues.
D&O Coverage. Assuming the condo association has Directors & Officers insurance, according to D&O expert Dick Clarke, CPCU, CIC, RPLU, “Most HoA D&O policies contain a blatant BI/PD exclusion, along with several other eliminations of coverage for construction defects, violation of any construction-related inspection/maintenance situations, etc. Most of these policies are REALLY restrictive and, with the passage of time (several renewals), more and more exclusions are added.”
Lawsuits have reportedly already been filed against the officers and directors of the Surfside HoA. So, IF there is an exclusion for BI and PD that’s applicable to this claim, these individuals may find themselves with no indemnification or defense. Some homeowners and personal umbrella policies may provide coverage, but given the likely amounts of the lawsuits, the greatest value of such coverage could be in funding a legal defense.
E&O Coverage. There may be many insurance agents involved in the Surfside collapse. Do they have an Errors & Omissions exposure? Almost certainly they have an exposure that may require legal defense, but the issue is whether they have liability that requires indemnification of the insured for uncovered losses. The first question is, what exactly were the agents’ errors or omissions? How were they allegedly negligent? Did they hold themselves out to be condo experts? Did they make promises (e.g., “full coverage”) that they allegedly didn’t fulfill?
What is an agent’s legal duty to advise with regard to coverage and limits in Florida? In most states, the agent’s duty is largely limited to complying with requests, not advising beyond that, but there are exceptions based on “special relationships” or assertions of particular expertise. If a duty exists, did they fail to recommend coverages or higher limits available to them in what is one of the most restrictive marketplaces in the country? Did they fail to explore the E&S marketplace for DIC coverage for collapse, if such markets even existed? If the markets did exist, would the available DIC forms have covered this particular collapse based on cause(s) yet to be determined?
Association Property Policy Exclusions. In my earlier article, I discussed the possibility that an “ISO-like” property form might not provide collapse coverage if the cause of the collapse was not a specified peril for collapse coverage. In an online discussion, someone raised the question of whether there might also be grounds for denial based on the failure of the association to act promptly to repair allegedly known structural problems.
Absent demonstrable fraud, concealment or misrepresentation, negligence in addressing corrective maintenance or construction issues is unlikely to be a basis for denial, though an “acts or decisions” exclusion similar to that in the ISO CP 10 30 could be material.
Another issue is the adequacy of coverage for costs that are limited in policies. Most property forms provide some measure of coverage for debris removal and Ordinance Or Law expenses. It’s quite possible that the cost of debris removal in the Surfside collapse will be vastly more than the likely limited additional amount provided by the property policy. (Needless to say, without examining the policy in question, this and other coverage issues involve conjecture not facts.)
Likewise, the cost to tear down the ‘undamaged’ portion of the building and rebuild in compliance with codes and ordinances would likely exceed any built-in coverage for this expense. A further complication is how such coverage reads in the policy if codes or ordinances are updated and more restrictive in the time between loss and reconstruction (if there is reconstruction).
For years, insurance experts such as Jim Mahurin, CPCU, ARM have strongly asserted, based on their consulting and expert witness experience, that debris removal and Ordinance Or Law policy limits are often grossly inadequate. Perhaps the Surfside collapse will result in a lesson learned in this area.
HO-6 Condo Unit Owner Policies. Most condo homeowners forms contain the same limitations as commercial property forms with regard to collapse coverage. In addition, while it’s not a primary focus of the Surfside tragedy, condo unit owners are well advised to make sure they maximize their coverage for association loss assessments. This is particularly important where a unit owner’s potential liability for such assessments is joint and several.
Most HO-6 condo policies include separate loss assessment Additional Coverages for both property and liability assessments. However, these amounts are usually very low, in the range of perhaps $1,500. Condo unit owners should consider purchasing the maximum possible loss assessment coverage. Most insurers can provide $50,000 or more and the coverage is usually relatively inexpensive.
Condo unit owners that serve as directors and officers should question the coverage and limits of association D&O policies. They should also do the same with regard to coverage under their own homeowners and, especially, umbrella policies.
General Observations and Suggestions. My son bought a condo in a high rise building several years ago. From a market value standpoint, it has proved to be a very lucrative purchase given the development of the area surrounding the building. However, my first recommendation to him was…don’t buy a condo. It’s a personal preference dating back to a bad experience when my first home was a condo, but it’s also based on decades of observations of insurance issues with condos.
I believe any time you enter into collective ownership of property with dozens or hundreds of individuals you don’t know, you can expect problems and conflicts. Association “leadership” is usually populated by individuals who know little or nothing about risk management and insurance. My son elected to buy the condo anyway, though he has followed my advice to not serve in any capacity as a director or officer, but to attend meetings and ask questions dealing with insurance and other issues.
If you are considering buying a condo, I strongly recommend that you place the insurance through an experienced and highly qualified insurance agent with expertise in condo insurance. When my son bought his insurance, such an agent was kind enough to review both the condo association bylaws and the master policy and make recommendations for his insurance program based on those documents. That kind of advice is priceless.
In addition, I would also consider consulting with an attorney with regard to means to limit your liability, especially where unit owners have joint and several liability. That might mean forming an LLC for the purchase in an attempt to expose only the LLC’s limited assets to claims. The “corporate veil” likely won’t insulate you from direct liability for your personal negligence, but it might for other liabilities like loss assessments and other debts or financial obligations. I’m not an attorney or legal expert, so I offer this suggestion only as a legal layman. Many residential properties today are purchased under trust or LLC arrangements. Again, if you do this, be sure the agent you select is knowledgeable about insuring trusts or LLCs and what are the proper forms to use.
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Bill Wilson, CPCU, ARM, AIM, AAM is the former Associate VP of Education and Research for the IIABA National. Since retiring from the Big “I” in 2016, he has published six books and blogs regularly from his web site at www.InsuranceCommentary.com. In his spare time, he plays lead guitar with his band The Spyders.
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