(June 2022)
Condominium underwriting always begins by evaluating the
association agreement and bylaws. This is followed by evaluating Construction,
Occupancy, Protection and Exposure (COPE). C.O.P.E. is the
acronym for Construction, Occupancy, Protection, and Exposure. Although
the primary underwriting concern is the potential for fire, all other causes of
loss must also be evaluated. Loss history, financial considerations, and
pricing are other areas to consider.
Every condominium association must have bylaws and a condominium agreement that should be available for underwriter review. Underwriting based on them is important because they define the property being covered. This affects insurance to value requirements and the property being considered.
The agreement should provide the following information:
4. A description of property the association owns or that is its responsibility. This directly affects the condominium association and the unit-owners’ limits. In other words, the more the association owns or is responsible for, the higher the limits it must carry. Conversely, unit-owners’ limits can be lower.
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Examples: · Towers Condominium Association’s agreement states that the association owns all interior and exterior walls and ceilings. This means that the unit owners are responsible for all partition walls. However, the association is responsible for any wall that is part of an exterior wall as well as everything within the space between the interior and the exterior wall. The association must value the property, knowing it is responsible for the electrical, wiring, plumbing, etc., in the space between the interior and exterior wall as well as the interior wall. · No Fault Condominium’s agreement covers only the exterior walls and structural features of each unit. This reduces the values that it must carry but significantly increases the values the unit-owners must carry. This is because the unit-owners are responsible for all interior work and all electrical, plumbing, and heating, ventilating, and air conditioning. · Manor Born Condominium’s agreement covers the exterior and into the exterior of the interior wall. This means that it is responsible for installing the interior walls but not for finishing them. It is also responsible for all items within the walls, including electrical, insulation, plumbing, heating, ventilating, and air conditioning. |
These examples illustrate some of the many variations in condominium agreements and suggest why values cannot be properly evaluated until each party’s exact responsibilities are known. The claims adjuster will have a copy of the agreement and will determine valuation based on it. A coinsurance penalty could be imposed if the valuation was off resulting in limits insufficient to meet the coinsurance requirements. On the other hand, the association pays too much premium if the valuation includes items for which it is not responsible. In addition, the loss potential increases as more interior items over which the association has little control are included in the list of property it covers.
5. A description of personal property within individual units. The association insurance program can insure the following items inside individual units if the condominium association agreement includes them as association property:
· Fixtures, improvements, and alterations (but only if they a part of the building)
· Appliances. This includes, but is not limited to, refrigerators, ventilation systems, stoves, ovens, cook tops, dishwashers, washers, dryers, security systems, and housekeeping systems (i.e., in wall vacuums).
If included, these additions must be factored into the condominium association’s valuation and limit of insurance. It must be noted that loss potential increases as personal items are added because individual unit-owners may not take proper care of property they do not own.
6. A description of loss assessment procedures. This should completely explain when and how unit-owners are assessed for an uninsured loss. This is also important for the unit-owners’ loss assessment coverage.
A final point to note is that these agreements and bylaws can and do change. The renewal process should always include a question regarding any recent changes in the bylaws or condominium agreement.
One of the critical considerations in evaluating property risks is to determine the susceptibility of the building or structure to damage from the covered causes of loss.
Fire is the primary consideration. Is the building construction wood or frame, meaning is it highly susceptible to fire spreading and causing extensive damage? Or is it built using fire-resistant materials that reduce the spread of fire and the resulting damage if a fire does begin?
Many risks are located in areas of the country subject to tornados, hurricanes, or high winds. Are the buildings designed and built to resist losses these conditions cause (or to at least minimize the damage they cause)?
What about earthquake? If this cause of loss is covered, will the building's construction stand up to the damage an earthquake is likely to cause?
Another important element of any type of construction is the building's age and the dates its systems were last updated or replaced. When was the heating system, roof, plumbing, and electrical systems last updated or replaced? When any of these systems or components is not properly maintained or updated when they should be, the potential for one of them to cause or contribute to a loss increases.
Construction quality is another important element. Inferior construction that does not comply with building codes is a serious concern. Each structure must have the proper number of properly constructed load-bearing walls.
Green aspects of the building plus any anticipated green replacement after a loss must be taken into consideration. If a building has a green certification the added cost of maintaining that certification following a loss must be included in the valuation. Any vegetative roof landscaping must also be considered.
Was the condominium originally built as a condominium? Many condominiums are converted from apartments, hospitals, libraries, or other structures. A conversion can degrade the structure’s integrity if openings are made in firewalls or structural beams are eliminated. Electrical, plumbing, heating, ventilating, and air conditioning systems should be totally updated at the time of the conversion.
Another important area of concern is the building's occupancy and use. The main underwriting concern is to determine if there are any unusual operations conducted in the building that could start or contribute to a fire spreading. The type of occupancy and the processes it employs determines the nature of the property in the building. What kinds of property, contents, stock, chemicals, flammables, and related materials in the building or on the premises could provide additional fuel if a fire begins?
While fire's relationship to occupancy is probably the greatest concern, it is not the only one. Theft must be considered in high-end condominiums.
It is important to consider if a nearby or adjacent operation might cause an emotional social response. How does an emotional social response lead to higher loss potential? Consider the medical clinic that also performs abortions. Even though the hazardous processes on the premises are minimal, the potential for loss or damage by vandalism, burglary, and arson are higher simply because of the nature of the business. The condominium adjacent to such operations could be similarly affected.
If earthquake coverage is provided, the susceptibility to loss or damage by even relatively minor tremors must be evaluated. Even a minor shake could result in a large loss to an elaborate condominium clubhouse that has highly damageable glassware and statuary.
Damageability of other personal property must also be considered. Are the contents so delicate and sensitive that even a small flame or amount of heat could cause a disproportionately large amount of damage? For example, electronic equipment may be susceptible to significant loss from even a small amount of smoke or a minor nuisance fire.
Is a fire that does start difficult to extinguish? Some fires are difficult to extinguish and can take a long time to burn themselves out. Fires in some circumstances are considered too risky for firefighters to enter under any circumstances and are fought only from the outside or are allowed to burn out.
Most condominiums are exclusively residential. However, many high-rise condominiums have office and retail exposures on lower levels that must also be considered and underwritten carefully.
Some condominiums are concerned with their vacancy rate and the number of owner-occupied units versus tenant-occupied units. Preferred condominium associations have all units occupied by their owners who also take an active interest in the association and its activities.
The two areas of concern in this category are public protection and private protection.
When considering fire as the cause of loss, the nature and extent of the protection available, the water supply, and fire department response time are the most important factors. Public protection in the form of fire departments can range from the volunteer fire department whose availability and equipment is questionable to the fully paid and well-equipped service available around-the-clock.
The water source, supply, location, and the rate of flow or pressure are all important elements to consider. A public grading system in place grades and evaluates fire protection based on a scale of one to ten. In this system, one represents the best public protection available and ten means that there is no reliable public protection available. Understanding all the components of the grading system and how they fit together is essential to evaluate the fire loss potential of a given risk.
It is important to understand the type of private protection available and how it coordinates with the public protection. For example, a sprinkler system offers valuable protection but only if its water supply is adequate. Does the condominium have a sprinkler system, standpipes, and hoses, any kind of fire suppression system, sprinkler alarms, pressurized or gravity water tanks, fire alarms, or similar types of protection? Is the fire department aware of the private protection systems provided so that it can coordinate its response with them?
What about exposure to loss due to theft or criminal acts? What types of safes, alarms, watch service, locks, fencing, lighting, and similar deterrents are in place to protect the premises? Does the alarm sound both on premises and at a central station or reporting center?
When evaluating wind and hail, what protective devices are installed, or procedures initiated to reduce or eliminate damage to windows, glass, and property in the open? Are hurricane blinds and shutters used on risks in coastal areas?
What is the construction and occupancy of adjacent properties? What is the distance between the condominium and those properties? A hazardous exposure can have a significant negative effect on the loss potential of an otherwise acceptable property risk. An extreme example to illustrate the point is the relatively low hazard 12-unit condominium building located a few feet away from the dynamite manufacturing plant.
The point is that part of an overall risk evaluation must include the condominium's exposure that adjacent or surrounding occupancies and operations present. This issue affects the condominium’s occupants as well as the building itself. A condominium located next door to a char broil restaurant is considerably different than the condominium located next to an office supplies store. Exposure evaluation also includes analyzing fire walls, fire doors, each structure's construction, vegetation that grows between buildings, and differences in building height, to name a few.
Another major consideration in risk evaluation and underwriting is the condominium's geographic location and the corresponding increase in certain hazards because of it. Some common examples are:
Insurance must be considered in conjunction with the community. Other items to consider are legal and social issues that may increase the condominium’s hazards. It is important to evaluate the effect of the legal directives, laws, and ordinances of the jurisdiction where the condominium is located.
Once the hazards and exposures have been identified and analyzed, the loss history must be reviewed. The loss history should have a minimum of three complete years, but because of the infrequency of property losses, the more years, the better. This history should include all details on the type of property losses, the date of their occurrence, the cause of loss, circumstances, amounts paid, and deductibles. It is also valuable to gather information on what has been done to prevent future losses of the same type. Both the frequency and severity of the losses are important considerations.
Accurate and complete loss information is critical for use in forging the relationship between the agent, insured, and insurer that is necessary to set up an affordable insurance program.
The condominium’s financial condition can lead to moral and morale hazards and issues that can cause losses to occur. Moral hazard is the situation where the condominium association board takes active steps to fraudulently create a loss for gain.
Morale hazards are less obvious than moral hazards, but their effect may be even greater. For example, the condominium association board becomes lackadaisical in monitoring potential loss exposures. On the one hand, it does not actively cause a loss to occur. On the other hand, it does not take the necessary steps to prevent losses. Perhaps it eliminates its maintenance crew and contracts with a local handyman to come as needed. It may reduce its management team and place added service and cleaning responsibility to those who remain which can create resentment and turnover issues. Small losses begin to appear in the loss history.
Rating establishes the condominium’s manual property premium.
Related Article: ISO Condominium Association/Condominium Commercial Unit-Owners Coverage Forms Rating Considerations
Pricing begins immediately after the rating process ends. Pricing evaluates parts and features of the condominium that rates do not necessarily reflect. The most important of these is the condominium association’s board. How long has the current board been in place? Does the loss history reflect its involvement and leadership? What is the condominium association’s financial condition? How does it address loss exposures that have been identified? Does the condominium association have an active loss prevention or safety program in place? Are the risk and its values sufficiently spread so that a total loss is unlikely? Is there a plan for updating and maintenance? Is the association aware of any geographic-related concerns and has it taken steps to minimize loss?
These factors are applied after the initial premiums are developed. They reflect individual risk characteristics such as those stated above but could also include an alarm system not otherwise contemplated in the rate used and other unique loss prevention initiatives and techniques. Duplicate credits and debits are not allowed. For example, if a class loss cost or rate is used based on the public protection at risk, an additional credit or debit that reflects the same characteristic cannot be used. Debits are applied when a generally acceptable risk does not have the management, loss prevention, or other features expected of an average risk.
Even if the rating is completely accurate and the pricing appropriate, the premium is still wrong if the exposure basis is not accurate. If a building worth $1,000,000 is insured for only $500,000, the premium charge is automatically 50% low. To encourage proper insurance to value, the coinsurance provision requires that the named insured carry insurance to a certain percentage of the property’s value. The normal options are 80%, 90%, or 100% of the full property value. If the limit at the time of loss is inadequate, the condominium association "co-insures" the loss along with the insurance company. In other words, the association is responsible for the portion of the loss that is not covered because the limit of insurance is inadequate. However, it is not just the condominium association’s responsibility to verify that the values are adequate. The agent and the insurance company underwriter should also verify them. The condominium association may think saving a few premium dollars by not insuring to value is a good idea. However, when a loss occurs and it winds up sharing part of it, the decision no longer looks wise, especially if the financial impact of the loss is significant. Insuring to value and keeping values current are important for the insurance company to collect adequate premium, for the condominium association to receive full recovery when a loss occurs, and for the agent to keep a satisfied customer.
Deductibles are another important underwriting tool. The ISO Condominium Association/Condominium Commercial Unit-owners Coverage Forms rating program incorporates a standard $500 minimum deductible. Credits for higher deductibles are available. Deductibles are a practical and effective option for both the named insured and the insurance company because they make the named insured responsible for small frequent losses below the deductible threshold and to participate to the extent of the deductible on losses that exceed the deductible. This encourages the condominium association to engage in proactive loss control and loss prevention and to properly maintain the property. Proper use of deductibles places some control of insurance costs directly into the condominium association's hands. The main reason for insurance is protection from major financial loss. Higher limits and higher deductibles assist in reaching that goal.
Once the hazards are evaluated, the appropriate policy and coverage forms must be assembled. The Condominium Association Coverage Form is not appropriate for Condominium Commercial Unit-owners and vice versa. The correct coverage form must be based on the type of condominium entity. The association bylaws and agreement specify the coverage required and the minimum coverage to purchase. Various appraisal and valuation techniques must be utilized to determine the appropriate limit. Valuation options such as replacement cost, agreed value, or even market value should be examined in order to arrive at the appropriate limit. Causes of loss forms must be evaluated. This also includes determining the need for earthquake and/or flood coverage. Enhancements should be considered based on a review of available endorsements.