Property Managers' and Condominium Association Leaders' Hurricane Matthew Dilemma - Financing the Repair Before the Insurance Company Pays

Property managers and condominium leaders will face an issue after Hurricane Matthew becoming all too recurrent following catastrophes—slow and underpaying property insurance carriers. While partial payments for small percentage amounts of easily agreed to damages are often made, full payment made within 90 to 120 days is almost non-existent with significant losses. Who can wait for that long to start substantial repairs?

A further problem facing most coastal apartments, condominiums, and homeowner associations is the large windstorm deductible which will likely apply. A five percent deductible does not seem large, but when applied to a large building with millions of dollars as the policy limit, the deductible amounts can wind up in the hundreds of thousands of dollars. Insurance agents should always obtain quotes for "deductible buydown coverage." Many insurance agents fail to do this (which is clearly malpractice by insurance agents) and some in management decline the coverage after considering the quoted premium cost.

Faced with non-payment of insurance funds and large deductibles, the issue arises regarding how to pay for repairs which need to be completed immediately. The answers are not perfect, but I will try to highlight some considerations.

The insurance restoration industry and contractors will push that the answer can easily be found by using an assignment of benefits clause in a construction contract. Simply sign a construction contract for all repairs less the deductible and assign the benefits of the policy claim to the restoration contractor. Assignment of benefit clauses are allegedly giving rise to and supporting fraudulent practices, "gaming" the insurance adjustment process, being overly broad and often civilly or criminally illegal. Richard "Dick" Tutwiler wrote a guest blog on the topic from the standpoint of public adjusters in The Unlicensed Practice of Public Adjusting - The Insurance Claims Keep Rolling In.

I have warned that such contracts are now under attack and giving rise to class action lawsuits by disgruntled policyholders. Any contractor using one of these contracts should read my post, Unauthorized Practice of Public Adjusting and the Lon Smith Roofing Case Should Scare Contractors and Roofers with Contingent Contracts.

Managers and association leaders should be concerned about the scope of repairs promised to be accomplished. It is critical that they thoroughly check the references of any such contractor and interview multiple contractors if they choose to accept this route of repair. Merlin Law Group attorney Nicole Vinson wrote an analysis of this in Policyholders Should Be Aware of Assignment Provisions.

Associations could consider using reserves. For example, if the association has half of a roof replacement already reserved, why shouldn't it be able to tap into those reserves to finance the repair or replacement of association property? This is a complicated area and I suggest that property managers and association boards consult with an experienced condominium attorney. I called Donna DiMaggio Berger of the well-respected condominium law firm, Becker Poliakoff, for her opinion.

Berger stated that, in Florida, the emergency powers of the Association President and Board are very broad following a catastrophe and during an emergency situation so long as the Governor has stated that an emergency exists. During such times, they may authorize, without prior association member vote, using reserve funds for emergency repairs. The warning is there needs to be an emergency and an Order in place at the time. Otherwise, using reserve funds usually requires member approval through a vote pursuant to association by-laws. My advice is to get a condominium lawyer like Donna Berger to guide you through the process because she warned that "mistakes" can lead to fines and personal liability.

Alternatively, I have suggested to many of my past commercial property owner and association clients they obtain a credit line for emergency construction. Donna Berger agreed this is an excellent avenue for most Associations, but that the credit line should be obtained in advance to speed up the process.

Finally, special assessments can be made on association members to cover the shortfall of deductibles. These assessments can also provide interim funding of repairs caused by non-paying and slow paying insurance companies. This may be covered under loss assessment coverage, as noted in Florida Law Requires Loss Assessment Coverage for Condominium Unit Owner Policies. Loss assessment coverage usually pays up to a limited amount for the special assessments required as a result of the Association not purchasing or not having enough coverage under the master policy. However, some recent individual policies exclude coverage for assessments made to cover the shortfall of deductibles, and members purchasing this cheap form of condominium insurance will suffer out-of-pocket losses.

There is no easy answer on which is the best alternative for quickly obtaining funds to pay for the repair, but there are alternatives to just doing nothing. It is my experience that getting repairs underway and finished right away is far better for association morale and welfare. Getting repairs completed, even when insurance companies do not pay, helps put rental income into the pockets of apartment and commercial building owners and prevents many tenants from cancelling leases resulting in lost revenues once the repairs are completed.

Positive Thought of the Day

If your actions inspire others to dream more, learn more, do more and become more, you are a leader.
             —John Quincy Adams

Is Your Hurricane Deductible and Coinsurance Provision Enforceable?

In a previous post, Failing to Obtain Regular Appraisals Can Hurt Associations After A Large Loss, I wrote about the negative effect that a coinsurance provision can have on an association’s ability to recover after a large loss. Equally as problematic, almost all policies issued in Florida contain a separate deductible which applies only in the event of hurricane damage. Instead of a small deductible, most “Hurricane Deductibles” are based on a percentage of the policy limits. These deductibles vary, depending on the policy and the association’s choices when purchasing the policy, and they can rise as high as 10%.

After Hurricane Wilma, many associations were pleased to learn that they had only suffered a small amount of damage. After learning the devastating effects that the storm had on many buildings, associations were grateful to incur damages of only a few hundred thousand dollars. Unfortunately for many, coinsurance penalties and high hurricane deductibles were applied, leaving associations without any recoverable proceeds to fix the buildings.

Florida Statute §627.701 authorizes and regulates coinsurance penalties and hurricane deductibles. Florida Statute §627.701(4)(a) states:

Any policy that contains a separate hurricane deductible must on its face include in boldfaced type no smaller than 18 points the following statement: "THIS POLICY CONTAINS A SEPARATE DEDUCTIBLE FOR HURRICANE LOSSES, WHICH MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU." A policy containing a coinsurance provision applicable to hurricane losses must on its face include in boldfaced type no smaller than 18 points the following statement: "THIS POLICY CONTAINS A CO-PAY PROVISION THAT MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU."

While the statute is clear that this language must be contained in the policy, it has become apparent since Hurricane Wilma that many insurers have failed to comply with the statutory requirements. Arch Specialty Insurance Company, QBE, and Citizens Property and Casualty Insurance Corporation, to name a few, all have issued policies that do not comply with §627.701.

Despite non-compliance with the clear language of the statute, many insurers have applied Hurricane Deductibles and Coinsurance Provisions to reduce, and in some circumstances avoid, claims payments.

There is ongoing litigation concerning whether non-compliance with Florida Statute §627.701 makes the hurricane deductible and coinsurance provision unenforceable. In fact, these issues are currently pending before the Florida Supreme Court in Chalfonte Condominium Apartment Association, Inc. v. QBE Insurance Corporation. Also, several class actions have been filed in order to recover monies improperly withheld because of Hurricane Deductibles and Coinsurance Provisions that did not comply with the statutory requirements.

The recourse sought by the policyholders in these cases are simple. If an insurer did not comply with the clear language of §627.701, the percentage Hurricane Deductible and Coinsurance Provision should not apply. Money improperly deducted should be returned and claims that did not meet the high deductibles should be paid.

The implications of this could be extremely beneficial to every association involved, especially those who were forced to conduct special assessments to pay for Hurricane Wilma damage.

All associations that suffered damage from Hurricane Wilma should check their insurance policies to see if the correct language is contained and whether it conforms to the statutory requirements. If not, you should consider contacting an insurance coverage attorney to determine whether you might have a cause of action.