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Council of New York Cooperatives & Condominiums
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Conference Highlights: Homeowners Insurance

Published: Winter 2003

Every autumn, CNYC brings members together for an intensive Sunday of learning and networking at its annual Housing Conference. This Conference is the premiere educational event for shareholders and unit owners in New York housing cooperatives and condominiums. Professionals, industry experts and experienced board members share their knowledge in dozens of workshops, which explore virtually every aspect of operating cooperatives and condominiums. Video tapes of CNYC’s television show Co-op Roundtable are show throughout the day at two locations and in the Exhibit Hall vendors shop products and services for the building and for residents. The Conference ends with a convocation where refreshments are served and special New Yorkers are recognized (see page 1). At CNYC's 22nd annual Housing Conference on November 17, 2002, Robert E. Mackoul, CLU, founder and president of Mackoul and Associates once again presented his classic review of homeowners insurance. Following are highlights of his presentation:

Many cooperative and condominium dwellers tend to think that they don’t need homeowners insurance. This is generally due to two basic misconceptions: the first, that they do not need homeowners insurance because the building already has coverage; the second, that since banks and mortgage companies don’t require homeowners insurance in a cooperative or condominium, such coverage is not a necessity. In this seminar, Robert Mackoul clearly showed this view to be wrong on both counts.

Mr. Mackoul has many years' experience insuring cooperatives and condominiums; he finds that these beliefs are not only wrong, but they can also be dangerous. Building insurance, he said, rarely provides coverage within units themselves. And while banks may not stipulate homeowners insurance as a requisite when making a loan, that's cold comfort if a fire or other catastrophe renders your apartment temporarily uninhabitable.

The issue, he noted, is not whether you should have homeowners insurance, but how much coverage you should secure. For co-op shareholders and condo unit owners, the ideal policy should cover the basics:

1) Improvements and Alterations,
2) Contents and Personal Effects,
3) Loss of Use coverage for extra expenses that arise from being temporarily unable to occupy the unit following a claim,
4) Personal Liability to protect against lawsuits from other parties or insurance companies, and
5) Assessment Coverage.

IMPROVEMENTS AND ALTERATIONS
In a cooperative or condominium, improvements and alterations that are within the unit are the unit owner's or shareholder's responsibility. These improvements/alterations are not covered under the building’s insurance policy.

If there is a claim, the building’s insurance company is responsible for the building itself and the infrastructure, the pipes and electrical wiring inside the walls. When it comes to the individual unit, the insurance company is only required to put the apartment "back to spec"; that is, exactly how it was when it was built. Thus, all the updates to a specific unit that have occurred since the building was first built are the responsibility of the current owner, and not the building. This includes new bathrooms and kitchens, flooring and carpeting, and molding put in by the current owner. In addition, the current shareholder is responsible for all the improvements and alterations done by previous owners.

If, for instance, the flooring in a unit had been in place since the building’s inception, that would be covered under the building’s insurance. However, especially with older buildings, the probability of having a unit with all its original features intact is rather low. The building insurance company will not pay for these alterations and repairs. This is where homeowner’s coverage specifically for improvements and alterations comes in; if properly planned, it will cover all the alterations and improvements in a unit, regardless of who put them in.

PERSONAL PROPERTY
Shareholders or unit owners are responsible for insuring all of their apartment’s contents and personal property. This includes everything from furnishings to kitchenware to clothing – anything that can be moved around, picked up, and taken, said Mr. Mackoul. What can’t be moved, such as bathroom fixtures and kitchen cabinets, qualify as improvements and alterations.

Personal property coverage should be adequate to meet the cost of replacing items today, as opposed to the cost when they were originally purchased. If something that is considered personal property is destroyed and there is no replacement cost coverage, the insurance company will depreciate the loss and greatly reduce the compensation for the damaged item. For example, a television purchased for $500 five years ago, without replacement costs, would be worth $250 today (assuming that the useful life of a television is 10 years). But with replacement coverage, the insurance would cover the full cost of a new television. As a rule of thumb when deciding on the level of coverage for your new insurance policy, Mr. Mackoul suggests estimating how much all your personal property and apartment contents are worth and then doubling that value.

LOSS OF USE
In the event of serious damage to your unit, you will need money to live elsewhere. This is provided for under a part of the homeowner's policy called "loss of use". In insurance policies for cooperatives, limited loss of use only covers 40 percent of the total personal property coverage amount. If your property is insured for $100,000, the maximum loss of use compensation that you could receive would be $40,000.

If repairs to the unit go on for an extended period of time, which they often do, this may not be enough to cover living expenses – especially the high cost of living in New York. This is why it is best to have an unlimited loss of use policy. "This feature comes standard with the plans offered by Chubb and Fireman’s Fund, and most other companies will allow the homeowner to buy up their unlimited coverage," said Mr. Mackoul.

Unlimited loss of use coverage may be the most important feature of your policy. Consider the story of a co-op building in Manhattan: In the late 1990s, the penthouse residents decided they did not like the way the roof drains looked, so they had them covered with screens. In August 1999, when the city had 6.5 inches of rain in one day, the screens prevented the water from draining properly. Water rose up over the parapet walls and into the building, drenching the underlying units from the ninth floor down to the sixth. The interiors were so soaked that no work could be done until everything was dried out, which took some time. Restoration contractors then reported that all the electric systems in the building had been destroyed, as was the beautiful plaster workmanship of this pre-war structure. The apartments had to be gutted and rebuilt.

The situation only got worse: it took a long time to get the claim settled and work under way, because the board of directors rightly insisted that plaster, rather than sheetrock, be used to restore the building. The board was correct in expecting insurance to pay for the plaster, as this was dictated in the original building plans. But it took eight months to restore the building, displacing those living in the affected units.

For some, there was good news: the shareholders on the eighth and ninth floors had unlimited loss of use coverage. Their insurance provided hundreds of thousands of dollars to house them in Manhattan hotels. It also paid for them to eat out and for all the extra expenses that result from not living at home. After six months, the insurer decided to reduce the ongoing expenses and found these residents furnished two-bedroom apartments. But a hard lesson was learned by the residents on the sixth and seventh floors: their limited loss of use coverage ran out after about a month.

LIABILITY COVERAGE
According to Mr. Mackoul, most homeowners insurance claims pertain to resident-related incidents. For instance, if someone slips and falls in your unit, you may be subject to a liability lawsuit. But liability doesn't stop there. If your toilet overflows and damages the downstairs neighbor’s oriental rug, or if your cat scratches someone in the eye – all these are potential liability issues.

The answer is personal/family liability coverage. Most standard homeowners insurance policies include $100,000 of liability coverage, but Mr. Mackoul stressed that unit owners should not have less than $500,000 in liability coverage because, "you never know whose Picasso you’re going to ruin."

THE RISKS OF NOT BEING INSURED
When shareholders or unit owners do not have homeowners insurance, it is not only their problem but it could create significant problems for the building, as well. If an apartment is rendered uninhabitable for an extended period of time and the owner has no coverage to pay the expenses of temporary living accommodations, the personal cost could drive the owner into arrears and potentially into default on the unit. The same could happen if an incident in an uninsured shareholder's unit affects another unit in the building: the resulting lawsuit could force the shareholder into bankruptcy.

This is why many cooperatives and condominiums have made homeowners insurance mandatory for every shareholder and unit owner, said Mr. Mackoul. If your board considers establishing such a policy, it should specify the minimum amount of each form of coverage that the unit owners must take. The amount, he said, depends on the building; for example, $25,000 is a good starting point for personal property coverage in a middle-class building, but a more upscale building may be expected to have considerably higher minimums. Minimum coverage for improvements and alterations and for liability should also be established. "You should evaluate based on the value of the most expensive unit in your building, and work backward from that," Mr. Mackoul advised. An annual monitoring process should also be established to ensure that everyone is covered.

 
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