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If you don't find this image particularly amusing here in the Charleston area, you're not alone.  Storm season has arrived.  Be Prepared.

Storm Season: Precautions and Expectations
By J.C. Bookman, CIC

Storm season is just around the corner. Believe it or not, June 1 is the beginning of another hurricane season for the East Coast. It seems as though this area just ended what could be described as one of the most damaging hurricane seasons of all time.

For other parts of the nation, events such as fires, tornadoes, landslides, and floods will take their toll in the coming months. Across the United States, associations must address a host of concerns and undertake preparatory procedures in anticipation of damage resulting from these and other catastrophic events.

Storms Blow Material Prices through the Roof 

No matter where the association is located, the cost of materials has risen dramatically in the last six months due mostly to the forces of Hurricanes Katrina and Wilma. In some areas, this increase has been at least 30 percent over the same costs prior to these storms. As a result, it is imperative that associations appraise their properties once again, even if an appraisal had been performed within the last twelve months.

Necessitating these new appraisals is the fact that the property insurance policy limit is based upon the "replacement cost" of the property itself. Replacement cost is basically a product of two variables — the cost of materials and labor.

The catastrophic damage caused by this past hurricane season has led to depleted supplies (especially for roofing materials) and soaring demand. And in the South and Southeast, labor costs has increased significantly because qualified artisan contractors are in such short supply. Consequently, associations in these regions could see an even greater rise in the replacement cost of their property.

Associations are urged to review their property insurance policies. Better yet, have a qualified consultant — one that does not otherwise sell insurance — review the policies on behalf of the association.

A number of association policies contain a provision that provides for 100 percent coinsurance. For those that are unaware, coinsurance is a potential PENALTY CLAUSE.

When I taught insurance to association managers, I found that they believed coinsurance provided for 100 percent coverage if the policy had a 100 percent coinsurance clause, or it would provide for 90 percent coverage if the policy contained a 90 percent coinsurance clause, etc. This interpretation is absolutely wrong (the same holds true for health insurance policies).

The coinsurance clause is an agreement between the insured association and the insurance company. The insured agrees to insure, at a minimum, the specific percentage shown in the policy of the total replacement cost of the association property and, in turn, the insurer agrees to provide lower property rates if the insured complies. Compliance will be determined at time of loss, not at the time of policy inception. And replacement cost is determined by the appraisal obtained by the association.

The penalty incurred by the insured if the insured is determined not to be in compliance of insuring the minimum required property limit reduces the amount an insured association may collect for a partial loss. For example, if the association insures only 2/3 of the amount required by the policy’s coinsurance clause, the association will only collect 2/3 of its partial loss. This penalty could amount to millions of dollars that most likely would have to be passed on to the unit owners in the form of a special assessment.

The Problem of Insuring Damaged Property

For some associations, lack of materials or manpower have prohibited completion or even the initiation of recovery work from the 2005 storms. How does this affect the property’s insurance program?

Simply put, it is impossible to damage that which is already damaged. But then the question could be asked, "Why are we paying premiums for coverage at this time when no coverage potentially exists?"

There are no hard and fast rules addressing this issue. Some insurers will deny any coverage sustained by the association due to a current storm when prior damage still exists. Other insurers will attempt to determine the extent of any additional damage and pay for whatever the final claim adjustment turns out to be. The outcome of the ultimate claim adjustment is determined by the mindset of the insurance company covering the claim.

Remember, however, that in most cases, non-binding arbitration is an option to the insured for a negotiated settlement. In some cases, mediation is an option. Appraisal is still another option allowed by the insurance policy. In Florida, mediation would be the preferable first option because the majority of the costs of mediation, if available to the insured, is the responsibility of the insurance company (not including the costs of the insured’s experts).

Furthermore, a new legal doctrine is rapidly emerging around the country for the benefit of insureds that have been denied coverage as a result of their policy’s exclusionary wording. It is known as the Doctrine of Reasonable Expectations.

Broadly interpreted, this doctrine says the insured might be entitled to coverage as a result of the representations, or lack thereof, by the insurer’s representative or representations made by insurance sales brochures upon which a reasonable person could reasonably expect to rely on, even when unambiguous wording within the policy excludes coverage. Such states as California, Alabama, New Hampshire and New Jersey have already adopted the doctrine, and many others are expected to follow.

Some courts have even gone so far as to determine that the insured is not under an obligation to read their standard insurance contract in order for this doctrine to apply. Contact your association attorney for a more precise and concise explanation of this doctrine.

It is time for associations to realize that insurance is no longer just an expensive line item on their budget. Instead, it is an evolving necessity that requires expertise from both the insurance agent and, more importantly, the association itself.

J.C. Bookman, CIC, is President of Risk Management Consultants, Inc., in North Palm Beach, Fla.

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