Why Your Governing Documents Are Sabotaging Your Insurance Rates

A newer Upper West Side condominium was facing a crisis: three water damage claims over four years had pushed their insurance premium from $50,000 to $130,000. Sophie Bird, Senior Vice President at IMA Financial Group, reveals how her team discovered the real culprit wasn't the building itself, but something hidden in the bylaws that was driving up claim costs. Bird explains the unconventional strategy her team used to help this condo escape the expensive non-admitted insurance market and start bringing premiums back down. Along the way, she shares insider knowledge about when boards should actually report claims and why frequency matters more than severity. Whether your board is currently struggling with rising insurance costs or wants to prevent future problems, this case study offers a roadmap for using governing documents strategically to protect your building's financial health. Habitat’s Emily Myers conducts the interview.

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Transcript

Emily Myers (00:37)
Welcome to Problem Solved, a conversation about challenges facing New York co-op and condo board directors. I'm Emily Myers with Habitat Magazine and I'm joined by Sophie Bird, Senior Vice President at IMA Financial Group. Sophie, thanks so much for being here. So in this episode, we're going to discuss how bylaws or the proprietary lease can affect insurance and why it's so important to have clarity in the governing documents.

Sophie Bird (00:52)
Thanks for having me.

Emily Myers (01:03)
about who is responsible for repairs, particularly water damage. We'll also talk about what a board can do to ensure losses don't impact a building's ability to get coverage or push it into what's called the non-admitted market where premiums are often more expensive. So let's kick off our conversation with a look at a condo you're working with, on the Upper West Side. Can you explain the insurance challenge they faced?

Sophie Bird (01:29)
Sure, so this was a newer construction condominium built in 2010 and they had a couple water damage incidents. So they had three different incidents over the course of a four year period. None of them were super large. The largest one was around a $60,000 claim. But what it did indicate to the insurance market was that they had a water damage issue in this building. So they were facing a non-renewal of their coverage. And like you had mentioned, their bylaws

played a big role in this non-renewal because it made the condo association responsible for anything within those units that was original, especially the floors. So that was where a lot of the cost was coming from these repairs was from original floors because, you like I mentioned, it was a newer building, not a lot of people had done renovations. So it was putting the responsibility of these repairs fully on the condo association.

Emily Myers (02:21)
Okay, so what was your strategy then to help the condos insurance issues?

Sophie Bird (02:26)
Sure, so we spoke with the board and the property manager and pointed out the fact that a lot of the costs for the insurance claims was coming from the original floors in the building and suggested that perhaps they look at amending the bylaws to make the responsibility of the floors to push that to the unit owners versus the condo association. So the unit owners would be responsible for insuring those on their homeowners policies.

Emily Myers (02:49)
Okay, and how did that affect the condos premiums?

Sophie Bird (02:51)
So the condo, you know, after they had the several incidents over the four year period, they did get non-renewed and their premiums had gone from around $50,000 a year to around $130,000 a year because of those claims. Like you said, they wound up in the not admitted market, not great policy terms and conditions and much higher premiums.

It took some time for them to convince the unit owners to deal with building counsel, to get the drafted amendment to the bylaws, and then to have the building approve this change. Because it took some convincing. Unit owners were taking on more responsibility from an insurance perspective, but we were able to express to them, this will help present you much better to the insurance market because you do have a loss history. And we can go to them and say, here are the claims they had.

a lot of these repairs were due to the cost of the floors and the floors are now the responsibility of the unit owners. So, know, hey, insurance carrier, you won't be paying these claims going forward. And we were able to, we're in a very tough market right now in that first year, bring their insurance premium down around $15,000. So

over the course of several years, they will realize some significant savings and hopefully if the insurance market softens in the next few years, it will only help to improve their pricing and bring it down even further.

Emily Myers (04:07)
Okay, you mentioned this is a newer construction building. So I'm curious, is this a problem for the new construction? I mean, have you seen similar challenges in older buildings?

Sophie Bird (04:18)
So older buildings, if they have bylaws that are written like this building, whereby it puts the onus for original installation in the units on the condo association, in the older buildings, you're going to see more units have been renovated. And once those renovations take place, you know, it's called improvements, embedderments, or additions or alterations within the unit. Once any unit owner makes those changes, the onus is on the unit owner from an insurance perspective. So the older buildings don't face these challenges usually.

because a lot of the units have been renovated. It is a big issue in these newer buildings because nobody's gonna renovate within the first couple of years or not nobody, but fewer people will have done renovations in a newer condominium. More things are likely to be original and therefore the responsibility of the association.

Emily Myers (05:03)
So, I guess clarity then in the governing documents is a key takeaway here.

Sophie Bird (05:08)
Absolutely, clarity and then putting more responsibility on the unit owners for the things that are within the four walls of their unit.

Emily Myers (05:16)
And what other advice then would you give to boards facing rising

costs?

Sophie Bird (05:22)
Definitely take a look at your bylaws, know what the building is responsible for insuring and know what the unit owners are responsible for. I think educating unit owners on what they're responsible for and if it's a building that's had issues, perhaps looking at amendments to those governing documents to push more responsibility to unit owners versus having it be on the association.

Emily Myers (05:43)
Is there a way in which boards can perhaps reduce the number of claims then? Because a frequency of small claims is clearly an issue as well.

Sophie Bird (05:52)
Absolutely, frequency of claims is a big issue. Carriers will see,

have five small claims, frequency to them leads to severity. It's only a matter of time before you have a large incident and they don't wanna be the ones on the hook paying those claims. So I would say have boards and their property managers work very closely with your broker to determine what claims should be reported. Is it close to your deductible? Is it just slightly over your deductible? You can wait a couple days before reporting a property claim.

so you don't have that incident on your loss run. So really working and collaborating with your broker on what claims it makes sense to report from a property standpoint.

Emily Myers (06:28)
I mean, it's frustrating for boards to hear that they perhaps should think twice before submitting a claim. After all, they have insurance for a reason. But what you're saying is perhaps frequent small claims can push you into the non-admitted market and opting for perhaps a higher deductible essentially rules out that option of a smaller claim and keeps your insurance costs down.

Sophie Bird (06:49)
Absolutely. you know, higher deductibles are definitely something that to one point helps prevent the smaller claims. If you have a $10,000 or a $25,000 deductible, you're not putting in those small $1,500 or $5,000 claims. That also helps keep your premium down because carriers do give a credit for taking a higher deductible.

Emily Myers (07:08)
And would you say then that buildings should regularly review their proprietary leases and bylaws, even if perhaps they're not currently facing insurance issues?

Sophie Bird (07:14)
I would say it's a good thing to review. I don't know that you need to do it with much frequency, but reviewing it if you're not familiar with how a claim would be adjusted and being familiar with those documents I think would be a good thing for any board to do.

Emily Myers (07:26)
So what are the other takeaways then? Have we touched on everything or have you got any more advice? Because this is such a key issue for so many buildings.

Sophie Bird (07:33)
I'd we've touched on most things reviewing your governing documents, making sure you're aware of what the building is responsible for insuring, reviewing your insurance policy, making sure, you know what you're self insuring with your deductibles. If you have a low deductible, buildings used to carry $2,500, $5,000 deductibles, that hasn't been reviewed, looking and seeing what premium savings you could have by increasing it to $5,000, $10,000. then the other thing is,

review your alteration agreements. If you have unit owners that are amending their unit, make sure you know what are in those alteration agreements and put as much responsibility back on the unit owner as you can once they make those improvements.

Emily Myers (08:10)
Yes, because water damage is a key issue and we freezing pipes, perhaps old pipes, perhaps less so in the newer construction. Can you get into situations where there's a dispute about, you know, responsibility then?

Sophie Bird (08:23)
We have seen, not in this particular building that we helped with the amendment to the bylaws. We have seen governing documents that are not clear and it's not cut and dry who's responsible for what. We have had buildings where you've got the two insurance carriers, the carrier for the building and the carrier for the unit owner pointing fingers at each other saying, we're not responsible for this, you are. And then you have an uncovered claim and you've got a unit owner fighting with the condo association over who's responsible for the repairs to their unit.

So really making sure it's cut and dry who's responsible for different things within the units is very important.

Emily Myers (08:57)
Great, good advice there, Sophie. Thanks so much.

Sophie Bird (09:00)
Thank you.

Emily Myers (09:00)
Sophie Bird, Senior Vice President at IMA Financial Group.