Is Deductible Buy-Down Insurance A Wise Choice For Condominiums? A Basic Guide For Association Boards and Property Managers
Deductible buy-down insurance, also referred to as buyback deductible insurance, is designed to reduce the deductible that an insured party would have to pay in the event of a claim. It operates on a simple principle: by purchasing a deductible buy-down policy or endorsement, the insured party can reduce or even eliminate the deductible that would be due if a loss occurs. This mechanism is particularly relevant for policyholders when the deductible on a claim is set at a high amount.
Deductible buy-down insurance is a powerful tool that offers financial protection and risk mitigation for condominium associations. This coverage purchased as an endorsement or separate policy can significantly reduce the financial burden associated with high deductibles on master insurance policies. As a general rule, the higher the deductible, the more likely a condominium association should inquire about the affordability of deductible buy-down insurance.
A real life example of how a buy-down deductible policy can soften the blow for an association and unit owners is from Superstorm Sandy. I represented a condominium association located in Seaside Heights, New Jersey, following Superstorm Sandy. The winds ravaged the roofs and many of the units. The flood waters ruined most of the first and second floor units. The association master policy had a deductible of $250,000 for windstorm related losses. The association’s insurance agent suggested that the association purchase deductible buy-down insurance in the event of a wind loss claim that reduced the deductible to $50,000. In other words, it paid for windstorm related damages above $50,000 to $250,000. The primary master policy paid for windstorm damages above the $250,000 deductible.
The association followed the agent’s suggestion and purchased the policy through Lloyd’s. After the storm, Lloyd’s and the master policy insurer retained the same independent adjuster. While there were large differences of opinion about the total amount of the loss that required my retention, the loss was obviously above $250,000. The Lloyd’s policy paid $200,000, which was sorely needed money to start the repairs.
Why Deductible Buy-down Insurance Is More Relevant in Today’s Condominium Insurance Marketplace?
Condominium association master policies are increasingly being subject to larger percentage value deductibles. While it is often dependent on geographic location, many association policies covering wind, hail damage, wildfire, or earthquake have large percentage deductibles for those types of claims. A percentage deductible of 1-5% may seem small, but the dollar value can be staggering depending on the total amount of coverage under the master policy. These percentages can be anywhere from 1-5% of the coverage but recently are being increased so that 5% is not uncommon. If an association’s master policy has $20 million condominium building coverage and a 5% deductible, that amounts to a $1 million deductible, which is extremely high for a condominium association.
Deductible buy-down policies are most often considered to cover specific perils with high deductibles, such as windstorm, hailstorm, wildfire, and earthquake. However, they can also be purchased for other loss types or to reduce the general deductible. For example, many high rise condominiums face a peril from water damage caused by any number of problems with plumbing lines that can cause a stack of damage as the water spreads downward. Some insurance companies are now significantly raising the common $10,000 deductible because of these continued water losses prevalent in high rise condominiums. If that deductible amount were raised to $100,000, then considering a buy-down may be prudent for that association.
Where Do Condominium Boards of Directors and Property Insurance Managers Start?
The starting point for every condominium board member, property manager, and insurance agent of a condominium association should be to read the condominium declarations and by-laws and inquire about state law to be certain that the right types and amounts of insurance are purchased. In The Big Tip For Making Certain Association Insurance Agent Is Getting The Right Coverage, I wrote about Edgewater Condominium President Suzanne Harris sending a letter every year to her agent requiring the association’s agent sign a letter acknowledging that all the required insurance had been purchased.
The issue facing the association is whether the large deductible is allowed under the association’s governing insurance obligations. It could be that reducing the large deductible is a mandatory requirement rather than a permissive subjective act. Always check the governing documents and state law to see what the association has to purchase as a minimum.
Generally, a cost-benefit analysis in relation to the association’s unique situation and insurance requirements must be made. Insurance is a financial management tool in the event of loss. An association that is only insuring the common elements is in a different situation than an association in a state that is purchasing insurance for all unit owners and the association’s common elements.
For example, if the association is in Alabama, which allows the association to purchase insurance for the unit owners real property interests, and the association governing documents place that burden on the association, a high deductible can be devasting. A single unit owner loss could be responsible for the entire deductible of a claim under the master policy. Indeed, having such a high deductible will usually not satisfy the unit owner’s lender requirements. If this is the case, high deductibles may not satisfy the legal requirements, and deductible buy-down coverage may be mandated unless further negotiation with the master policy carrier regarding the deductible can resolve this issue.
The above scenario underscores the relative complexity of condominium, townhome, and owner association insurance. Board members are usually inexperienced amateurs when it comes to these association insurance issues. Professional property managers and trusted insurance agents need to carefully consider the ramifications of high deductibles and consider advising the board members about the need to purchase deductible buy-down coverage in the event of a high deductible.
After being asked to be a member panelist of insurance experts at an insurance agent conference, I noted that some of the highest errors and omission issues for property managers and insurance agents arise with association coverage issues and buy-down coverage in particular. The article, Insurance Agents Play An Important Role In Everyday Life, noted this warning:
Condominiums and Apartments—sell the insurance required in the by-laws or financing agreements. Every condo has a set of bylaws which explicitly explain what needs to be purchased and items are often not covered because they are excluded property, or the risk excluded such as wind driven rain. Apartments are usually financed, and the finance agreements usually require certain insurance amounts—and sometimes on such things as mold. Ask for by laws and insure to bylaws. Ask for financing agreements and sell at least to what is required. Deductible buy down insurance should be suggested to all condos if there are large deductibles. Watch for enough Law and Ordinance Coverage for these large structures older than 20 years—the building codes have changed a lot and create large gaps for older buildings.
By investing in deductible buy-down insurance, condominium associations can enhance their financial resilience and ensure that unit owners are not burdened with excessive costs in the event of a claim. It’s a proactive approach to safeguarding the financial well-being of the community while promoting peace of mind among all stakeholders. Whenever a high dollar or percentage deductible is required under the master association policy, the issue of deductible buy-down coverage must be addressed.
Thought For The Day
Insurance is the only product that both the seller and buyer hope is never actually used, but it’s also the one product you’re grateful to have when the unexpected happens.
—Warren Buffett
