Association Insights Risk Management

Risk Management in the Aftermath of Surfside

The June 24, 2021, collapse of the Champlain Towers South Condominium—a 12-story, 136-unit beachfront condominium in the Miami suburb of Surfside, Florida—if it has not already, will become a defining moment for condominium associations across the country. Prior to the collapse, associations managed their buildings with varying degrees of attention. Associations with strong management, strong leadership, and residents who understand that older buildings don’t hold up forever without proper planning and maintenance, have done well and will continue to thrive. Associations without strong oversight (including regulatory), inadequate reserves, a reluctance to increase assessments to fund reserves, infrequent or a lack of any reserve study, apathy among residents, or worse, opposition from owners, are likely to face problems in the future.

While it could take months and possibly years until we understand fully what caused the collapse of the tower—the cause could be a combination of factors, including porous limestone soil, rising tidal waters, construction errors including a lack of slope on the pool deck and either inadequate or a lack of waterproofing, and poor oversight from local officials—strong evidence suggests the building was allowed to fall into disrepair over some period of time. Champlain Towers South had known, at least since October 08, 2018, when Morabito Consultants, a Sparks Glencoe, Maryland-based engineering consulting firm hired by the association in advance of its 40-year recertification, advised the board of more than $9 million in estimated costs that would be required to make extensive repairs. The report noted that “abundant cracking and spalling of varying degrees was observed in the concrete columns, beams, and walls” including the topside of the entrance drive ramp and the underside of the pool/entrance drive/planter slabs, which included areas with exposed, deteriorating rebar. “Though some of this damage is minor, most of the concrete deterioration needs to be repaired in a timely fashion,” the report warned.

The association, however, failed to take steps toward any meaningful work. Citing frustration with not having been able to move the project forward because of “egos, an undermining of the roles of fellow board members, circulation of gossip and mistruths,” and the stress and emotional impact of serving on the board, the association’s president resigned September 14, 2019. In five years, in fact, the association had five presidents and five vice presidents. By April 2021, the association had gained the necessary votes among the members to move forward with repairs, and it had commenced a roof project, but by then, the combined costs for repairs had grown to nearly $15 million.

From tragedy, however, can come change. The Community Associations Institute (CAI) has convened a special task force to develop best practices, public policies, and education initiatives in three critical areas including Reserve Studies and Funding, Structural Building Integrity and Inspections, and Insurance and Risk Management. Reserve studies—and more importantly a requirement to fund reserves—are not conducted among associations with any consistency. Locally, while Virginia requires associations to undertake a reserve study at least once every five years, only Prince Georges County (effective October 2020) and Montgomery County (effective October 2021) in Maryland require reserve studies and reserve funding. The District of Columbia has no statutory requirement to conduct a reserve study or fund reserves.

Not surprisingly, reserve study and reserve funding laws are woefully lacking in most states, with only nine states requiring reserve studies, and of those, only four have true reserve funding requirements. Delaware is among those few states with a strong reserve study and reserve funding law. Some states’ laws seem not to make sense. While the Florida Condominium Act requires a reserve schedule for major repairs and assigns associations a statutory duty to maintain and repair, the reserve funding requirement is diluted by the allowance of a majority vote not to fund. Arguably, a true statutory requirement to fund reserves along with greater discretionary spending powers for the board for urgent maintenance might have been the backstop the Champlain South board needed to move forward.

While reserve requirement changes may be coming, perhaps even on a federal level, many associations are anxious to understand the insurance ramifications of the Surfside collapse. Will insurance protect them from a similar situation? And what should they be doing differently to avoid serious loss? Because boards have a fiduciary responsibility to maintain the association’s structures, it is important to understand insurance coverage as it relates to risk management, as the two, while intertwined, can easily be confused.

While insurance—the strategy of transferring risk and the chance for property loss from direct, physical damage to a second party (the insurance company)—certainly is a form of risk management, it is not the only form, and in the last few months, condominium residents, boards of directors, and management teams across the country have come to learn what insurance management professionals have understood for some time: risk management and the strategy of controlling and avoiding loss begins with the insured.

Great American, the Property carrier for Champlain Towers South, has agreed to pay the policy limit of $31.4 million, likely to avoid a drawn-out adjustment process and the very real possibility that a number of factors led to the building’s collapse. But in its purest sense, collapse coverage under the Insurance Services Office (ISO) policy (the standard policy form on which many carriers’ Property Coverage forms are based) is subject to exclusions including, but not limited to, “building decay that is hidden from view unless the presence of such decay is known to an insured prior to collapse.”

For Champlain Towers South, certainly the association knew on some level of major problems and that “failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially,” according to the Morabito Consultants report. While Champlain Towers South’s carrier has agreed to pay policy limits under the Property form (and the General Liability and Umbrella Liability carriers will also pay policy limits of $2 million and $15 million), policy language still provides a cautionary tale not to be ignored: boards and owners need to understand that allowing building structure(s) to deteriorate could result in partial payment or denial of a claim.

Despite Great American’s intent to pay, too, it is concerning that the building was likely underinsured. While Florida is a bare walls state—the obligation of the association and its Master Policy carrier by statute is to insure the building up to the unfinished walls, with the condominium unit owners’ (HO-6) policy insuring everything from the unfinished walls in—an annual examination of values seemed to have failed despite the fact that appraisals are required by Florida law every 36 months and the Condominium Act requires that the association insure the building for its full insurable value.

Regardless of how the legislatures intend to address the failures that led to the Champlain Towers South failure, associations should begin to examine the health of their own associations now. Laws may require and provide an association with the framework and guidance to do the right thing, but absent laws, working with your professionals—management, legal, and insurance—is now critical. Commercial buildings across the country have an average median age of 53 years—that age jumps to 90 years in older-infrastructure cities like New York City. And while garden- and townhouse-style homes have fewer stories, reports of deck failures and collapse are still rampant.

HERE ARE 10 THINGS BOARDS SHOULD BE DOING NOW:

  1. Required by law now or not, if your association has not already obtained a reserve study, it’s important to establish a baseline study that will help the Board determine life expectancy of major and even minor components. Understanding how long a component will last and the average cost of replacement (scaled for inflation) will allow the Association to begin reserving for eventual replacement.
  2. Fund the reserve study. It does little good to obtain a reserve study that isn’t funded. Owners will always be resistant to spending money and will complain about increased condominium fees without a full understanding of how the fees are to be spent. Boards may feel intimidated into not raising fees, but aging buildings require money to operate safely.
  3. Communicate with members and be transparent about the short- and long-term goals of the association. Share reserve study and structural engineering reports early with members so that they understand the timeline for upcoming expenses. Be clear with owners about failures that can result by not reserving now and that, as a community, you are trying to avoid even more costly special assessments and loans.
  4. Follow the reserve study but be prepared to move forward ahead of schedule. It is not uncommon to begin to see failures of components one- to five years prior to a scheduled replacement. If a roof, for example, is scheduled for replacement in five years but weather conditions have caused early failure resulting in water infiltration and unit damage, the roof should be replaced sooner to avoid more costly expenses including insurance losses and self-insured deductibles.
  5. Remember that the insurance program is not a maintenance contract. Insurance is intended to respond to losses of a direct, physical nature that are sudden and accidental. Losses from ongoing leaks and failure to maintain may not be covered or may garner only limited coverage.
  6. Consider group purchases of in-unit components when relying on owners to do regular replacements and repairs can result in certain loss. High-rise associations that are seeing a spate of condensate line leaks or water heater bursts, for example, would do well to consider group service agreements where all the condensate lines are cleaned prior to air conditioning season. Group water heater replacements, too, can yield a cost savings while avoiding costly water heater failures. While this may seem like an enormous effort, it’s far easier than managing a loss and the inconvenience and expense that can impact many units and common areas.
  7. Work with your attorney when it comes to the association’s right of entry. Many boards are reluctant to enter units or believe they don’t have the power to make proactive repairs. Maryland law, for example, includes among the broadest right-of-entry laws in the country, and most bylaw language allows an association to make repairs or compel owners to make repairs and replacements to avoid losses.
  8. Work with your insurance professional and don’t be afraid to ask questions about Property Coverage limit adequacy. Regardless of state-specific laws, obtaining a certified appraisal can be very helpful if you are unsure of your building’s replacement value. Ask questions about how the buildings are insured. Unless an association has limited coverage due to loss frequency and severity or some exposure that limits coverage, the vast majority of Property policies available are written on either a Replacement Cost basis (coverage up to the policy limit absent depreciation), an Extended Replacement Cost basis (adds an additional 25%, 50%, or more of the coverage limit in the event additional coverage is needed), or on a Guaranteed Replacement Cost basis (which affords property coverage without limit or cap regardless of the limit used for rating purposes). All options should be based on as close to 100% of the blanket replacement limit as possible, and coverage ideally should be written on a blanket basis, which allows for the full limit of the policy to be applied to any given loss, as well as on an Agreed Amount basis, which waives any co-insurance.
  9. Resist objecting to your agent’s or your carrier’s application of a building value increase. Costs of building supplies and services are on the rise, and valuation increases should be expected. Smaller valuation increases at annual renewals can help to avoid larger increases that can impact premiums and budgets. Your agent can discuss with you why a valuation increase is being applied.
  10. Create an environment of inclusion and then work together. Too often in community associations, resistance, lack of trust, misunderstandings, and personal agendas prevent otherwise lovely communities from succeeding and moving forward, which can result in resignations of experienced but frustrated volunteer board members and low interest in volunteering among the rest of the community. Communicate to owners and volunteers alike that the association’s goal is to remain healthy and vibrant for many years to come. In making and fulfilling those goals, members’ investments are protected. But as Benjamin Franklin was so keenly aware, failing to plan is planning to fail.

By Robin Manougian

Robin is vice president of John Manougian Insurance Agency, a division of JGS Insurance, in Silver Spring, MD, and a 13-year member of the Maryland Legislative Action Committee.

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