Wow. I can’t believe I am writing this article. I’m an optimist at heart and somehow always believed my major competitors (other HOA insurance “experts” you may be familiar with) were acting in good faith as I always have done. I thought they did what was right for their clients the majority of the time like you would expect them to do. On rare occasions when we came across a misrepresentation of coverage, I chalked it up to an honest mistake (they can happen as we are all human).
Sure, I have a difference of opinion in regards to matching interior betterments coverage to association CC&Rs with most other agents in my field. It is my opinion that when we sell an insurance contract, and that’s exactly what insurance brokers and agents do (we sell contracts); it needs to match up to the contract that governs the association. The purpose of the very precise terminology and language in an insurance contract is to define the limits of responsibility for the insurance company. That way, they only have to pay under certain conditions and can refuse to pay when those conditions are not met. I have seen it happen; claims that were denied due to policies written “Walls-in” when the CC&Rs dictated “Bare Walls”. But, intentionally mismatching coverage to CC&Rs is small potatoes compared to what I just witnessed last week.
Okay, here’s what happened. I tell you this only so you can ask questions and make sure your HOA has not fallen victim to this evil deception.
I was asked to bid the insurance for an HOA by a very sharp manager named Janice*. As part of the process, we presented an RCW (Replacement Cost Worksheet) that accurately reflected the construction and character of the building. The value came out at $7.9 million and the current agent, Jerry*, was insuring the building property for $6.9 million. Naturally, Janice called up Jerry to ask why he was insuring it for so little and his reply was “…you have Extended Replacement Cost at 150% on the contract so it doesn’t matter”.
First of all, understand that the underlying policy contract in question provides only “Replacement Cost” by default. The 150% “Extended Building Replacement Cost” coverage is provided as an endorsement to the policy and is valid ONLY when three conditions are met:
1. Property must be insured to value (accurate and inclusive of parking structures) when policy is bound.
2. The insured accepts each annual inflation adjustment in building coverage limits to maintain proper insurance to value, and pay the premium.
3. If you make physical changes to the property you need to inform the company and increase the value within 90 days.
In plain English, this means the “Extended Replacement Cost” endorsement is VOID if you do not comply with ALL three requirements
Back to our story. Janice examined the current policy to check out the Extended Replacement Cost verbiage and found mention of 150%. So far so good. However, she then pulled the previous year’s policy and noted the coverage limit was exactly the same as the previous year. Janice asked Jerry, “that doesn’t seem right, there is usually an inflation increase and the limit this year is exactly the same as last year’s.” Jerry tried to ease her mind by saying “…oh, we did a replacement cost worksheet for this year and 6.9 million is correct so we didn’t need to raise it this year”.
Janice was not satisfied. “How could there be two RCWs produced on the identical software program but with Reconstruction Valuations off by about a million dollars?” Clearly, someone, we or the current agent had to be wrong. What to do?
Remember, I mentioned Janice was a smart cookie. So what she did was to obtain the Replacement Cost Worksheet from Jerry so she could try to untangle fact from fiction. Upon close inspection she noticed our RCW included a subterranean garage (which indeed exists) and Jerry’s RCW defined the space as an unfinished basement. There is was! That seemingly minor difference accounted for the million dollars of value differential. Now, whether or not this was accidental or intentional this misrepresentation of the risk means Janice’s HOA has not complied with requirement (a) on the endorsement which means they are not entitled to “Extended Replacement Cost” coverage via the endorsement.
Now Janice has learned that her client is dangerously underinsured so she calls Jerry and explains the issue. She is shocked when he dismisses her request to fix the property description and replacement cost by telling her that she does not need to be looking at things so closely and that everything is okay as is. Jerry has no interest in fixing the value and updating her policy upon renewal.
What the %^&*? In my book this is blatantly unethical and irresponsible.
In order to get a cheaper price and lock out honest bids from other agents, it appears that Jerry is playing games with insurable value, voiding the very coverage limit he claims to be providing. When a claim happens, the insured is now at the mercy of the carrier to pay to a value they are not legally bound to do. It is possible they will pay anyhow, but the insurance company has protected itself with the endorsement conditions it can use to invalidate Extended Coverage at any time it wants to.
Takeaways to Consider:
- A verbal assurance of coverage from an agent or broker is worthless
- Captive insurance agents represent the insurance company and have no fiduciary responsibility to you. They do what is in their insurance company’s best interest. If you, the insured, are hurt in the process, it isn’t their problem.
- If an agent tries to dissuade you from asking questions, they may be hiding something
- Honest brokers and agents are happy to provide and explain the insurance carrier contract and/or property limits they are selling you
*Names have been changed to protect confidentiality of parties involved in this exchange