“Becoming a big issue”: Conflicts at condo, homeowners associations fuel insurance woes
Extensive past litigation and claims stifle insurers’ appetite to provide coverage, prompt higher premiums
Jun 3, 2024, 7:00 AM
In Pembroke Pines, the Heron Pond condo complex’s property insurer halted coverage in April, and the general liability carrier warned it won’t renew its policy when it expires in June.
Near North Miami Beach, the Star Lakes condo complex’s board president said he expects this year’s insurance premiums to be about 45 percent more than the association paid in prior years.
And at the Hammocks in West Kendall, the association’s general liability and umbrella insurers refused to renew policies this year, and few new carriers offered new policies.
These associations have one thing in common: For years, board members pulled off various types of mismanagement and schemes, lawsuits and homeowners allege.
They aren’t alone. Condo associations and HOAs across South Florida have been involved in hotly contested disputes, with owners alleging that boards of directors ran plots such as election meddling, fund misappropriation, insider deals with vendors and inadequate property maintenance despite assessment hikes.
At some associations, after hard-fought battles to oust board members, new leadership is working to fix past misdeeds and make the communities whole. But leaders are finding that the associations’ histories of litigation, insurance claims and building code violations are still haunting them.
Insurers aren’t looking kindly at these associations, with carriers unwilling to provide coverage or quoting higher premiums and deductibles, according to experts and records.
The issues come amid Florida’s strained insurance market. Premiums surged in the wake of the deadly 2021 collapse of Champlain Towers South in Surfside. Some carriers already have stopped insuring properties in the state, while others are raising premiums because of the exposure to hurricanes and storm surges. Champlain was only insured for $48 million.
Some associations saw their total insurance costs double or triple, driven by property premiums. Overall, property insurance costs are now starting to stabilize, though not soften, brokers said.
But associations with a litigious history, structural safety citations due to alleged mismanagement, or in some cases criminal investigations into former board members are dealing with a new frontier of insurance issues.
“Imagine if they oust the corrupt board, and someone had filed a lawsuit, and the insurance is going to pay. When it’s time to renew, there are significant increases,” said Tamara Reyes, founder of South Florida Property Management Solutions, which helps homeowners who suspect association mismanagement.
“You have to either go into the secondary market, which means the premiums are going to go up, or not be insured. It’s becoming a big issue.”
The problem is pronounced at the Hammocks, one of Florida’s biggest HOAs, where a former board president, her husband and three ex-board members were arrested in 2022 on charges that they ran a massive fraud scheme by hiring bogus contractors that did no work. When the association paid the contractors, the ex-board allegedly misappropriated the payments.
Due to the prior board’s alleged misconduct and the association’s claims history — including four wrongful death claims — just three carriers provided quotes for general liability insurance and two for umbrella coverage, which provides excess protection to general liability. All came in at “exorbitantly high premiums,” the Hammocks receiver who oversees the HOA wrote in a court filing.
Reyes said issues don’t have to be as severe as at the Hammocks for associations to experience insurance woes.
“You have to either go into the secondary market, which means the premiums are going to go up, or not be insured,” she said. “It’s becoming a big issue.”
Association insurance 101
Under state law, condo associations and HOAs must secure property insurance, which is the costliest. Association flood insurance is required by mortgage lenders to homebuyers, as it’s usually too expensive for unit owners to get this coverage on their own.
But association governing documents and contracts with property management firms also usually spell out a slew of other required policies. They include directors and officers (D&O) policies protecting board members if they or the association is sued over their decisions; workers’ compensation; general liability (GL), and umbrella policies that provide excess coverage for D&O and GL policies, according to experts. Crime insurance covers financial fraud and theft.
Policies are annual, and insurers generally require a lump-sum payment. That pushes many associations to take out financing for the premiums, repaid in increments at interest rates of about 5 percent to 8 percent, adding to the total cost.
Insurers consider an association’s five-year claims history, said John Lee, vice president of FirstService Financial in Florida. Civil litigation also could play a role, as D&O and GL policies include a duty to defend an association and its board members.
“That’s going to affect many things with your ability to get insurance,” Lee said. “[In Florida,] there’s not a lot of carriers, there’s not a lot of capacity, and there’s not a lot of appetite. So the carriers that are writing insurance, they want the clean stuff that doesn’t have any claims history or anything attached to it that’s not squeaky-clean.”
Some properties have been thrust into the public eye through campaigns to oust board members. Insurers are taking note. “Underwriters are people too,” said Ben Meyers of AssuredPartners. “They’ll Google the association.”
D&O premiums are elevated in Miami-Dade County because of its higher concentration of condo associations and fraud, said Oscar Seikaly, CEO of NSI Insurance Group. Some D&O carriers are pulling back in parts of Florida to limit their risk exposure.
Two carriers used to control 90 percent of the D&O business in Miami-Dade, Seikaly said. Alternatives are more expensive.
In a sampling of condo associations in Miami-Dade and Broward counties, provided by NSI Insurance, annual D&O coverage was just over $1,000, representing about half a percent of those associations’ total insurance costs for 2024. But for one association, the cost of D&O represented just over 4 percent of the total insurance cost — a $32,000 premium for a community where the property insurance this year cost $750,000 and all premiums totaled about $845,000.
Associations with a history of claims could have to pay as much as 10 times more for D&O coverage, said Brown & Brown insurance broker Derrick Karadi.
“In most cases you would still be able to find it, but at what cost?” Karadi asked.
“It’s just a tremendous amount of negligence
that is costing us.”
Insurers also consider the frequency and severity of past claims.
Case in point: Heron Pond. Pembroke Pines city officials declared 122 of the 304 condos unsafe due to structural issues and evacuated residents last summer. The property insurer cited the city’s unsafe-building notice as a reason to discontinue coverage, records show.
In the meantime, nine unit owners sued the association, alleging that the disrepair is the result of some former board members’ neglect of the complex, allowing them to amass units at a discount. As things came to a head, a receiver was appointed in April to oversee Heron Pond.
“It would be extremely difficult and extremely expensive to find insurance for a property” with such issues, Lee said after hearing a summary of Heron Pond’s problems. “It’s kind of a multiplier. … It’s like 10 things at the same time.”
Heron Pond’s receiver has said the association’s ability to secure property and GL policies is in doubt. “The legion of issues presented by the property … and the lack of sufficient funds on hand to properly operate the association, are of grave concern,” receiver Daniel Stermer wrote in court.
Inching out of the muck
As associations that ousted allegedly corrupt board members try to tread out of the muck, they are exploring other insurance options.
Though some consider self-insuring, it isn’t a realistic path, experts say. State law requires an association to set aside sufficient funds if it is self-insuring. On a basic level, if a building would typically be insured for a $10 million replacement cost, the association that is self-insuring would have to have those funds if that building were destroyed. The association would also have to file as an insurance company, among other requirements.
“The logistics of it are just too impractical,” said FirstService’s Lee.
The Hammocks could be a trailblazer. It is considering self-insurance after securing a GL policy for a $735,525 annual premium and an umbrella policy for $414,370.
The Hammocks is in a unique position because of its large size and budget of over $4 million, and because its insurance costs have skyrocketed due to its history, court filings say. Spanning 3,800 acres, the HOA is home to over 18,000 residents.
“The excessive insurance costs that are now a reality for the association (and will be a reality for the next five years) … necessitate exploring the self-insurance route,” receiver David Gersten wrote in court.
In December, at the 19-building Star Lakes complex, unit owners won a suit to oust the board after years of allegations that no improvements were made at the property despite $3 million in special assessments. The new board is resolving past litigation and closing structural citations in a bid to get a reprieve on premiums by showing insurers it’s working through issues.
Though roughly half the buildings are past due on recertifications, the new board found that former leaders had neglected to file some completed structural reports to the county. “Some of these buildings didn’t even have problems,” Star Lakes board President John Baptiste said. “All they had to do was submit the reports.”
While Star Lakes’ insurance broker is putting feelers out in the market, preliminary estimates show new policies would cost $600,000 to $700,000, combined, in annual premiums, Baptiste said. That’s more than the roughly $350,000 to $415,000 the association paid in prior years.
“It’s just a tremendous amount of negligence that is costing us,” he said.
Reyes emphasized that even associations with less extreme litigation histories are dealing with heightened costs.
Said Reyes: “We are discussing it in every single case.”