Got Hail?

September 25, 2017

Imagine that you are the Board president of a large townhome association when marble-size hail and heavy winds hit. The next day you notice visible damages on the property, from downed trees and torn plants to structural damage on roofs, siding, and windows. It seems that each following day, more and more roofing contractors circle your units, becoming increasingly more belligerent. At this point, you take action and call the Association’s insurance carrier.

What you find out is that the 120-unit association is valued at $30 million and has a 2% wind-hail deductible. Although you immediately turn a claim in on this 10-building association, you discover that the mundane 2% wind-hail deductible translates to an out-of-pocket cost of $600,000 and the total damage to the soft metals on the roofs and windows is only $400,000. Being the total damage is under the Association’s deductible, do you have to have the repairs made?

The answer is YES for the following reasons:

  1. You cannot file a claim for the same damage more than once.
    Storm losses are on a per occurrence deductible basis and are never figured on an accumulative basis. Most adjusters can differentiate old storm damage from new. Even if they do not immediately note the old claim, they do have the ability to research if Associations have previously filed storm claims.

  2. You cannot sell damaged goods.
    Individual unit owners are constantly buying and selling homes and the Association needs to make repairs to the buildings exteriors, so future home sales will not be diminished by potential buyers discovering that the home exterior has prior storm damage.

  3. You cannot borrow money against damaged goods.
    Mortgage companies are not willingly going to borrow money to units with storm damage that has not been repaired.

Knowing the Board’s overriding goal in every decision should be for the appreciation of the Association’s property, what is a Board to do, as they do not have $400,000 in the Association’s operating funds? Through their corporate governance, the Board does has the ability to transfer the $400,000 repair to your members. On most storm losses it is reasonable to treat this as a common expense (expense divided equally amongst all 120 members), but maybe not always. For example, if the damage is not widespread to all 10 buildings, the Board has the option to assess the members in only the buildings that sustained damage. The key in any assessment is for the Board to be consistent and transparent.

How are the members going to pay for this expense? If the Board has done their homework and diligently alerted all members of the possibility of a wind-hail assessment like this occuring, the heavy lifting is already done. Any prudent member would have transferred this deductible exposure to their personal insurance carrier and would only be obligated to pay their small deductible on their personal policy. Some members will choose not to adhere to the Board’s advice on obtaining proper personal insurance coverage, but they should be the exception and not the rule. Dealing with multiple members on this process is going to take some time and the Association should supply the members with claim filing documentation, but this is a very workable solution, assuming that proper groundwork has been done.

This strategy of transferring a wind-hail repair cost back to the members works when damages are less than the fictitious $400,000 used in this example, or if the Association is at the epicenter of the storm and the total damage to the roofs and siding is a higher cost, like $2.5 million. In this case, the maximum wind-hail deductible of $600,000 (2% of $30 million) is met and the Association’s master carrier pays $1.9 million, with the members being assessed the deductible of $600,000.

Each loss is unique, but ultimately the Board needs to act in the best interest of the Association by making the repairs caused by storm losses. This is important not only so as not to impede the individual members’ ability to sell or refinance their units, but also for the Association’s ability to file future storm claims.