This month, we interviewed David Halberg, a Principal of KDB Brokerage Services, LLC, which was established in 2003.  He is a Licensed Insurance Broker for Property and Casualty, as well as Life, Accident, and Health in New York, New Jersey, and Florida.  He has extensive experience working with international clients, as well as individuals relocating to New York.  Prior to founding KDB, he headed the Latin American Crisis Management practice of American International Underwriters for nearly seven years.  Fluent in both Spanish and Portuguese, he lived and worked in Mexico, Brazil, and Chile. We get a lot of questions regarding insurance from our clients, so we figured he’d be the perfect person to interview.

Here’s our Q & A session with David:

Question: What is a Master Insurance Policy?

The Master Insurance Policy of a Cooperative or Condominium is designed to cover the common areas of the Building including hallways, courtyards, and the lobby, as well as the actual Building structure, equipment and apparatus.  In addition, it contains Liability coverage which protects the Building in the event of legal action due to events such as someone injuring themselves in a common area.

It is important to note that in Cooperatives the coverage also extends to the actual structural interior of the apartment i.e. floors, walls, ceilings, but it excludes paint, skim coating, wallpaper, flooring, etc.

Question: Is it Necessary to Review the Master Insurance Policy?

Regardless of whether the unit is in a Cooperative or Condominium, it is crucial that the Proprietary Lease and/or Bylaws, as well as the Offering Plan be examined by a real estate attorney as part of the due diligence process. This review can identify the specific responsibilities of the Building and Shareholder/Owner should damage occur to the unit.  Moreover, many Buildings now require Shareholders/Owners to obtain certain minimum limits of Homeowners Insurance.

Question: What is an H0-6 Policy and what does it cover?

Cooperative and Condominium Homeowners Insurance (HO-6 Coverage) is an essential complement to the Master Policy.  It provides what is often referred to as “walls in” coverage for the interior of the unit.  Under most Proprietary Leases/Bylaws, Shareholders/Owners are responsible for repairing damage sustained to their units including the Improvements and Betterments such as hardwood floors, built-in cabinetry, and tiling.  Moreover, Personal Property such as clothes, electronics, bedding, furniture, artwork, etc. are not covered by the Master Policy, but are protected under an HO-6.

Question: Does an H0-6 Policy cost more for a Condominium or a Cooperative?

Whether the unit is located in a Condominium or Cooperative, the premium for an HO-6 Policy does not vary significantly and the coverage is relatively easy to obtain.  If the unit is located in a prewar Building, it is important to ensure that the policy has Mold coverage due to the frequency of leaks in old plumbing infrastructure.

The cost of an HO-6 policy in New York City depends on a number of factors.  A key one is the Replacement Cost of the unit which is calculated based on labor costs, the square footage of the unit, as well as its interior finishes and appliances.  Other important elements are the construction material and age of the Building, the value of the Personal Property contained within the unit, the existence of Building security such as CCTV, keyed elevator entry, or a 24 hour doorman, loss mitigation components such as sprinklers, and any prior Shareholder/Owner claims history.  Another factor that will affect the cost is the Deductible amount, as well as the selection of Insurer.  Some offer very broad policy coverage and a more client centric approach to claims resolution, while others are not as consumer friendly.

Question: What are the Different Components to a Homeowners Insurance Policy?

Homeowners Insurance principally consists of the following components – Dwelling, Personal Property, Loss of Use, and Liability.

The Dwelling portion indemnifies the Shareholder/Owner for damages that occur to the interior of the unit as the result of a covered loss such as a fire or leak from a pipe.  The Dwelling Limit represents the amount available to the Insured for replacing and/or repairing hardwood floors, skim coated walls, permanent lighting fixtures, countertops, moldings, cabinets, large appliances such as refrigerators, stoves, or dishwashers, tile work, drop ceilings, etc.  Given that NYC real estate is so costly, it normally represents a significant portion of clients’ net worth.  Therefore, it is crucial to accurately calculate the Replacement Cost of the Dwelling.  In other words, should the worst case scenario occur and the unit is completely destroyed, there must be enough funds to reconstruct/repair the apartment to its condition prior to the loss.  Moreover, when financing the purchase of an apartment with a mortgage, the bank will usually require Homeowners Insurance and a Dwelling amount calculated on a Replacement Cost basis, so that it is protected against a catastrophic loss.

The Personal Property section indemnifies the Shareholder/Owner for items such as electronics, furniture, clothing, bedding, portable light fixtures, glassware, silverware, etc.  Essentially, if an apartment could be flipped upside down, it covers everything that would fall on to the floor.  Personal Property is covered on a Replacement Cost basis which means that the Insurer will pay out the necessary funds to purchase a new item that is of like kind and quality, instead of adjusting for depreciation. Separate Limits can be obtained for valuable pieces of jewelry, art, or furs.

Loss of Use protects the Shareholder/Owner in the event of a covered loss that renders the apartment unusable.  For example, a significant leak would necessitate the replacement of floors and possible mold remediation.  Obviously, the Shareholder/Owner could not be present in the apartment while this work is ongoing.  The Loss of Use cover allows rental of a unit of like kind and quality in a similar neighborhood until the apartment is habitable again.

The Liability portion provides protection against Third Party claims should someone get injured in the apartment of the Shareholder/Owner or if there is an incident such as fire that causes damage to an adjacent unit.  The Homeowners Insurance would provide Primary Coverage of anywhere from $300,000 to $1,000,000.  However, a severe incident could result in a claim that pierces through this Limit and that is when an Umbrella Liability Policy would be essential in asset protection.

Question: What Should People know About Insuring an Investment Property?

Investment property units present unique challenges with regards to Homeowners Insurance (HO-6 Coverage).  Normally, a Primary Residence can be insured by a Standard Lines carrier such as Hanover.  However, in the case of an Investment Property, the unit is generally rented out to tenants, so it is not even utilized as a Secondary Residence.  Moreover, Investment Properties are often purchased in the name of a Corporation or LLC.  As a result, the Standard Lines companies have very little appetite for these types of risks.  Consequently, it is necessary to approach Excess and Surplus Lines carriers such as Lexington Insurance Company and Underwriters at Lloyd’s, London, which are generally more expensive.  These Insurers are not subject to the same regulatory framework as Standard Lines companies and, as a result, have greater flexibility in determining the premium charged for a particular risk.  Furthermore, they are required to collect an Excess Line Tax and a Stamping Fee on each policy.  Despite the additional cost, the coverages offered under the Excess and Surplus HO-6 are very similar to the ones described earlier and provided by Standard Lines insurers.

Question: Should Renters Obtain Insurance and should Landlords Insist Upon It?

Investment Property Owners should absolutely insist that any Lessee of a unit obtain Renters Insurance (HO-4 Coverage).  This type of Insurance has three principal components – Personal Property, Loss of Use, and Liability.  Should a loss such as a fire or leak occur, the Lessee would rely on the Renters Policy to replace damaged Personal Property rather than turn to the Owner for compensation.  Moreover, if a guest of the Lessee trips in the unit and is injured, the Renters Policy would respond to any subsequent Liability that might occur thereby mitigating the Owner’s exposure.

Question: Are there Additional Policy Types That People Should Consider?

Umbrella Insurance is simply defined as overlapping Liability Coverage. It protects against claims above and beyond the amounts covered by Primary Insurance policies such as Homeowners or Automobile. Moreover, Umbrella Insurance also provides protection against claims arising from slander or defamation. Coverage is usually offered in $1,000,000 increments and the cost is quite reasonable.