Excerpt from AssociationHelpNow™ Condo/HOA Primer by Raymond Dickey
Author Note: With hurricane season on the horizon, we thought this chapter from my book would be useful to our readers.
What happens when a property damage disaster occurs in an association? What steps need to be taken at the time of the disaster and afterwards in order to restore the property to its pre-disaster condition? Who is responsible for taking the necessary actions, the residents or the association? We spoke with Tom Licciardi of Accurate Reconstruction in Somerville, New Jersey to answer these questions.
Property damage events result in the destruction, ruin, and loss of possessions and property. However, the effects on a property manager, association board members and the affected co-owners can reach much further than just the property involved. Due to this, individuals involved in such situations need to remember two common themes: the necessity to keep a level head under intense emotional stress and perceived chaos, and they need to remember the difference that an experienced, qualified, certified insurance repair contractor, as opposed to just a regular contractor, can make.
Restoration companies handle cleanups and repairs for a wide variety of disaster situations. These can include many different situations. Anything from storm damage, such as shingles missing from a roof, siding that gets blown off the exterior, fires, floods and sump pump backups, to a car driving through a building or biohazard cleanup (such as situations where people pass away). Restoration companies have specialized training in a variety of restoration situations, such as smoke removal. They also have a unique knowledge and experience on how to properly clean and restore personal belongings that have been impacted by fire, smoke, soot, water, microbial growth, etc. It is then the reconstruction contractor, along with the insurance adjuster who determines when structural items should be replaced, depending on how much char they have on them after a fire.
An insurance repair/reconstruction company, sometimes utilizing the services of an engineer or architect, makes repairs, additions and modifications to buildings without the added challenge of dealing with soot, char, microbial growth, etc. However, some reconstruction companies, like Licciardi’s, offer both restoration and reconstruction services.
Emergency Response – Steps to Take Following a Disaster
According to Licciardi, when faced with an emergency situation, the first step an association should take is to mitigate the damage by making the building safe and preventing further damage. Concurrently, noted Licciardi, the association must notify its insurance agent about the incident.
Who should the association call first — the insurance agent or a restoration/reconstruction company? “The association should call the insurance agent first,” said Licciardi. “However, if the disaster happens on a weekend, they may not be able to get their agent. For example, if it happens on a Friday night, it may not be until Monday that they’re able to talk to their insurance agent,” he noted.
Therefore, Licciardi’s suggestion is for every community to have an emergency plan in place in the event of a catastrophe, whether it occurs during or after business hours.
What are the basic components of an emergency plan? According to Licciardi, the property manager of a community should have a list of emergency numbers, whether it is a physical list or one on his or her cell phone. This list should include the phone numbers for the police department, fire department and utility companies (gas, water, electric). The property manager should also know where the meter banks are in the buildings, as well as where the gas and water shut-offs are located. In addition, the property manager should have the insurance broker’s contact information as well as contact information (primarily cell phone numbers) for each unit owner.
Licciardi said the property manager should also have contact information for both a restoration and reconstruction company. He noted that the majority of restoration/reconstruction companies are willing to work with an association ahead of time with regard to preparing a disaster plan.
Is it acceptable for an association to contact a restoration company to start the remediation process even if attempts to contact the insurance agent have not been successful? “It’s the association’s obligation to mitigate the damage under the insurance policy. They’re not authorized to do anything beyond that until the insurance company has done an investigation as to the cause and an assessment of the damage,” Licciardi said. “They should also have a relationship with a restoration company that works with their insurance company and is qualified to at least mitigate the damage while they’re waiting for further instructions,” he added.
What does mitigating the damage entail? In the case of water damage, Licciardi said this involves turning off the source of the water and preserving the cause of the loss by putting the item aside or by not disrupting it. In addition, a restoration company should be contacted to dry out the building as quickly as possible. This usually consists of extracting any freestanding water and installing drying equipment.
In the event of a fire, Licciardi noted that in most situations the fire department will not release the scene while the fire is being put out and for a short period thereafter. “No one is allowed to go anywhere near the building. It’s during that time the property manager can get a plan in place for when the property is turned back over to the association,” Licciardi said. “Generally, the first thing that happens is a fence is put around the property to prevent people from coming in and getting injured.” Licciardi noted that a good reconstruction/restoration company will handle getting the fence put up, as well as working with the insurance adjuster to have the cost of the fence covered. “Concurrently, all the utility companies need to be notified and the utilities need to be disconnected,” he explained.
Licciardi pointed out that most of the time, the fire department will contact the utility companies; however, in the case of a less severe fire, the contractor onsite or property manager will be responsible for calling them.
The next step in the case of a fire is to avoid further damage by preventing weather from getting into the building. This could include placing a tarp over the roof and boarding up windows, said Licciardi.
Selecting a Reconstruction/Restoration Company
What should the board look for in a contractor and what role does the insurance company have in the process of deciding what restoration companies are hired?
“The association is at will to hire whomever they would like,” said Licciardi. “Preferably, they should hire someone that is an expert in the type of damage and that will do the work for exactly what the insurance company agrees to pay,” he noted, explaining that the insurance company will never pay more than the value it places on the loss.
In the instance that the board members do not have any contractors in mind, they can reach out to the insurance company who won’t recommend a particular company, but can provide some names of companies that perform this type of work within the community association industry. Servicing community associations is different than providing residential or general construction, said Licciardi. That is why it is important for the board to choose a company with experience in this industry.
Ultimately, it is the board (typically the board president) who is responsible for signing the contract with the restoration or reconstruction company. Therefore, Licciardi said that the board should interview contractors as well as check references from other associations with whom the contractors worked, which could involve a site visit to a project that is underway or one that has been completed.
“Some of these claims are very complicated. There are a number of insurance adjusters involved with trying to decide what’s damaged, who’s responsible and what’s the extent of that damage,” Licciardi noted, adding that it is important to hire a company that has experience with insurance policies and claims. “The company that will be handling the claim needs to be intimately familiar with how the insurance company works because it’s one big negotiation matrix and it all has to come back together at the end. The company has to be able to speak the same language as the insurance adjusters and to negotiate in a friendly way with each of the carriers that are involved without creating animosity and roadblocks,” he explained.
What are some red flags the association should look out for when choosing a restoration or reconstruction company? According to Licciardi, it’s important that the company the association wants to work with has a good relationship with the insurance carrier. One red flag is negative feedback from the insurance company. For example, if the insurance adjuster tells the association he or she has never had a good experience with a specific company — that would be red flag, said Licciardi.
He noted that some people prey on others facing a catastrophic situation. “These could be public adjusters and insurance reconstruction providers that don’t have the best reputation or the association’s best interests at hand,” Licciardi said.
He explained that these “predatory service providers” typically try to get people to sign a contract on the spot when they’re at their most vulnerable. He advised that the board should be cautious of such providers and should not sign any contracts until the insurance company has investigated and approved the value of the claim and several contractors have been interviewed. The only thing the board should do at the time of the claim is authorize enough work to control and mitigate the situation to prevent further damage, said Licciardi.
Who is responsible for the final payment to the contractor? According to Licciardi, it is the association who is responsible for the final payment to the contractor. “The insurance companies only pay their named insured, which is the association. The insurance company will pay the association the fair value for the work. The association will contract directly with the reconstruction company and is responsible to that reconstruction company for whatever the amount of that contract is,” explained Licciardi. “That’s the reason why the claim has to be negotiated and settled before there can be any contract in place because no one knows what that number is until all the pieces get put together,” he added.
Therefore, Licciardi suggested, the board should wait until the cost of the repair work has been approved by the insurance company before committing to signing a contract.
Licciardi explained that once there is an agreed upon price for the work, the insurance carrier will send the association most, but not all of the money for the agreement on the claim. Then once the claim has been completely resolved, the insurance company will release the “hold back,” which is the rest of the money to pay the contractor.
Common Misconceptions in Property Restoration/Reconstruction
According to Licciardi, the most common misconception many have is that the insurance adjuster is going to try to pay as little as possible for the claim. He explained that in most cases involving community associations, the adjuster is an independent adjuster, not an employee of the insurance company. “The adjuster’s job is to settle the claim as quickly as possible and as fairly as possible without supplemental issues coming in later if they can be avoided. It’s important for the association to understand the adjuster is there to work with them to help them get the claim settled as quickly as possible,” he said.
Licciardi noted that associations should also be cautious of contractor promises with regard to the claim because there really is no control initially regarding how the claim is going to be handled. He said that contractors should not make promises with regard to how long repairs will take, how much damage there is or how long it will take for the residents to move back into the building. Licciardi explained that the contractor should perform inspections along with the adjuster and prepare reports to discuss with the association. He said the contractor should be willing to meet regularly with the association, the board if requested, and the unit owners to keep them in the loop as to what’s happening.
What is the communication process between the contractor and the unit owners? “The reconstruction contractor has to have very close communication in dealing with every unit owner that’s involved. The association’s coverage, no matter how good it is, is not going to cover every cost of getting the project completed. There are certain obvious things that fall outside the insurance coverage for the association that the unit owners have to have their own insurance for,” explained Licciardi.
For example, he said, the unit’s contents are not insured by the association’s coverage and for that reason, most homeowners have their own insurance policies.
In addition, the association’s coverage usually does not include improvements that have been made to a unit. Therefore, with this type of policy, if a unit owner has made improvements, the association’s insurance policy would cover repairs to the original standards for the unit. For example, if a unit owner installs hardwood floors but the original standards included carpet, the association’s insurance policy will only cover replacing the carpet, not the hardwood floors. However, Licciardi noted that the reconstruction contractor may sit down with the homeowner and ask permission to speak with his or her insurance adjuster about covering the difference in value between the standard carpet and the hardwood floors. He explained that in most cases, this would require a separate contract with each unit owner.
“At the end of the project, every unit owner needs to be happy. That’s the only way the property manager is going to be happy. That’s the only way the contractor is going to get paid. There is more communication with unit owners than there ever would be with anyone else that’s involved with the project,” Licciardi noted.
Insurance Policy Types
According to Licciardi, there are three types of insurance policies for community associations. These include Bare Walls, Single Entity and All-In.
Licciardi noted that the Bare Walls policy is no longer common. With this type of policy, the insurance company insures from the unfinished sheetrock out. That means everything inside is not covered, such as cabinets, flooring, painting, light fixtures, ceramic tile and trim work. In addition, this policy usually only covers the weight-bearing walls, not the partition walls.
The Single Entity policy is the most common type in New Jersey, said Licciardi. With this type of policy, the insurance company will restore the unit to the way it was originally built at the time of its conveyance, which is the time the title was transferred from the developer to a unit owner. This policy covers everything the original builder installed but no betterments or improvements, Licciardi explained.
Lastly, Licciardi noted that the All-In policy covers whatever exists at the time of the loss as long as it is permanently affixed to the building, no matter what betterments or improvements have been made.