The Changing Environment of Large Loss Claims

What you need to know about the changing environment of large loss insurance claims. We all know that most, if not all, insurance policies for wind and hail are going to a percentage-based deductible accompanying more denials of coverage for Colorado. But did you realize that natural disaster costs doubled from $188 billion in 2016 to $306 billion in 2017 and continued to exceed the prior 10- year average at $155 billion for 2018[1]? Changes to our industry are here.

So, what does this mean to you and why should you (the HOA/owner/ management company) care? In short, the insurance carriers stand to “lose” billions of dollars paying for claims well above those estimated/anticipated by their actuary tables for 2016, 2017, and 2018. This translates into a significant catalyst for insurance carriers needing to save money and raise rates. Higher deductibles and more complicated claims and construction processes are just the beginning. It is becoming commonplace for carriers to enforce the policy’s statute of limitations for filing a claim and necessitating more detailed proof of loss while placing higher standards on the documentation required to recapture the recoverable depreciation. If you’re saying to yourself, “this is the way it’s always been,” you aren’t recognizing the half-trillion-dollar loss mentioned above.

Additionally, carriers are increasingly more focused on identifying fraud or conflicts of interest, especially in large claims. As an example, if funds from a contractor are paid to the HOA or the management company, it may be considered a deductible buyback, or fraud, and could provide the carrier the leverage to deny coverage or sue all involved [2].

The same influencers affecting premiums and claims also necessitate a new strategy to adequately compensate the HOA management company and community managers for their work conducting assessments and other incurred costs beyond their standard duties. Don’t worry, there is an emerging carrier recognized method of getting those additional expenses paid, but not in the manner that some management companies and contractors have gone about it in the past.

Given the increase in carrier scrutiny, now is the time to make sure HOA boards and management companies are reducing their risk on large claims by recognizing a few things.

1. What worked yesterday for general contractors, HOA managers, HOA boards, and tradesman, won’t necessarily work tomorrow.
   • Given the size of carrier losses across the country, the claims environment is changing significantly and swiftly.
2. HOA boards and management companies accepting funds of any kind from contractors is never a good idea.
   • If you wouldn’t want to read about it in the Denver Post, don’t do it.
3. Not filing a claim because of a high deductible is a bad strategy and works in the carrier’s favor. It also doesn’t prevent a premium increase.
   • Premiums are adjusted by the increase in claims based on a specific region, not based on an individual property’s claim history. In other words, a property’s rates can go up even if they don’t file a claim.
   • There are multiple strategies to address high deductibles.
   • If you have damage and don’t file, you put your property in a pre-existing condition scenario, setting up an opportunity for a future denial.
   • Carriers have a statute of limitations on filing a claim which they are now standing behind.
4. A changing industry environment requires new perspectives and professionals that can manage both the claim and the construction.
   • Management companies are experts at managing HOAs and conducting assessments, rarely are they experts at insurance claims and large construction.
   • Roofing companies are experts at roofing, rarely are they experts at identifying all the damage, at negotiating with the carrier, or at construction management. If they are the roofer and the “general contractor” on the same project, then they are conflicted by self-dealing.
5. Whomever you hire to manage the entire project should have a documented process that can withstand an audit.
   • If they can’t produce a final documented deliverable with a third-party financial audit, you should reconsider. A deliverable as stated is your greatest asset if lawyers happen to get involved later.
   • Insurance proceeds should not be commingled with other HOA funds and should be held in an escrow account that requires a dual signature for release (owner and project manager signature).
   • Most significant issues with large loss claims revolve around the management of the funds.
6. Utilize trades that have been vetted.
   • Trades should be picked based on their relevant experience along with a current understanding of their debt at the supply vendors, their reputation in the community, if their subcontractors are being paid, and if there is pending litigation that they are involved in.
   • There is never a need to collect multiple bids from contractors on insurance-related work. If you save funds by picking the lowest bidder, the residual funds belong to the carrier, not the owner, unless that was agreed upon in a settlement.

Clinton Dorris has leveraged his two engineering degrees to manage billion-dollar programs for better than 20 years and is a managing director for (PLA) Property Loss Advocates, LLC. Please visit www.proploss.com for more information or call to schedule a CE credit discussion on this topic and others.

[1] Swiss Re https://www.swissre.com/media/news-releases/nr_20181218_ sigma_estimates_for_2018.html
[2] Colorado State of https://leg.colorado.gov/sites/default/files/images/olls/2012a_sl_267.pdf