Manage Risk by Being Proactive Instead of Reactive

Effective risk management for condominiums requires proactive maintenance of key systems (roof, plumbing, electrical) to secure favorable insurance rates. Addressing these now positions properties for better coverage when the market stabilizes.

The article explores the concept of risk management, particularly through the lens of insurance for condominium associations. Insurance is a financial tool that spreads risk among policyholders, with companies relying on data to assess and price risk. In Hawai‘i, a limited number of insurers creates an uneven dynamic, making it essential for buildings to present themselves as low-risk investments.

To secure favorable insurance rates, building managers must identify and mitigate potential risks—both insurable and operational. This includes maintaining critical infrastructure such as roofs, plumbing, electrical systems, windows, HVAC, and fire and security systems. Deferred maintenance can lead to catastrophic failures, insurance claims, or denial of coverage.

Given current instability in the insurance market due to recent disasters, rates are high and underwriting is strict. However, this is expected to stabilize in the future. The article emphasizes that now is the time for property owners to act—by upgrading and documenting their buildings’ condition to be competitive once insurers begin expanding again.
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Manage Risk by Being Proactive Instead of Reactive

“Risk management” is a buzzword that we hear all the time. But what is it? How do you go about it?

INSURANCE
Insurance is a way to manage risk. By throwing your hat in the ring with an insurance company, you pay money to share your risk with the other insured parties. The insurance company acts as the moderator to pay or deny claims based on your purchased coverage.

Insurance companies look at risk from a financial perspective, both current risk and future risk. Since managing risk is what they do, they are very good at predicting risk and charging accordingly for it.

Insurance companies love data that supports their own sustainability as an industry. Emotion is not a part of what insurers care about. Insurance is data-driven. Remember, insurance is purchased to spread risk over a bigger pool.

Insurers are betting on collecting more premiums than they pay out and keeping the difference as profit. Unfortunately, there is no option for a condominium association to opt-out of insuring its property. This creates an asymmetrical relationship between the small number of insurers that do business in Hawai’i and the large number of potential insureds.

POSITION YOUR BUILDING
So, how do you position your building to be at the top of the list of properties the ever-gracious insurance companies will admit into their fold? Since insurance companies are looking at risks to make money, a building manager seeking insurance must look at the same risks and mitigate them.

IDENTIFY THE RISKS
The first step in risk management is to identify the risks. Anything associated with money is a potential risk. In the context of running a condominium association, there are the risks of collecting association dues, payments to vendors, financial reserves, the cost of insurance, utilities, building maintenance, operational risks and more. Some of these risks are insurable, while others are not.

The bulk of the insurable risks are damage to the property caused by weather, natural disasters and failure of building systems. This coverage comes from a building’s property insurance.

When it comes to building systems, property insurance is not coverage for the systems themselves, but from the damage these systems can do to the building and its contents. Proper maintenance of these systems is one of the keys to getting favorable rates on insurance premiums. If an insurer’s data suggests a property is a bad bet on their future profits, they will either raise the premium or decline to renew.

MANAGING RISK THROUGH MAINTENANCE
The building envelope must be pristinely maintained. The roof should be of the highest priority. A leaking roof will not only cause water damage but contribute to mold and destruction of the property. It’s often hard to distinguish between a roof leak and a plumbing leak. Water builds up in the insulation and continues to do damage for months after stormwater penetrates the roof.

Spalling must be addressed immediately. Spalling occurs when water penetrates the surface and pushes off flakes of concrete. Once the water reaches the rebar, the resulting rust pushes off bigger chunks of concrete. If spalling is left unchecked long enough, the entire structure will fail and the building will collapse.

Windows must be maintained. Window leaks can be as problematic as roof leaks and they’re often difficult to pinpoint. Railings must be inspected and maintained to reduce the risk of accidental falls.

Plumbing systems must be maintained or replaced. If waste piping is over 50 years old, it is at the end of life (the exception to this is copper waste pipes). The walls of cast iron waste pipes get thinner from wear and tend to leak at the joints.

Eventually they will collapse from their own weight and spew raw sewage into the walls and out into apartments. This creates a biohazard in addition to water damage and results in a complete shut-down of the plumbing stack, rendering all the apartments on that stack unlivable.

Central air conditioning systems must be maintained. Whether they are chilled water, condenser water or direct expansion, the possibility of water damage and mold exists from leaks or damaged insulation.

Electrical systems, often forgotten, require maintenance. Have a professional examine your system. Regular maintenance includes keeping equipment accessible, exercising breakers and disconnect switches, performing infrared testing, tightening loose connections and replacing dangerous Federal Pacific Electric Stab-Lok breaker panels.

Fire alarm systems should be updated. A lot has changed since the building boom of the 1950s, 60’s, 70’s and 80’s. Voice evacuation systems are now required in high-rise buildings. If a fire alarm system is over 25 years old, it should be updated.

Security systems should be up-to-date and permitted. Security systems are often overlooked in risk management. Unscrupulous and unlicensed installers offer cheap solutions that often violate building codes and create more risks than they solve.

THE BOTTOM LINE
Unfortunately, this is a very tumultuous time for insurers. There have been several disasters recently that have depleted the insurers reserves. They are forced to raise rates and reduce risk (read this as “drop high-risk properties”) to stay solvent.

Be assured the situation is temporary. In a few years the insurance industry will bounce back, and as more insurers expand their market, prices will come down.

If your property has done the upgrades that are listed in this article, it is important to provide a narrative to the insurer to help sell them on how small of a risk your property presents.

If your building has not addressed these issues, it is extremely important for the owners to position themselves for the day when insurers are again seeking new clients. The best rates will go to the properties with the least risk (i.e., properties that have been well-maintained and upgraded to reduce the frequency and severity of claims). The time to act, however, is now. Contact a licensed professional today to assess your building’s current systems.