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GULF COAST, TX-With property insurance costs steadily rising, condominium associations, mainly on the coast, are hiking deductibles to glean lower premium rates. The Catch-22 is many condo owners don’t realize it’s happened until it’s time to put in a claim.

“A $10,000 deductible is not all that unusual,” Charles E. Comiskey, senior vice president of Brady Chapman Holland & Associates in Houston, tells GlobeSt.com. “Property insurance companies don’t want to sell low deductibles. It would be cost prohibitive.” And, he adds, high deductibles are equally commonplace for all types of commercial buildings.

“In most cases,” Comiskey says, “it’s a question of what’s available in the marketplace. It’s not always a matter of choice.” He also recommends condo and commercial owners review mortgages because the high deductibles could be in violation of lending agreements.

Comiskey, a recognized expert in the Southwest’s coastal insurance circles, says the first two tiers, or counties in lay terms, from the ocean’s edge have had insurance rates skyrocket 250% to 400% this year due in large part to the 2005 hurricane season. But that’s just the tip of the explanation. The reinsurance industry’s primary buying times are Jan. 1 and July 1, coming right after and during hurricane season. “The cost of reinsurance dictates to some degree what customers will be charged,” he says.

As the reinsurance industry spreads out the risk, the layers of insurers for properties are increasing. Comiskey says many properties are tied to seven layers of policies, but he also knows of some with 21.

“As bad as it is today, it could get worse. It’s been a dramatic change, dramatic increases in deductibles and premiums,” Comiskey says, “and it has yet to play out if we have a horrible hurricane season. If we have a gentle hurricane season, the market will probably right itself. The windstorm deductible isn’t likely to plummet, but rates could come down.”

Comiskey, also president of RiskTech Inc., Houston’s oldest risk management consulting firm, says another season like 2005 might require legislative measures to cork the problem. “People are hoping this is a short-term problem and will go away with a gentle season,” he says.

Condo associations are empowered to elect the method of a deductible. Aside from a flat rate, Comiskey says many associations are choosing a riskier deductible formula for its members for properties that are ineligible for state-controlled windstorm pools: 2% to 5% of the entire project’s value or 2% to 5% of the damaged building’s value. Plus, the association gets to determine who pays the deductible–the owner if one unit’s damaged, all owners for a damaged building or the membership at large.

The immediate concern is focused on coastal properties, but it’s highly probable it won’t be long before condo owners in inland cities are facing the same dilemma. “I have not seen that here yet, but insurance companies tend to take advantage if a disaster occurs in other areas,” says attorney Edward A. Peterson with Winstead, Sechrest & Minick in Dallas. “They’re in business to make money. As premium rates rise that is the normal thing that happens. There will be higher deductibles chosen by associations.”

Peterson says he’s heard reports that insurance on a $100-million building has risen to $1 million per year versus $40,000 or $50,000 about six years ago. Under condo law, associations are required to maintain insurance on common areas while individual owners are responsible for insuring their interiors, both possessions and unit finish-outs.

“People should be aware. There’s plenty of disclosure,” Peterson says. But, he also realizes not all buyers read the fine print.

Peterson’s suggestion for condo buyers is opt for quality in the developer, association and management company. “If they run their projects right and the construction is a high quality, it keeps risks at a minimum,” he advises.

Comiskey says there is one other option that too many condo owners don’t exercise–a loss assessment endorsement policy. It provides up to $1,000 for deductibles and up to $50,000 to bridge an inadequate coverage gap. He says the coverage is available in every condo owner and townhouse owner policy. And, it most often costs $20 per year.”We’ve sent out mailer after mailer telling people to do this,” he says. Some listen; some do not.

Comiskey says the insurance issue hasn’t yet slowed development. “It has to have a negative effect if it stays like this,” he stresses, adding the rental market will be the one to hurt the most. “It will have a negative effect on cash flow and trickle to development of apartments.”

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