Here’s another group of issues that have just one thing in common: I find them interesting. I hope you do too.

What’s a Condop?

It’s a bird, it’s a plane, no it’s a condop! A condop is indeed a rare bird; a 2005 survey found that New York City had 6,700 co-op buildings, 2,300 condos and only about 300 condops.i A condop can be said to be a coop within a condo. It is used to structure ownership for a mixed-use building. In a Condop, the property is owned by a condo association that has only a few units, often just two. In its simplest form, one condo unit is the residential space within the building and the other is the mercantile space. (There could also be office space, parking garage, etc. as part of either unit or as separate units.) The commercial unit can be retained by the sponsor or sold to others.

The residential unit in a Condop is owned by a cooperative corporation. Thus, the coop owns a condominium unit rather than a fee simple interest in the land and building as is usually the case. The condop cooperative corporation sells coop apartments just the way a regular coop would. The stockholder/tenants in the residential space often regard themselves as living in a coop—and, in most senses, they are correct. However, when arranging the insurance it can be a mistake to write it with just the coop as the named insured— even if the person providing the information for insurance applications gives you just that name. Often, the governing agreements call for the insurance to be written in the names of all the entities. The only way to know for sure is to read the offering plan.ii But, or course, reading the offering plan is a sine qua non for arranging the insurance for any condo or coop and you always do that, right?

Don’t Ask, Don’t Tell

The one who’s supposed to notify the insurance company is sometimes the last to know. The change in New York law lessens the risk of late reporting—with regard to policies effective after January 2009, coverage is now voided only when the insurer has been prejudiced by the late notice. However, no one knows just what the courts will decide is prejudicial to the insurance company’s interest. And, if the report is more than two years late, the burden of proving that the insurance company was not prejudiced falls on the insured. Therefore, knowledgeable brokers and agents continue to ask that a knowledgeof- occurrence clause be added to policies; many insurers provide it routinely.

A typical clause reads:

Knowledge of an occurrence or loss by an agent, servant or employee of the insured shall not constitute knowledge by the insured unless the insured’s risk manager shall have received such notice.

A case decided in New York by the Appellate Division for the First Department (the First Department is composed of Manhattan and the Bronx) involved a policy that included just such a provision.iii The president of a general contracting company witnessed an accident that caused serious injuries to a sub-contractor’s employee—the employee was taken from the jobsite to the hospital by ambulance. Notice was not given to the insurance company until three years after the accident. The court ruled: The claimed lack of knowledge of the accident on the part of Gangi’s Corporate Risk Manager did not relieve Gangi (the insured) of the obligation to provide QBE (the insurance company) with notice within a reasonable period of time, where Mr. Gangichiodo, Gangi’s president, vice-president, secretary and sole shareholder and officer, admitted contemporaneous knowledge of D’Ambrosi’s accident and the severity of his injuries. As Gangichiodo was an “executive officer” as defined by the policy, and not merely an “agent, employee or servant” (emphasis added) of Gangi, his knowledge was properly imputed to Gangi and triggered its duty to notify QBE of the accident. Admittedly, the failure to notify the insurance company sounds egregious; nevertheless it’s just the sort of loss-of-coverage situation that we thought the knowledge provision was intended to avoid. Even if the new law had been effect at the time, Gangi would still have a problem. A threeyear delay almost certainly involves prejudice to the insurer.

Here’s a possible improvement based on a suggestion from an attorney working for one of our clients (the changes are italicized): Knowledge of an occurrence or loss by any person including, but not limited to, any director, officer, partner, manager, member, agent, servant, or employee of any insured shall not constitute knowledge by the insured unless the insured’s risk manager shall have received actual notice.

A related problem involves neglecting to forward claim papers to the insurer. It’s sometime possible to expand the clause to provide that receipt of any demand, notice, summons, or other papers shall not be deemed receipt by the insured unless the Risk Manager has received such papers.

Home is Where the Heart is

Or home is where the lowest insurance rates can be found, but New York courts don’t agree. The Appellate Division for the 1st Department recently ruled against coverage for an insured who misrepresented her address to obtain lower premiums. The court said that the misrepresentation was material—legal speak for saying that the insurer would have declined coverage, charged a higher premium, or otherwise modified policy terms if it had know the true facts. The Appellate court upheld the lower court’s summary judgment—a summary judgment is awarded without a trial when the court feels that there is no issue of material fact and that one party is entitled to judgment in its favor as a matter of law. I don’t always agree with court decisions on insurance—for that matter I don’t often agree with myself—but in this case I think the court nailed it. Insureds who use fictitious addresses subvert the insurance mechanism; they’re not paying their fair share.

Who Knows What Evil Lurks in the Hearts of Men—and Women

Last month I wrote about recent employee theft losses involving two firms in the insurance industry. Just when I think that I’ve seen everything in the way of employee dishonesty losses, the news contains a new shocker. This month’s is a more than $20,000,000 embezzlement from Koss Corp.; latest estimates say the loss may exceed $31,000,000.iv Koss makes top-rated headphones. It has about 75 employees and last year’s sales were $38 mil. Although publicly traded on NASDAQ, the Koss family owns 73% of the stock making it much more like a closelyheld business.

$20,000,000 equals the total profit for the four years that the theft was going on; Koss will have to restate its financial statements back to 2005. The CFO, employed for over 15 years, had the complete trust and confidence of management. She was well-regarded in the community and her husband, an attorney and MD, is head of quality control at a Milwaukee hospital. Almost $3,000,000 of the theft went to pay for credit charges at upscale clothing boutiques. Experts in the field think this is the largest known embezzlement loss for 2009—2008’s largest loss was a mere $65.6 million. There were an estimated 450 embezzlement losses that exceeded $100,000 each in 2009. The median loss probably exceeded $500,000.v Let me say it again: Your clients have to implement effective loss control and they need high-limit employee theft/dishonesty coverage.

i Vivian S Toy “What Exactly Is a Condop?” New York Times May 20, 2007

http://www.nytimes.com/2007/05/20/realestate/ 20cside.html (accessed 1/2/10)

ii Just to make things more confusing, some real estate people use “condop” to refer to a coop that has the same transferability rules as a condo, that is, no board review of financial data, etc. It’s not what lawyers mean by “condop.” Reading the offering plan is the way to be sure.

iii QBE Ins. Corp. v. D. Gangi Contracting Corp., 66 A.D.3d 593, 888 N.Y.S.2d 474 (1st Dep’t, 2009)

iv “Embezzlement Accusation at Koss Corp.” New York Times, December 26, 2009. http://www.nytimes.com/2009/12/26/business/ 26koss.html.

v Rich Kirchen “Koss embezzlement highest of ’09” Milwaukee Business Journal 1/1/10 http://milwaukee. bizjournals.com/milwaukee/stories/ 2010/01/04/story1.html?b=1262581200^26 68611 and Rich Kirchen “Sachdeva delays court hearing in Koss case” Milwaukee Business Journal 1/7/10 http://milwaukee.bizjournals.com/milwaukee/st ories/2010/01/04/daily66.html?q=Koss%20emb ezzlement