Mgmt charges a % for handling damage claim?

Do most management contracts include a clause which gives the property manager a fee equal to 5% of the cost of administering insurance claims, or something similar to that? I find myself in a position to have to explain this.

I can understand if that's the case-who wants to do extra work for free if it's not part of expected routine and recurring day-to-day basics? That's all I really would like an answer to, but for those of you who would like to hear the story behind the question, read on. I'd appreciate any knowledgeable feedback, especially from professionals.

I am a board member of a 72-unit condo. We had an owner cause over $165,000 worth of water damage that is going to be covered by the owners policy. It damaged two lower units so badly that the owners had to move out for over 6 weeks. Two units below them were damaged to a lesser extent but didn't require vacating. Based on our contract with the PM, this would entitle him to $8,250 in fees for handling this mess.

At the beginning of the process, however, the PM graciously made a verbal agreement with the adjuster to waive the 5% and bill on an hourly basis which, after several months, came to $3,600, less than half of what he was contractually entitled to. Was anyone grateful for this? Not the owner nor their insurer, as it turns out.

Now the Insurer says they will not pay the $3,600 because they claim in their experience, PM's administer these claims as part of their routine services. Furthermore, they will not release the $165,000 until we relieve their client of responsibility for the PM's fees. (How is this not extortion?)

We reminded them that this is a binding contractual obligation for this owner, and if they wouldn't pay, the owner will have to. We have already paid all of the bills for this work including the PM, while waiting for the insurer to step up. Our Declaration requires us to initiate repairs and assess the responsible party for all costs, which we have done. Therefore, any forgiveness of the debt would be borne by all owners.

We won't consider that until we get a legal opinion, which we are waiting for. I don't know about the rest of the country, but condo lawyers here in our neck of the woods are so busy our regular guy can't even give us an estimate of when he'll be able to review our situation. Good times!

So, what's typically considered routine, and what's extra??

Thanks everyone!

Missy

The extortion is the PM wanting 5% to handle an insurance claim. That's not even realistic because each insurance claim is different and they have no knowledge of what extra hours will be required. So if they spend one hour or five hundred hours they get 5%. It's just that everyone wants their cut of insurance proceeds.
I doubt the PM was being gracious by going with an hourly rate; more likely told to do so by the adjuster, if they wanted any compensation.
I'm curious what the hourly rate was to develop the final charge? They should have to justify their time spent, as well as a "normal" hourly rate. That could be the holdup too if the insurance company doesn't feel it was earned.
I'm confused too, why the HOA has paid for all work, including the PM, while it is the owner's insurance that is involved. Why would they accept this responsibility and use common funds? Did the HOA contract to have the repairs made?

Harold, I should have added that the PM's contractual right to charge the 5% is enforceable on the responsible owner regardless of what the insurer might want. Knowing this PM as I do though, I do believe that he proactively made the decision to waive the 5%. He really is that kind of guy, and I think the insurer sandbagged him on this.

I do agree with you that 5% across the board is too simplistic, and that's why I'm interested in hearing if that is typical boilerplate in contracts generated by PM assocations. It's time to re-negotiate that one! This contract was let before I was an owner.

Hi Susan,

By "handling" I mean we charged him with total responsibility for all aspects of getting this job done including those things you mentioned. We do not have an on site manager, only a part-time handy man. Even the people who were displaced by this avoidable (very negligent) accident were very happy with his responsiveness.

Missy

Mellisa, our Agreements handle this based on an hourly charge, along with other items which may occur from time to time.

I wasn't suggesting that the management company could or should sue you, just that criminal accusations don't belong on a discussion board where we rarely get all of the facts. As to whether or not an hourly rate is better or worse than a percentage, it would probably depend on which came out lower in the end. And you can't tell that in advance of the claim.

Joe

MelissaS1: Did the Board or owner sign the contract with the mgmt. company?
IF the Board contracted with the mgmt. company to include responsibility for
administering insurance claims, in my opinion, this should have been included as part of the overall mgmt. fee paid to them, not an extra fee. However, I'm not personally acquainted with a mgmt. company who does business like this.

I question two things: 1) why the Board would accept/sign a contract which would allow the mgmt. co. to also enjoy a separate fee; 2) how and why the Board would have authority to agree to the fee on behalf of the unit owner and his insurance company. You state, "this is a binding contractual obligation for this owner"; but is it?

You state the owner's insurance will pay the damage claim but not the fee to the property mgr. Since the Board entered into the contract (not the owner)
it may legally fall upon the Assn. to absorb payment to the mgr. It will be interesting to learn of the attorney's take on this, and from mgmt. companies out there as well. I wish you well in the outcome. You may want to revisit the mgmt. company's contract.

Here's my thoughts. I have been on a HOA board for over 2 years. I'm ready to start my own managment company. They nickel and dime you to death. Please read all their contracts very carefully. They are a management company and that is their job. They get paid to manage, why would this repair work not fall under the heading of managing. Good Luck!!

Sandy,

Management contract pricing is based on the management companies best estimate of the time and expense it will take to fulfill the requirements of the contract under normal conditions. Most companies exclude or charge extra for abnormal occurrences. For example, you're considering starting a management company out in California, so you price your first contract at an estimate of 12 hours of your time per month. 6 months later you have a major brushfire and your time jumps to 40 hours a month to handle the insurance claim for damage to the common areas. You've just lost your entire profit for the year because of something beyond your's and the association's control. You won't be in business long. Management companies started doing this years ago when they realized how much managing a catastrophe recovery could cost them.

Yes, they nickel and dime you, but the alternative is to set the monthly fee to cover any and all contingencies, which, if none occurred, would mean the association spent the money for unneeded insurance.

As far as the owner paying the 5% fee, I think this is the way that should occur. The manager would have billed the association for the time. The association should have submitted an invoice to the individual owner's insurance company which would include the amount to cover the invoice (under contract supervision for common area repairs). Since this is a condo issue where the damage moved through the common areas to other units and since repairs to the unit would also involve common areas, it should be covered, if not by the owner's policy then by the association's policy.

Joe

And Melissa don't forget and always remember that for everyday the insurance company can stonewall and refuse to pay you - is one more day's interest on that money in their coffers.