Condo Insurance: Fault, Deductibles, and Enforcing Unit Owner Policy Requirements

David Silver

Many of us are quick to point fingers and assign blame when things go wrong.

Referees are an easy target when your

team loses, politicians get blamed for, well, you name it, and distracted drivers are the problem whenever there’s a traffic jam. I admit that operating in this mindset offers a certain satisfaction by helping make sense of life’s simple aggravations. But when you stop and think about it, there’s almost always a more nuanced explanation for why something happened, or who is truly deserving of blame.

When it comes to damage to a condominium, knee-jerk decisions and finger-pointing can lead to a whole host of problems. When faced with a conflict, dispute, challenge, or harmful event, directors, managers and owners should pause and think before acting and reacting. More importantly – they should check their governing documents before assigning fault and requiring payment for repairs.

When it comes to casualty damage at a condominium, the party responsible to pay for damage may not be the same as the party who caused the damage. For example, if an owner draws a bath, forgets to turn off the faucet and floods their unit and the unit downstairs, our instinct is to point the finger at the upstairs neighbor and demand that they pay for all necessary repairs. In fact, I have seen boards make knee-jerk decisions requiring an owner to deal with the damage they caused, by ordering the owner to make a claim against their homeowner’s policy. That may seem fair, but it’s not always correct under the governing documents. Admittedly, sometimes that approach turns out to be correct, but if it is, it is normally right only coincidentally, like how a stopped clock is right twice a day. It is more likely that this type of “at fault” procedure directly contradicts the declaration.

Under an association’s governing documents, the owner who caused the flood may not be the party responsible for the costs to repair the other unit or the common elements – even if they caused the problem negligently. This is because when damage is covered by insurance, the Condo Act states the association’s insurance is primary. For old act condos, the statute is silent, so it is imperative to check the governing documents.

Irrespective of fault, a new act condominium association’s property insurance policy is always the primary policy, at least for the portions of the condominium it covers. Because this concept derives from the Condo Act, those condominium declarations that appear to require a homeowner’s policy to pay first are likely invalid.

22 Community Associations Journal | June 2017 In the above example, assuming a new act condo, if the

association’s policy is triggered and it covers units (which it probably does), it would be the association’s policy that likely pays for the repair to both units and common elements in a multi-unit flood like the one described above.

The association’s policy is almost always subject to a deductible. Which party pays that deductible—the association as a common expense, or the owner who caused the damage, or both— depends on the language of the condominium’s declaration.

It is common for a declaration that requires owners to pay the association’s deductible to also require an owner to maintain a condominium unit owner’s insurance policy (commonly called an “HO-6” policy) to cover this liability. While it’s great in theory to require owners to maintain HO-6 coverage, it often goes unenforced until an event of damage, at which point it would be too late.

If an owner is assessed the association’s deductible, but the owner does not have HO-6 coverage, then it is less likely the owner will be able to pay.

It’s as simple as that. The owner

would have to pay out of their own pocket, and that can be difficult for some owners.

To help avoid this problem, association boards should first determine if owners are required to obtain HO-6 policies, or if it’s optional.

If it’s required, the board should follow the

association’s enforcement procedures to ensure compliance. Often, this would begin by sending a letter to owners reminding them of the requirements of maintaining coverage and letting them know how to meet the requirements, such as filing a copy of their policy’s declarations page with the manager. The letter should explain how long owners have to comply, and what will happen if they don’t (such as the potential fines). An association might even have the authority to purchase the insurance and assess the owner, although we recommend checking with association management and counsel before doing so.

Protect your associations. Before damage happens, figure out how the association’s deductible is allocated, and if owners are required to maintain an HO-6 policy. Also, determine if there are any other specifics surrounding any requirement for an owner to obtain insurance. Boards should be proactive. If owners are required to obtain insurance respecting their units, boards should uniformly and consistently enforce the insurance provisions. Doing so will increase the odds that deductibles and other uninsured amounts are recovered by the association.