Published in the ECHO Journal, April 2013
A burning question for associations and owners is who is responsible to make repairs and restore property when there is a water leak that causes damage to a unit or units. It’s not an easy question to answer because there are so many factors to consider.
Where did the water come from?
I’ve always advocated that it is critically important to properly identify the source of any reported leak, and document it, even if the association believes it is strictly the owner’s responsibility! Why? There are at least two reasons:
- You might be wrong and
- Even if you are right, the Board may have the responsibility to make sure the owner resolves the problem and negates any threat to the neighbor’s property or common area. Thus an association board in any attached multi-unit housing units should stick their noses in at the very least to investigate and document the situation, even if the board believes the leak is not the association responsibility. It is the responsibility of the board to act prudently and turning a blind eye to water leaks and damage can backfire.
What Role do the Governing Documents Play?
Understanding what the governing documents say about responsibility is critical. Equally important is understanding that the language in the documents may not be the final determining factor in the question of exactly who holds responsibility to make the repairs or pay for losses. And any lack of language also provides direction – pointing to the next source of authority, which is California law. But one has to start with the document review of all provisions related to ownership of the areas damaged, maintenance obligations, insurance, and damage and destruction provisions to see what they say. Ownership does not always determine the maintenance or insurance obligations but the more information a board has before it, the better able it is able to proceed rationally. For example, while the association’s insurance policy may cover repairs or reconstruction of units in a casualty loss (such as a burst pipe), which could include replacement of commodes, common fixtures, cupboards, etc., at the same time the governing documents may obligate owners to maintain and replace these items as needed from general wear and tear. In these cases, if there is master coverage, the association cannot deny the owner the right to a remedy equivalent to that the coverage, if not the proceeds of a claim. (Some boards do not want to make a claim – more on that below.)
Again, it is possible that the owner would have the obligation to do the repairs if there was no master insurance coverage; but unless the actual policy aligns with that, there is a conflict, and the owner wins (because the insurance companies will not take the risk of being sued for wrongful denial of coverage).
California Law on the Subject
Civil Code Section 1364 says: unless the Declaration [which most commonly is the CC&Rs] provides otherwise (meaning they control if they provide a different scheme), the association is responsible for repairs, replacements and maintenance of the common areas in a CID, other than “exclusive use common areas”, and the owner is responsible for maintaining his or her separate interest and “exclusive use common area”. It is confusing to the extent of the “exclusive use common area” (see more below) but does set up a default scheme – i.e., if the Declaration defines responsibility, it controls, and if not, 1364 does.
Past Practice
In a nutshell, past practice is important to the extent that if it is determined the board did not properly apply the documents and/or statute language to past similar situations, and a party paid that should not have, that can be a problem in enforcement of obligations in the current scenario, and legal counsel should be consulted as to what exactly “that” means.
What Is Important to Know About “Master” and “Individual” Coverage?
The CC&Rs or Bylaws probably require the association to purchase master coverage for repair or replacement of the common area and may require coverage for the buildings that house the owner’s units. Some require coverage only to original building construction; some require insuring for Code upgrades; and some require coverage for unit betterments and upgrades. Without the obligation to insure for upgrades, owners would be responsible. But if no one makes this clear for boards and/or owners, when the conflict arises, a lot of finger-pointing begins, and sometimes the delays while the battle rages on lead to bigger problems, like additional damage and/or mold!
Pay close attention to the Declaration AND policy language!
While common area water and sewer pipes ultimately include a point of separate service to a unit; they often are still considered common area pipes. While some Boards would like to “designate” all pipes that serve a separate unit as “exclusive use” pipes and make them the owner’s obligation, there is case law that says you cannot do that if the Declaration (CC&Rs) defines the pipes as common area. Left open is the point that if the CC&Rs define owner responsibility to begin from the point of separate service designating those pipes as “exclusive use common area” pipes, the responsibility could be shifted to owner. At least that is the way I read the Dover Village vs. Jennison case. My full explanation can be found in the March 2011 E-newsletter which is available in the E-News archive at www.californiacondoguru.com.
And, if the Board does not carefully review the insurance policy as well, it may miss language that abrogates the CC&Rs. Some policies contain language covering “exclusive use” common area pipes even with that designation, opting instead to avoid arguments by providing coverage simply because they are part of the common area property.
There Are Two Policies (Hopefully) to Check
There are two policies involved in condo and attached townhouse associations to be concerned with (although I’ve seen a few weird exceptions). The “master” coverage is what the association purchases to cover the real property it must insure and the owners’ individual coverage is commonly known as an HO-6 policy. If an owner does not have an individual policy then he or she is likely to try and pressure the association to pay, justly or not. Thus, I believe it wise when updating governing documents to require owners to purchase individual HO-6 policies, but also to make it clear that associations are not responsible to police the purchase. A way to provide “incentive” without an enforcement “hammer” is to make it clear that no loss may be claimed against the association policy or the association itself that would have been covered by such a policy, had one been purchased.
Homeowners’ association insurance is a complicated subject and carriers’ opinions about application do not always align with the Board’s opinion; that is why it is important to ask questions and seek clarification up front if there is any lack of understanding about what the policy covers, instead of waiting until “the” big loss occurs. Inundating owners with information about how they can get coverage for things like deductibles charged to the owner and replacement of furniture, wall and floor covering and personal property is the best way to help them understand as a responsible owner, they can be part of the solution to help their association avoid high risk premiums or loss of the ability to get coverage.
As to water damage, a “covered” event is generally associated with an immediate, direct, OR sudden and accidental discharge of water. A leak occurring because of a lack of maintenance is usually not covered. Seepage from the outside of the building is usually excluded because it requires “flood” coverage. So, for example, if shingles and roof paper blew off the roof in a storm and there was water intrusion as a result, it would probably be covered. If the roof leaked because it was not maintained properly the property insurance company would likely deny coverage. One might make a breach of duty claim under the D&O policy for failure to maintain the roof, which lends itself better to the discussion of whether negligence was involved (see below). If someone overruns a tub it is negligence, and that might be covered under the association’s policy, but should logically be covered under a homeowner’s policy. This is an area where the owner’s carrier sometimes pushes back, claiming that the damage is something an owner would expect would be covered under the master policy, arguing that since the owner pays a portion of the cost of master coverage he or she should be able to rely on it to cover accidents. Don’t get me wrong. Sometimes it all works out as one would hope, but other times the parties have to “duke it out” and information is power: information gleaned from understanding the situation, the governing documents, AND the insurance policies involved.
What About Negligence?
Negligence can be a factor. Clearly, if there is no insurance coverage available, and the documents do not clarify responsibility, or even if they do set the threshold standard, negligence may be a determining factor that sets or shifts responsibility. I cannot cover all possible scenarios here, but simply raise some pertinent questions. We are getting into an area that is complicated enough that you probably need a lawyer’s help. Besides the fact that insurance coverage can override negligence as a factor, a layperson isn’t generally able to determine negligence unless it’s obvious. Heck, sometimes it’s hard for an attorney. Take for example a tub overflow due to leaving the room. That is clearly negligence. But what about the failure of the seal under a toilet? Negligence is a cause of action that stems from breach of a duty (usual standard is that of a prudent person), that causes the identified damage. So in this last example, would a prudent person normally perform regular inspections to check or replace the seals? Probably not. But once there is a problem, then everyone argues it is the other party’s responsibility. Is there a duty on anyone’s part to regularly remove a commode and look? Probably not. Can the average person tell if a seal is gone? I doubt I could. Are the seals part of the common area, or the Unit? Hard to tell. The brightest and best can argue about it. What if the board was privy to failure of seals being a common occurrence in units because of age or other factors? Would it have a responsibility to inspect or repair? To warn the owners? Probably would have a duty to do something with that knowledge. Would the association be responsible for the damages from a failed seal if it did? If it didn’t? And after all, what do we purchase insurance for? Accidents? Negligence? Basically, it’s for “calamities” which are synonyms for disasters, catastrophes, mishaps, tragedies and accidents, and sometimes simple carelessness, like ignoring a condition that could lead to disaster. The above questions can be better answered by a legal professional who can look at the facts and suggest actions, including pros and cons, costs, and risk considerations, than a board made up of lay volunteers, especially if those volunteers do not like or are suspicious of the owner(s) making the claim!
Does a Board Have to Report Every Claim to It’s Carrier – Even Those That Do Not Exceed the Deductible of the Policy?
I know that there are readers that want to hear, “not always”, “especially if there is a concern for a negative claims history”. But alas, the “prudent” answer is usually “yes”, absent a sustainable and prudent “self-insurance” plan and fund in place that would cover the loss. If a board fails to give the insurance company notice of a water damage loss that might actually be covered, within a specified number of days after the event is discovered (commonly within 30 or 60 days of discovery), it gives the company grounds to deny the claim if/when it is later discovered that the damage was worse than first reported. And that can be a BIG, BIG PROBLEM! Let’s say there is only a 1% chance of this “big” problem for an association. Do you as a board want to be that association? Denying owners access to coverage that is available or may be available is a breach of duty. If the association is self-insured and pays the loss out of pocket, that is maybe the one exception. But what if it “self-insures” for small claims and the matter moves from that category to a big claim or demand? Can you go back and then hit up the insurance company? Not likely. It is a risk-balance argument every time but boards tend to forget that they have to consider all owners collectively, as a whole, rather than resting on what risks they would be willing to take as individuals.
According to insurance company professionals who speak at the industry seminars I have attended, a notice of potential claim that is less than the deductible or involves a non-covered event does not get counted as a “negative” on the association’s claims history so there is no risk in giving notice. I believe the inclination of attorneys who practice HOA law and some Boards would argue with that general representation, and most would agree that it seems likely an underwriter would look at the whole picture, but a truth remains – there is considerable risk in withholding information about a potentially covered claim from the carrier. Boards can improve the association’s position by raising deductibles substantially, and by amending their documents to clarify or redefine responsibilities and accountability, but trying to improve the position by sitting on or refusing to tender claims is pretty risky.
A Few Parting Points
There are agents or brokers well versed in HOA policies, but those that do not ask to see the CC&Rs and Bylaws to review when providing offers for coverage should be avoided. They need to know the insured’s obligations.
But even so, most are not writing creative policies –they are choosing from the boilerplate options that most closely fit the documents – and for master coverage, that often means coverage to rebuild to original construction. Upgrade coverage (Code or betterment) is often an “add on”. This factor is important if an association wants or needs FHA approval for financing because there is a requirement for upgrade coverage. Some argue it has to be the association’s obligation but others read the regs as accepting of coverage where the association covers the original code and code upgrade coverage but owners are required to insure their betterments and upgrades.
Many associations have been bitten by the realization (after the fact) that modifications or exclusions in the policies exclude something the board thought was covered, or cover something they thought was not covered. Case in point: tub overflow, owner’s neglect, damage to unit, board position that owner was responsible and owner’s policy was primary. Declaration agreed. But the association policy contained a “modification” stating that the master policy “covers losses including unit fixtures, improvements, alterations and appliances in the unit regardless of ownership or whether the Condominium Association Agreement requires the association to cover it.” The association’s carrier paid to repair the damages – much to the chagrin of the association, whose documents clearly attributed responsibility for these things to the owners. And sometimes the association will direct the master carrier to try and subrogate against the owner’s carrier, but many HOA and Condo master policies state outright that the company waives its right to recover payment from a unit owner (which includes his or her HO-6 carrier).
My PARTING Words: I hope if you get nothing else from this article, you get that water leaks require a full analysis of the facts and pertinent policies and documents to determine responsibility and insurance coverage, if any. If a board takes a position without the information gathering and analysis it might end up with a concussion of various proportions.
Beth Grimm is an HOA attorney in California. She is East Bay Resource Panel chairperson, author of various publications and books about condominium living and the law, a frequent contributor to the ECHO Journal, and a frequent speaker for various HOA industry groups. Visit her at http://www.californiacondoguru.com for the latest and hottest issues HOAs and homeowners face every day.