Imagine opening the door to your condominium (“condo”) only to be confronted by several inches of standing water. The first call is to your insurance company, which must then consider not only mitigating, adjusting and paying the claim, but subrogating against those responsible for the loss. Determining who is liable for such damage can be tricky and it depends on the source of the water. Condo associations carry insurance to cover common areas while individual condo owners carry coverage covering the interiors of their units, including the walls, flooring, and contents. A toilet supply line may have failed. The bathtub may have been left running in the unit above. Faulty construction or renovations may have allowed rain to infiltrate and cause damage. A washing machine next door may have failed. Regardless the cause, however, an even bigger obstacle may be overcoming state law and certain declarations intended to bar one unit owner (or his/her insurance carrier) from suing/subrogating against another unit owner. Knowing the law in this area from state to state becomes critical in evaluating subrogation potential.
A condo is a multiple-unit dwelling in which there is separate and distinct ownership of individual units and joint ownership of common areas. A cooperative apartment house (“co-op”), on the other hand, is usually owned and managed by a corporation, and the “shareholders” are tenants who lease their apartments from the corporation. While they are different, each is a form of multiple-unit dwellings with independent owners or lessees of the individual units comprising the multiple-unit dwelling who share various costs and responsibilities of common areas. Most states have laws which prescribe the property insurance coverage which must be included in a policy covering a multi-unit dwelling such as a condo or co-op.
This subject mirrors a question our firm is routinely called upon to answer. Under what circumstances may an insurance company step into the shoes of its insured unit owner and subrogate significant losses against another negligent unit owner? As with many legal issues, it depends. Whether or not you and your insurance company can subrogate against another unit owner and/or the condo association depends on two things: (1) your state law or (2) your condo declaration. Certain state laws or certain condo declarations require a mutual waiver of subrogation rights against another unit owner and the condo association.
The development of condo and co-op housing arrangements has accelerated over the years following the Fair Housing Act of 1968, which authorized the use of mortgage insurance on one-family units in multi-family structures. With ever-increasing real estate prices and the proliferation of these housing arrangements, property insurance claims involving fire and/or water damage to multi-unit dwellings such as condos, co-ops, and planned unit developments (PUDs) are becoming commonplace. Effective subrogation of those claims requires a working understanding of the biggest obstacle to successful recovery efforts – a waiver of subrogation provision contained either (1) in the building’s by-laws and/or property insurance policy, and/or (2) in the unit owner’s insurance policy.
A homeowner’s association (HOA) consists of condo unit owners and it manages the condo through a board of directors elected by the membership. It can exist under various names depending on the jurisdiction, such as “unit title”, “sectional title”, “commonhold”, “strata council”, or “tenant-owner’s association”, “body corporate”, “Owners Corporation”, “condominium corporation” or “condominium association.” Many condo corporations require declarations which contain a provision requiring insurance policies to include a “waiver of subrogation” against a number of parties, including the corporation, manager, agents, employees, owners, residents, tenants, invitees, etc. In other words, if Unit A suffers water damage from a leaking water supply valve in Unit B above it, and the damage is repaired by Unit A’s insurance company, Unit A’s insurance company will want to subrogate against the liability carrier for Unit B. Or, if the construction of the condominiums is lacking, resulting in water or other damage, the insurer for the damaged condo unit will want to consider the possibility of recovering against the condo. However, if the lease or by-laws contain a clause by which each unit agrees to waive subrogation against other unit owners and the condo association, successful subrogation becomes problematic.
Additionally, even if the lease or by-laws do not contain a mutual waiver of subrogation agreement, applicable state law may require a mutual waiver of subrogation when it comes to condo associations and unit owners. Condo and/or co-op association boards often require all unit owners to purchase liability insurance. If Unit A suffers water damage from a leaking water supply valve in Unit B that is above it and the damage is repaired by Unit A’s insurance company, Unit A’s insurance company will want to subrogate against the liability carrier for Unit B. However, if the lease or by-laws contain a clause by which each unit agrees to waive subrogation against other units, successful subrogation becomes problematic. A waiver of subrogation clause may be included in a condo or co-op proprietary lease or by-laws. A waiver of subrogation endorsement may also be included in the insurance policy of a unit owner or a condo or co-op corporation. These waivers are usually given effect, but not beyond the extent of its plain meaning. Quite often, a waiver of subrogation is only effective when both the lease/by-laws and the subrogating insurance policy contain effective waiver of subrogation language. Not all condo/co-op leases and by-laws require waivers of subrogation and, where they do, the parties covered by the waiver are not always the same.
In 1982, the National Conference of Commissioners on Uniform State Laws (ULC) promulgated the Uniform Common Interest Ownership Act (UCIOA), a model set of laws to govern condo, co-op, and PUD communities in the U.S. The UCIOA succeeded and subsumed the earlier Uniform Condominium Act (1977), the Uniform Planned Community Act (1980), and the Model Real Estate Cooperative Act (1981). In 2008, the ULC established amendments to UCIOA, along with a new Common Interest Owners Bill of Rights Act (UCIOBORA), which was meant to serve as a stand-alone Act states could pass when it was not feasible to enact all of the UCIOA. The UCIOA is a comprehensive Act that governs the formation, management, and termination of common interest communities, whether that community is a condo, planned community, or real estate co-op. In 1994, the ULC promulgated a series of amendments to UCIOA. The 1994 amendments did not change the general structure or format of the original Act, but were designed to reflect the experience of those states that had adopted UCIOA (or one or more of its predecessor Acts), and scholarly commentary and analyses surrounding the Act.
In 1994, the UCIOA, a uniform model Act for condos, was amended to include required waivers of subrogation against unit owners and condo associations as to the common elements of the condominiums complex. Since 1994, many states have adopted this section of the UCIOA and many states have substantially similar laws.
Section 3-113 of the UCIOA says that the condo association must maintain property insurance on all the common elements of the condo property, commercial general liability insurance, and fidelity insurance. Additionally, § 3-113(b) of the UCIOA says that if the condo units share common walls, the insurance must include the units because of the great interdependence of stacked units. Furthermore, if there is multiple-insurance coverage, the condo association insurance is primary. The subrogation section states:
(d) Insurance policies carried pursuant to subsections (a) and (b) must provide that:
(1) each unit owner is an insured person under the policy with respect to liability arising out of the owner’s interest in the common elements or membership in the association;
(2) the insurer waives its right to subrogation under the policy against any unit owner or member of the owner’s household;
(3) no act or omission by a unit owner, unless acting within the owner’s scope of authority on behalf of the association, voids the policy or is a condition to recovery under the policy; and
(4) if, at the time of a loss under the policy, there is other insurance in the name of a unit owner covering the same risk covered by the policy, the association’s policy provides primary insurance.
If a state has adopted the UCIOA provisions, the damage to private property would not be covered by the condo association’s insurance, but the damage to the walls would. Under § 3-113(b) of the UCIOA, walls are covered by the condo association insurance policy. Therefore, the condo association’s insurance company is responsible for covering any damage to the walls, other than surface level damage. Additionally, the association’s insurer cannot subrogate against the negligent neighbor upstairs because of the state mandated waiver of subrogation.
There are many things to consider when damage is done to property of a condo. First, you must identify where the damage occurred. In other words, is it a common element covered by the insurance policy? Are units covered by the insurance policy? Second, you must identify the possible liable parties. Third, it is important to know whether there are any legal barriers that bar you from pursuing subrogation. Remember to look at both the condo declaration provisions in order to see whether you have waived subrogation and, therefore, are barred from pursuing subrogation against liable parties. Further, be sure to look at state law to see if your state requires you to waive subrogation against unit owners and the association, also barring you from pursuing subrogation against liable parties.
With research conducted by Kelsey Burazin, a Marquette law student and MWL law clerk, MWL has created a state-by-state chart on condo/co-op waiver of subrogation laws.
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