Insurance coverage and the inevitable claims that coverage defends against are a fact of life for multifamily residential communities. In that setting, it’s critical for all parties to understand whose policy covers what, and under what circumstances. A good starting point is to view liability and claims from the perspective of that unique factor for condo and co-op living: shared common areas versus areas for the exclusive use of individual shareholders or owners and their families.

Yours, Mine, Ours

Alex Seaman is a senior vice president of HUB International, a national insurance brokerage headquartered in Chicago with offices throughout the United States. Seaman is located in Woodbury, New York. “An association policy is intended to provide coverage for common areas, including [physical] structures and common elements,” he says. “These elements are defined by the bylaws and/or proprietary lease. Common elements can differ from one property to another.” 

According to Ryan Fleming, a director with JGS Insurance, a national brokerage with offices throughout the United States, including Holmdel, New Jersey, where Fleming is based, determining who pays for an insurance claim “is a huge question. The determination of who pays for what is based on two different factors: the state in which you are located, and the governing documents that are in place. That’s what dictates who pays for what.” He goes on to explain that there are three different ways to insure in multifamily buildings: One is ‘bare walls,’ meaning the association will cover everything up to unfinished interior surfaces. The second is called ‘single entity’ (also known as ‘original specifications’). That means the association covers the whole structure including units, up to base model finishes, which only excludes the contents of the unit and any betterments or additions done by the owner. The third approach is ‘all-in,’ often used in a co-op style coverage. “But,” Fleming continues, “no matter what the association covers, that coverage excludes the owners’ possessions.”

Even with that said, there are still times when determining who covers what can be complicated. Consider a situation in which one owner lives above another. If the upstairs owner’s shower head has a leak and causes minor damage to the ceiling of the downstairs unit owner—nothing structural, but some staining around the ceiling light fixture—who is responsible for repairing the ceiling (if necessary) and bleaching or repainting the stained area? 

According to Gary M. Daddario, a partner with the Braintree, Massachusetts firm of Marcus, Errico, Emmer & Brooks, PC, “These situations sometimes arise and become somewhat similar to disputes that may be had between two neighbors with single-family homes.” 

In just such a case he was previously involved with, Daddario says that “the court made an inquiry as to whether or not the upstairs unit owner was negligent in some manner. The court looked at questions like, ‘When did the upstairs owner become aware of the problem? Once they knew about it, what was their response? Should they have [responded] any sooner? Was there any lack of normal maintenance which would have avoided the problem?’” In that case, the court concluded that a toilet leaked through no fault of its owner and that the owner took appropriate measures to fix it as soon as they became aware.  

 “So, the court explained, while the circumstances are somewhat tragic, they do not present a case for legal recovery,” says Daddario, and a shower leak would likely be analyzed along the same lines. “Other options would include the possibility of the damage being covered by either owner’s H06 insurance policy,” he continues. “The final answer as to those options would depend on the existence of such insurance and the terms of the policies, as well as the deductible amounts and the dollar value of the damage.”

Guest Policy

Another area of concern in the insurance claims sweepstakes is what happens when a guest visiting or passing through the property is injured, or does some kind of damage to the property. In general, the responsibility for a resulting claim lies where the injury or damage occurred. If it happens in a unit, it’s the unit owner’s policy that is the source of coverage. If it happens in common areas, the association or corporation coverage is likely to kick in.

“The unit owner is responsible for anyone or anything that happens within the unit,” says Seaman. “Things like common area falls and accidents are the responsibility of the association.” 

Fleming delves a bit deeper. “First things first,” he says. It must be determined “what was damaged, and whether it’s included in the specific definitions. If a guest causes damage to a unit, the question is what portion(s) of the unit? The next question is, how is the association insured, as outlined above. Is it bare walls, base model, or all-in? That tells us which policy will respond. Property coverage does not change due to fault. The policy does not care—it covers property from certain causes of loss. The policy doesn’t have a brain. It covers whatever it covers. If it’s a covered cost loss, the policy pays.” 

Covered cost is very specific to its description within the policy. Fleming explains this using a novel breakfast cereal-based description: If an insurance policy covers ‘sudden and accidental damage,’ Fleming describes that damage as things that go ‘snap-crackle-pop’—a burst pipe, a fire, or similar—as opposed to slower, less dramatic damage that occurs over time, like a slow leak. 

“In the event a guest is injured in the lobby of the building,” says Fleming, “no one responds unless the injured party sues. If they do, then the question is, who are they suing? Who is the defendant? It could be the unit owner, in which case the unit owner’s policy defends that unit owner. If the association is named in the suit, the association’s general liability policy will defend. If that’s exhausted, there is an excess liability policy underneath it.”

How Are Claims Filed?

In the event of a covered event, insurance claims and benefits don’t just show up and shout, “We’re here!” There is a process by which insurance pays for covered items. 

“Typically, the association contacts their broker, who contacts the carrier,” explains Seaman. “If it’s a first party claim, with damage only to the building, then it’s relatively simple, because only the policy covering the association is involved. If there is damage to individual units, insurance carriers for the unit owners are involved as well, and respective carriers would make a determination as to who is legally and financially responsible for the damages. Determinations are made between the respective insurance carriers.” This is the normal course of events.

Fleming adds that, “upon first notice or acknowledgment, the insured would contact their broker with all appropriate details—injury, damage, date, etc. The broker would then submit a claim to all the carriers responsible for responding. Once the carriers receive the claim information, they acknowledge and assign a third-party adjuster. At that point, the adjuster contacts the insured or claimant directly. Then the third-party adjuster will proceed to closure with an in-house adjuster. The broker stays involved if the insured or the claimant keeps the broker involved. Carriers want to close claims and bring the whole thing to an end as quickly as possible.”

In some cases, where responsibility for a claim may overlap between the building insurance and the unit owner’s coverage, both companies may get involved. “They may use company appraisers or independent appraisers,” says Seaman, “to determine the cost of repair or replacement. As a side note, the cost of repairs has escalated enormously in the past 24 months. Contracting, material, labor, everything is higher.” 

“Ideally,” says Fleming, “the third-party adjusters will communicate. That’s ideal, but typically, that’s not how it works. Each will adjust and come to an outcome alone, and that will be provided to the insured. The estimates usually don’t match. That’s when we have delays, and the broker has to get everyone in a room to get to a final outcome. Involving the broker from day one to quarterback is the key to getting a final outcome everyone wants.” 

Increasing Understanding, Speeding Up the Process

“There are few industries that require a license,” says Fleming, “but for some—like insurance—it’s essential. Boards and managers don’t require a license in insurance, so anything they’re communicating may be presented incorrectly. In light of that, many boards rely on or demand that their brokers, attorneys, etc., put together education sessions for their communities. This is good policy. We do unit education sessions twice a year for our clients. Rely on your licensed insurance agent to do the job.”

In the final analysis, insurers and insureds want the same thing: to settle claims quickly and fairly, with as little conflict as possible. Understanding who covers what is the first step in quick resolution.

A J Sidransky is a staff writer/reporter for New England Condominium, and a published novelist. He can be reached at alan@yrinc.com.