Insurance liability is a very important issue for a condo or HOA association or a condo board. Most have built up a good relationship with their insurance agents or brokers, and many are content to leave the details to the pros. 

However, the world of insurance liability isn’t static—new laws are proposed and enacted, and court decisions can have a huge impact on what will happen in any given lawsuit or insurance claim. That’s why it’s important to know the basics of what’s new on the insurance-related legislative and legal scene, and how these laws and decisions will affect their exposure to risk and loss.

In the Statehouses

Just a casual look at the bills being covered in statehouses across the country show quite a number that pop up when you search for both ‘condominium’ and ‘insurance,’ or ‘cooperative’ and ‘insurance.’ Some are overall condo and co-op-related bills that casually mention insurance in addition to other aspects of board and association governance; others are about insurance per se. Many deal solely with specific communities, or with matters such as reverse mortgages for seniors. As with most bills, the majority never reach the floor.

An example of a condo insurance-related bill before the Massachusetts state legislature is H.577, co-sponsored by Rep. John W. Scibak and Sen. Barbara A. L’Italien, which would regulate real estate appraisal management companies. The bill would establish a board, to be directed by the governor, that would ensure that real estate appraisals are done fairly. The bill was introduced in January and a hearing was held in June.

An example of a condo insurance-related bill before the New Jersey State Assembly is A1599, sponsored by Assembly members Scott Rumana and Kevin Rooney, which would “require condominium and homeowners’ associations to provide information to federal home loan insurance providers at no cost to potential buyers.” The bill was introduced last year and was referred to the Assembly Housing and Community Development Committee.  A summary states that the bill, which would update current law, “would require condominium associations and homeowners’ associations to cooperate to the fullest possible extent with federal home loan insurance providers, by responding fully and expediently to any questionnaires or other requests for information requires by the providers before insuring a loan.”

Turning to bills that have actually been passed into law, attorney Eric Goidel, a senior partner with Borah, Goldstein, Altschuler, Nahins & Goidel in New York City, says that in January 2009, New York enacted significant amendments to Section 3420 (a) of the Insurance Law “which overturned the longstanding common law rule that allowed insurers to deny coverage of a claim based solely upon an insurer’s late notice, and regardless of whether the untimely notice prejudices the insurer in any manner.”

The legislation now provides that the burden of establishing prejudice rests with the insurer if the delay was within two years of the time required under the policy. If, however, the delay in notice was two years or longer, the burden shifts to the insured to prove that the insurer was not prejudiced by the delay.

What exactly is meant by “prejudice” in this context? Prejudice, Goidel explains, is defined as the failure to give timely notice that materially impairs the ability of the insurer to investigate or defend the claim. He adds that “claims-made policies” are exempted—these policies may still state that the claim must be made during the policy period, any renewal or any extended reporting period. It does apply to occurrence-based policies, which cover losses that happen within a given period of time. 

Because  directors and officers (commonly called D&O) insurance is generally written on a claims-made basis, “The legislation will not be beneficial to cooperatives and condominiums which provide late notice to their D&O as distinguished from general liability carriers.”

An example of an insurance-related law from another state can be found on the blog of Keay & Costello, attorneys in Wheaton, Illinois. As of June 2015, all Illinois condo associations are required to have insurance consistent with changes to Section 12 of the Condominium Property Act that were signed into law in July 2014. Now, among other things, an association’s property insurance must provide coverage “not only for the full replacement cost of the insured property, but also coverage sufficient to rebuild the property in compliance with current municipal codes and ordinances in effect at the time of rebuild.” 

The legislation, according to Keay & Costello, also requires that all directors and officers policies “Must now cover claims that seek non-monetary relief (i.e., suits for injunctive relief, declaratory actions) and breach-of-contract actions.”

In the Courthouses

Decisions in court cases can also have a serious impact on insurance as it impacts condo, HOA and co-op communities, not only in the venue where they are decided, but in other states and localities that may follow suit. Many of these cases deal with tricky issues of liability—issues that are of concern to every board member, and sometimes to unit owners as well.

A recent court case in Massachusetts, Koch v. Siracusa, dealt with the issue of insurance policies and the issue of subrogation. When a fire originated in a condo owner’s apartment, and then severely damaged other condo apartments, the other residents filed a suit. The defendant argued that each individual unit was responsible for its own insurance, and also that condominium documents required that insurance to contain a waiver of subrogation, which waived the right to sue other unit owners of the condominium. According to a post on the website of Massachusetts attorney Nina Kallen (insurancecoveragemassachusetts.blogspot.com) the Superior Court found that “The requirement to waive subrogation if insurance is procured does not preclude unit owners from suing each other for losses that are not covered by insurance.”

Many other cases deal with tricky issues of liability—issues that are of concern to every board member, and sometimes to unit owners as well.

For example, Goidel mentions the New York case of Pekelnaya v. Allyn (1st Department, New York, 2005), which arose after a passerby was injured on the sidewalk in front of a condo building when a section of chain-link fence fell from the building’s rooftop. “While the plaintiff had originally sued the condominium, its board of managers and the original sponsor who erected the fence,” says Goidel, “when the plaintiff discovered there was only $2 million in liability insurance, the plaintiff sued the condominium’s unit owners individually.” The court allowed the case to go through against the individual owners. 

However, when the case was appealed, the ruling was reversed—the appeals court found that control of the operation of the property, rather than the common interest of the unit owners, was the criteria upon which liability should be based, says Goidel. Individual owners everywhere must have breathed a sigh of relief!

Board member liability has often been addressed in court cases, and Goidel gives two such examples, also from New York. Pelton v. 77 Park Avenue Condominium (1st Dept., 2006), involved a claim of discrimination against board members for not giving reasonable accommodations to a disabled unit owner. The court held that board members were protected by the Business Judgment Rule and there was no evidence of independent tortious conduct by them. 

Six years later, however, the Appellate Division issued a decision in Fletcher v. Dakota (1st Dept., 2012) where an African-American shareholder at the famous Dakota co-op claimed that the apartment corporation and two board members discriminated against him when they denied his application to buy an adjoining apartment. In this case, the court found that board members would be protected from general liability in a breach-of-contract claim—but in tort claims, board members could have personal liability.

Labor laws are another concern of condo and co-op boards and association, Michael Zeldes, senior vice president of Hub International Northeast insurance in New York, called our attention to Guryev v. Tomchinsky, decided in 2012 by the Court of Appeals, the state’s highest court, in Albany. This case ruled that condo buildings and associations are exempt from liability under NYS Labor Law 24(6) for injuries sustained by construction workers while performing work in individual units, on the basis that condo buildings and associations do not constitute “owners” or “agents of owners” under the statute. 

In Guryev, the plaintiff, a contractor retained by an individual unit owner, was renovating a condo unit while he was struck in the eye by a ricocheting nail. “In short,” he says, “the court reasoned that condominiums only own the land beneath the condominium building, as each unit within the condominium buildings is separately owned by each individual unit owners.” Co-op corporations, on the other hand, own the entire building and lease the individual units to the shareholders.

Zeldes adds that this decision could extend the liability exemptions of condominiums to what he calls “the nefarious ‘Scaffold Law,’” NYS Labor Law Section 240. This law makes property owners and general contractors strictly liable for bodily injuries sustained by workers who fall from heights, are struck by falling objects, or are injured as a result of another “elevation-related risk.” 

The owners of one-and two-family dwellings that exercise no control over the work being performed are specifically exempt from absolute liability under the statute, says Zeldes, and “the decision in Guryev would seemingly extend the same exemption to condominium buildings and associations as well.”

Another New York attorney, Joshua Gold of Anderson Kill P.C. in Manhattan, speaks about a trend that has been reflected in court decisions in several states and could have a serious effect on boards. The issue involves “excess insurance,” or a secondary policy. For example, a condo or co-op may take out their main policy to cover claims in the amount of $1 to $100, then might buy “another layer” that will cover claims for $100 to $200. There are any number of reasons that a board may buy excess insurance from a second insurance company—for example, that company may offer them better rates.

“What we’re seeing over the years,” says Gold, “is that based on some language from excess insurance company policies, they will claim that you will not have a right to get paid by your excess insurance company unless the primary company pays out 100 cents on the dollar.” One situation in which this could be a problem, he continues, is when the board’s primary insurance company goes out of business, and the excess insurance company, claiming an “exhaustion defense,” says they don’t have to pay a penny.

Gold says there have been many decisions related to this situation, including  Comerica v. Zurich American Insurance Co.  (2007), a Michigan federal case; Qualcomm Inc. v. Certain Underwriters at Lloyd’s of London (2008), a California state case, and others, including some in New York courts. These decisions make it imperative for boards to work with an experienced insurance broker who can navigate through the policy language. “It’s much easier to do this at the point of purchase than to get out of bad clauses in your policies later on,” he says.

On the other hand, according to Stephen Marcus, partner at the law firm of  Marcus, Errico, Emmer & Brooks in Braintree, Massachusetts, many condo associations are in fact, underinsured. 

“My concern is that I’m very afraid that there are many associations that are under-insured and have this false sense that the number stated in the [insurance] policy is any kind of guarantee by the insurer,” he says, describing how the cost to rebuild or repair can often be higher than the amount an insurance company says they will pay. “It’s a huge concern because we could be talking about millions of dollars.”

A guaranteed replacement cost policy is a much better plan, he says. 

What Can Boards Do?

What else can boards do to make sure their insurance policies are in line with the latest legal decisions and legislation and don’t have omissions that could cause them problems down the line? 

One thing they can do is to make sure they have a good insurance company. John Saisi, a Farmers Insurance agent and president of John Saisi Insurance in Arlington Heights, Illinois, (no doubt you’ve seen the TV commercial, “We Are Farmers”), says that Farmers’ legal team is top-notch and writes clauses based on the most recent decisions into their insurance policies as soon as they become aware of them. 

Saisi, who has about 50 associations as clients, adds that the best place to find out about these matters on your own is from the Community Associations Institute (CAI), which, as readers know, has local chapters from coast to coast. Farmers itself, he says, often uses CAI as a source for information.

Marcus says board should also have an insurance replacement cost appraisal done for the association, which would show just how much insurance may be needed. “Any association in the U.S. that doesn’t have a guaranteed replacement cost policy should today or tomorrow get the services of a decent insurance cost appraisal company,” he says.

Of course, there are also various online resources, including a blog aptly titled  Condominium Insurance Law (condominiuminsurancelaw.com), put out by the multi-state Merlin Law Group based in Tampa, Florida, and various others in different parts of the country. And in general, it wouldn’t be a bad idea to check in with your insurance agent or broker every few months to see if any problematic new issues have arisen that could affect your coverage.                            

Raanan Geberer is a freelance writer/reporter, and a frequent contributor to New England Condominium. Additional reporting by Georgia Kral.