Imagine arriving home to your condominium after a long day of work, opening the door to your unit, and being confronted with several inches of standing water. You enter your unit to the sound of dripping and look up to see that the ceiling in your living room is completely saturated with water. Upon further investigation, you discover that a leaking water supply valve in your upstairs neighbor’s unit has caused the serious water damage.
Who is responsible for the costs to repair the damage?
II. Condominium Insurance
Condominium ownership is unique in that it involves competing interests in real estate. Each condominium unit owner enjoys complete ownership of his or her unit and a shared interest, along with all of the other unit owners, in the condominium building and common areas. Typically, a portion of each unit owner’s monthly condo fee is used to pay for the condominium association’s insurance policy, which covers the condominium building, commonly owned property and liability insurance for the association (“Master Policy”).
However, the Master Policy does not usually cover damage to the interior of a unit. The Master Policy typically doesn’t cover damage to the unit owner’s personal possessions and liability for damage to other units .
Many unit owners, therefore, elect to purchase a separate insurance policy – often referred to as an H06 policy – which covers losses to any personal property and any structure and damages to any fixtures or upgrades added by the unit owner since the move-in date (“H06 Policy”).
In fact, more and more condominium associations have amended their By-laws to require each unit owner to purchase an H06 Policy in order to ensure that the unit owner will be reimbursed for damage to the unit, regardless of fault. Requiring unit owners to purchase an individual H06 Policy for the unit is especially beneficial in the scenario where the cost to repair damage to an individual unit is less than the deductible on the Master Policy.
What is subrogation and what happens when an insurance company brings a subrogation action against a unit owner for damage to an insured unit?
Subrogation permits an insurance company to stand in the place of its insured and seek recovery for losses paid under the insurance policy from the third-party that caused the damage. In the Condominium setting, an insurance company that issued an H06 Policy covering a unit that was damaged due to a neighboring unit owner’s negligence could seek to recover the sum paid out to its insured through a subrogation action against the negligent party.
1. Waiver of Subrogation
When an insurance policy contains a waiver of subrogation, the insurance company knowingly relinquishes any rights that it may have to seek reimbursement from a third-party, even if that party is responsible for the damage or loss.
2. Recent Cases
Koch v. Siracusa: Governing Condominium Documents Do Not Require
Unit Owners To Purchase Insurance
Recently, the Massachusetts Superior Court considered whether unit owners in a condominium complex could sue a fellow unit owner for starting a fire, despite a provision in the governing condominium documents requiring that “any insurance obtained by unit owners must waive the right of subrogation against unit owners.” See Koch v. Siracusa, 33 Mass. L. Rep. 235 (Mass. Super. 2016).
In Koch v. Siracusa, a seven-alarm fire caused catastrophic damage to a seven-story condominium complex in Boston. The plaintiffs were a group of unit owners who alleged that the defendant’s negligence caused the fire. The plaintiffs sought compensation for damage to their individual units and also for emotional distress.
The defendant moved for summary judgment arguing that, based on the governing condominium documents, the plaintiffs were either required or strongly encouraged to buy insurance against personal property damage and other losses. Had such insurance been obtained, the governing condominium documents required that the insurance waived subrogation rights against other unit owners of the condominium.
The condominium documents, however, did not require unit owners to purchase individual insurance policies. Consequently, the Koch Court held that “[t]hough they took a risk in not obtaining insurance, [the unit owners] are nonetheless still able to pursue compensation from the defendant for their financial losses by his alleged negligence.” Under Koch v. Siracusa, unit owners may not be prevented from seeking compensation from other unit owners unless the governing condominium documents contain a provision requiring that unit owners purchase insurance that includes a waiver of subrogation.
Pacific Indemnity Company v. Deming: Governing Condominium Documents Require Individual Unit Owners to Purchase Insurance
Conversely, in Pacific Indemnity Company v. Deming, the United States District Court of Massachusetts held that a subrogation waiver was enforceable based on the language in the governing condominium documents. In that case, a condo owner’s insurer brought a subrogation action against a neighboring unit owner who was responsible for causing water damage to the insured unit, due to an overflowing bathtub.
The governing condominium documents required that:
(1) each unit owner obtain an insurance policy for his unit which “shall” contain a waiver of subrogation and
(2) the condominium association obtain a Master Policy that “shall, insofar as practical, contain waivers of subrogation.”
By the express provisions of the condominium documents, the unit owners and the condominium association intended that there would be no litigation between unit owners or between unit owners and the condominium association for damage to individual units or common areas. Consequently, the Pacific Court held that the waiver of subrogation was enforceable.
3. Mutual Waivers of Subrogation
Ideally, the governing condominium documents would include mutual waivers of subrogation, as in the Pacific Indemnity case. Requiring mutual waivers of subrogation would ensure that:
(1) the condominium association’s insurer could not pursue claims against other unit owners, and
(2) a unit owner’s insurer cannot pursue claims against the condominium association or other unit owners.
Requiring mutual waivers of subrogation is beneficial to the condominium community as a whole because it prevents litigation between unit owners and the condominium association and promotes harmony in the Condominium.
Additionally, without a waiver of subrogation provision, a unit owner’s insurer would be liable not only for the costs of repairing the damage to the improvements and content in the insured unit itself, but also for the cost of repairing improvements and contents of all other units and/or common areas that are damaged. Thus, mutual waivers of subrogation also keep insurance premiums down for individual unit owners.
Given the unique nature of condominium ownership and the potential for internal conflict and discord in the aftermath of serious damage to the Condominium or an individual unit, it is important for condominium associations to rethink their approach to condominium insurance.
Requiring unit owners to purchase H06 Policies ensures that they will be reimbursed for damage to their unit, regardless of fault. Additionally, mandatory waivers of subrogation prevents litigation between unit owners and between unit owners and the condominium association in the event of damage to an individual unit or the Condominium.
This Client Update is designed to provide accurate and authoritative information in connection with the subject matter covered, but it should not be construed as legal advice or legal opinion on any facts or circumstances. Transmission of this information is not intended to create, and receipt does not constitute, a lawyer-client relationship. You are urged to consult an attorney concerning your own situation and any specific legal questions you may have.