By: Gregory J. Fioritto
A classic “right of spring” for attorneys at our firm every year is handling the resolution of water loss disputes for Associations. Most often, these situations arise from a non-resident co-owner’s or foreclosing lender’s failure to properly winterize a vacant unit (though these problems certainly can and do occur in occupied units as well).
If the negligent action of the owner was the cause of the loss (e.g., frozen/burst pipes caused by the owner’s failure to keep heat on in the unit during winter), the Board’s instinctual reaction is almost always to deny (or to attempt to deny) any responsibility on the part of the Association (or its insurer) for the loss. After all, why should the Association be responsible for a loss if it was caused by co-owner “fault?”
However, this gut reaction is often incorrect in light of how most Association’s Bylaws are written in Michigan. The fact of the matter is that if the damaged property in question is covered by the Association’s policy, the Association in most cases is entitled to receive insurance proceeds for the damage regardless of whether co-owner negligence caused the loss. The only exception to that rule would be if the Association’s policy contained an express exclusion of coverage for any loss caused by specific types of owner negligence (such as failure to maintain heat in the unit).
If the damaged property in question is covered by the Association’s insurance policy and the Association elects not to file a claim (and coverage for the loss is not otherwise excluded under the Association’s policy as mentioned above), then the Association is choosing to “self-insure” to the extent that its Condominium Bylaws required it to carry insurance for the loss in question. If the Association refuses to file a claim under such circumstances, any co-owner affected by the loss (including the negligent co-owner) would have at least a viable argument that the Association should cover the loss out of its own pocket as a result of its choosing not to file a claim and receive the insurance proceeds that were otherwise available to it.
Boards should remember that insurance exists to “protect the innocent.” The Association’s duties under the Bylaws to insure the condominium are not per se negated or altered by the fact that a particular loss might not have been the Association’s “fault.”
Co-owner negligence may be relevant in determining who bears the Association’s deductible. In some cases, the Association may be able to “shift” the deductible amount of the claim to the negligent co-owner, provided that the Bylaws authorize such shifting, and assuming that the facts and circumstances support a claim of negligence against the co-owner.
Community association insurance issues can be surprisingly complex. We recommend that Board members consult with a qualified community association lawyer as well as the Association’s insurance agent whenever a significant water loss occurs to determine the appropriate course of action in each particular case.
Gregory J. Fioritto is a partner with the firm. He has extensive experience in community association law and has been with the firm since 2003. Greg’s particular expertise in community association law includes document amendments, collections, parliamentary procedure, corporate governance, developer disputes, insurance duties, and intellectual property matters.
You can reach Greg at our Plymouth office at 734-459-0062 or via email at firstname.lastname@example.org.