Why can’t cooperatives cooperate in the event of a disaster?

June 16, 2022 – In those rural days of yesteryear, if a barn burned or blew, neighbors would rally to rebuild it. It was not required by law, unless you relied on the golden rule, nor in the statement of clauses, conditions, and restrictions (CC&R) in the bylaws of the non-existent homeowners association. It was the charitable thing to do, but it also made sense: lots of hands do light work, and your barn could be next.

Today, neighbors are not expected to help each other rebuild after a catastrophic loss. But there are communal obligations and risks to be covered by insurance for housing estates, condominiums and cooperatives, as well as the risk of harm to others by liability coverage.

Under these circumstances, insurance coverage becomes “more and more curious”, to quote Lewis Carroll’s Alice’s Adventures in Wonderland. While most single-family homes have the standard types of homeowners coverage, when does the Homeowners Association (HOA) have an insurable interest in private residences – who pays in the event of a catastrophic loss? And are HOA boards in danger? Should the HOA board maintain insurance coverage?

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The bill of sale or registered deed often governs these matters, as they may incorporate CC&R rules, raising the question of whether these documents, as well as the terms of homeowners and HOA insurance are adequate to avoid loopholes. or coverage duplications. Better to determine the answers before disaster strikes.

Basics of Insurance in an HOA

Purchasing homeowners insurance for an HOA or its members is more complex than the personal coverage that geckos, emus and other brand icons promote on television. State laws governing HOAs are not uniform, and CC&Rs often outline requirements for insurance coverage. But CC&Rs are unique to each development and its HOA.

Consider the issue of insurable interest. The purchaser of the insurance must have an “insurable interest” in the matter covered, whether it is life, liability or property insurance. A more familiar expression, “the skin in the game”, expresses the same concept.

If someone buys insurance on the life of another person with whom the purchaser has no family or contractual relationship, or on property to which the purchaser of the insurance has no right as owner or tenant, and the policyholder suffers no loss at the time of death or property damage, he or she is perversely the winner if the loss occurs. To avoid this “moral hazard” or the temptation to encourage loss and reap a windfall, insurance law has long required that the buyer be in the game.

Section 280 of the California Insurance Code, for example, states categorically: “If the insured has no insurable interest, the contract is void.” Several other states have similar standards, including but not limited to Arizona, Florida, Louisiana, Nevada, New York, and Pennsylvania.

The usual model is for the HOA board to purchase a “comprehensive” property and liability policy to cover damage to common areas and injuries occurring in those areas, and each homeowner to purchase a similar policy covering only their home and property. contents. The landlord does not own the common areas and therefore generally will not have an insurable interest in the shared pavilion and will not be able to insure it.

In detached homes within a development, property insurance is usually the responsibility of each owner under the terms of the sales contract or CC&R rules. CC&Rs often require the HOA itself to purchase insurance on all common areas of properties. Here is an example of such a clause:

“The Association shall obtain and maintain a primary or general insurance policy against fire and casualty, for the full insurable value of all improvements in the common area and on all common facilities, excluding the grounds, foundations, excavations and other items normally excluded from coverage The insurance must be kept in force at all times and the full replacement value of the property insured must be reassessed annually.

Private spaces – residences – are not covered by a general policy of this type.”

The HOA may be required to maintain other types of coverage for everyone’s benefit. These include liability and property damage insurance for the association, board members, any managers and owners, but only in respect of liability arising from the ownership and use of the spaces. common and other immovable or personal property of the association. It does not provide liability insurance to owners for events that occur on their property.

CC&Rs typically allow the HOA to purchase a Directors & Officers (D&O) liability insurance policy, protecting directors, officers, and volunteer committee members from claims against them for decisions they make in connection and the scope of their functions. Most HOAs cannot function without these volunteers, and few would accept leadership roles without protection from claims and lawsuits.

There is a common interest among HOA members, such as with the rural farmers who rebuilt the barn. In both cases, the objective is to maintain the value and usefulness of the property. In an HOA, CC&Rs are generally intended to prevent an owner from altering the size, uses, or appearance of their property in a way that diminishes the value of other properties. Such modifications can be adding a second story that blocks the sun on a neighbour’s solar panels or creating an eyesore by repainting a house in psychedelic paisley colors. When buying a home in an HOA, you give up certain rights to acquire communal benefits – tennis courts, clubs and private security services, for example. It’s a compromise.

In condominium developments, especially high-rise buildings, these considerations apply and can be intensified by the proximity of the units. An unreported plumbing leak that occurred in unit 14C while the owners left for a two-week trip could damage units 14B, 14D and 13C. This is a routine example, easily corrected. But if a construction defect allows widespread water intrusion damage to nearly every unit as well as common areas, the remedy and its insurance implications become increasingly curious.

The stakes are further hampered by another concept of insurance: additional insureds. A bit of background: when building a subdivision or condo, there is usually a general contractor, who does some of the work and selects sub-contractors to do specialized work, such as plumbing, the carpet and the electrical installation.

The contracts between the general contractor (GC) and each subcontractor (subcontractor) generally require each subcontractor to indemnify the GC against any claims against the GC arising from the subcontractor’s work and require the Subcontractor designates GC as an “Additional Insured” on the Subcontractor’s liability insurance policy.

The subcontractor’s liability policy may contain a “general additional insured” clause, which means that anyone to whom the subcontractor owes indemnification under a contract is automatically considered to be insured under the subcontractor policy. It’s not always the case. Without an additional general insurance clause or endorsement issued by the insurer, the subcontractor’s obligation to indemnify the GC is not covered by insurance.

These are generic concepts. This article does not discuss unique laws and insurance programs for earthquakes, hurricanes, and certain other catastrophic events.

Lots of blame to pass around

Here is a fictitious but all-too-common fact pattern in a large-scale property damage case. Three years after the completion of a 150-unit HOA-governed housing development, homeowners noticed their driveways were cracking and splitting. The same was happening to the concrete surrounding the common areas.

The HOA and its members filed suit against the GC, rebar subassembly, concrete basement, leveling basement, and soil consultant who recommended the degree of soil compaction. The GC invoked its right to be indemnified under the subcontracts. However, the concrete subcontractor’s liability insurance policy did not have a general additional insured endorsement. Although the concrete subcontractor’s insurance broker issued a “certificate of insurance” indicating that GC was an additional insured, the subcontractor’s insurer never issued an endorsement to this effect.

Furious, the sub sued its insurance broker, alleging malpractice. One owner, Burton, sued the HOA and its board members, alleging that the concrete basement belonged to the GC’s son-in-law, a fact never disclosed to the owners.

The HOA had not purchased a D&O policy. Although CC&R required that homeowners name the HOA an additional insured under their home insurance policies, Burton’s insurer refused to do so because , under applicable law, the HOA had no insurable interest in Burton’s driveway.

There are enough conflicts in this scenario to keep a squadron of law firms busy for three years, which is not an unusual estimate in such cases. Many construction cases never see a jury, thanks to court-appointed special masters or mediators who are adept at resolving multiparty lawsuits.

The irony of this tragic story is that all parties must share two common interests: to replace the concrete and to avoid the delays and expense of pursuing the case. By recognizing these interests early in the conflict and involving an experienced neutral to guide them to resolution, all parties can make the best of a bad situation.

Michael L. Zigelman is a regular columnist on commercial and professional liability insurance for Reuters Legal News and Westlaw Today.

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Michael L. Zigelman

Michael L. Zigelman is co-manager of the New York office of Kaufman Dolowich & Voluck, LLP and chairman of its General Liability Coverage Practice Group. He can be contacted at [email protected]

Louis Castoria

Louie Castoria is Co-Managing Partner Emeritus of the San Francisco office of Kaufman Dolowich & Voluck, LLP, and Co-Chair Emeritus of the firm’s Professional Responsibility Group. He also teaches law at Golden Gate University in San Francisco. He can be contacted at [email protected]

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