One of the areas that many managers and boards find themselves getting into hot water on with regularity is making declarations about what types of claims the HOA’s policy will and will not cover. We have seen this litigated more than a few times, so it is important to remember that coverage is based on the cause, not origin, of the loss.
Virtually no condominium communities maintain the interior of the owners’ units, so it is common that boards and managers alike inform owners that the HOA’s policy will not cover losses that originate within an owner’s unit. Common examples are backups in the exclusive servicing plumbing lines or a failure of the water supply line to the toilet. While maintenance obligations are based on origin of loss, insurance is quite the opposite with coverage being determined by cause of loss.
Client Case Study: Recently, one of our clients had a three-floor loss due to a soft clog in an owner’s exclusive servicing plumbing line. The association’s initial reaction was to inform the owner that they were responsible for all damages within their unit as well as damages to the units below. From a maintenance standpoint, this was right on, but the association’s CC&Rs called for a unit-inclusive and “primary” (first-paying) insurance policy. A drain line backup and overflow is covered by insurance, the HOA’s policy paid for the damages minus deductible. The board was predictably upset that its policy covered the loss and inquired with their attorney if they could avoid filing similar claims in the future. This idea was roundly rejected due to how the CC&Rs are written, and the attorney reinforced the reality that applying maintenance standards to insurance decisions was a surefire way to expose the association to litigation for breach of duty.
Lesson Learned: Insurance and maintenance are two very different animals. Just because a component may be owner responsibility to maintain does not mean that the HOA’s policy will not cover losses from that component failing. Counter-intuitive? Yes, but knowing that insurance and maintenance obligations are different is the first step in preventing a potentially nasty lawsuit.