In a recent “Ask the Experts” webinar, we discussed best practices regarding handling water leaks in condominiums. Though this piece will discuss some North Carolina laws, there’s also plenty of information on governing documents and insurance policies that will be useful to condominium board members in all regions.
In North Carolina, condominiums fall into one of two categories: those built pre-1986 and those built post-1986. Older condominiums will fall under NC General Statute 47A – the Unit Ownership Act - whereas newer condos will fall under NCGS 47C - the Condominium Act. When it comes to requirements of insurance coverage and rebuilding, these two acts have some distinct differences and it is important for boards to understand these differences.
Condominiums Built pre-1986 (NCGS 47A)
For many condominiums that fall under the Unit Ownership Act, there is no mandatory insurance requirement. These types of condominiums are often apartment buildings that have been converted to condos and the association has very limited obligations to rebuild as requirements to rebuild are very specific to the association’s governing documents. In these instances, insurance typically doesn't include personal property, damaged unit interiors or betterments and improvements - they won't really include anything but repairs to or rebuilding of common elements. In fact, some associations are set up to where they're only responsible for the "shell" of the building.
Can older condominiums choose to adopt provisions of NCGS 47C? Yes, they are free to adopt some of the language and coverage requirements into their governing documents but aren't able to fully opt into the act itself. Adopting some of the requirements of 47C is highly recommended.
Further, condominium owners have made a fundamental choice to live in a condo and "be in it with everyone else". Trying to limit liabilities is typically a very short-sighted idea because if there's serious damage that an owner can't afford to repair, it may affect the entire group negatively.
Condominiums Built post-1986 (NCGS 47C)
For newer condominiums that fall under the Condominium Act, there are mandatory insurance obligations and an obligation for the association to rebuild. This does not, however, typically cover additions, betterments, and improvements; however, you should read the governing documents to confirm if additions, betterments, and improvements are covered under the condo policy.
The obligation to rebuild is separate and distinct from having the funds to do it. The Condominium Act does allow the association to pass costs onto the owners if the governing documents also allow for such. Regardless of the association's or owner's financial situation, time is never on your side with water leaks and they must be addressed quickly, or you run the risk of increased damages. Associations also have a duty to preserve property meaning steps must be taken to immediately stop the water leak and remediate as soon as possible. One way to think of this concept is treating the water leak as if something were on fire - water damage has the potential to be as destructive fire damage and should be handled with the same expediency.
Insurance - Who is Responsible for What?
Unfortunately, there are situations where condominiums become in essence uninsurable due to the amount and expense of claims. For example, if a condominium has received extensive hurricane damage and hasn't yet been reconstructed completely, you will have a hard time finding coverage. This will also cause policy costs to leap up over time and premiums will become astronomical.
Boards will, understandably, become nervous in these types of situations but ignoring the issue is never a good idea. The best thing to do is advise the membership as quickly as possible of the extent to which you were unable to secure necessary coverage, so they have the opportunity to go out and find their own. As with most things, it's important to remember here that communication is key.
Who Pays for Damages?
Cost responsibility is something that should be addressed in the governing documents. Though associations may initially bear the financial responsibility, there are a few ways in which these costs can be passed on to unit owners. However, experts warn that it is never a good idea to pass insurance proceeds directly on to unit owners. If they use the funds to hire contractors who aren't reputable or the repairs aren't made up to code, the responsibility to remediate will fall back on the association as the insurance company has fulfilled its obligation.
The ability to charge back unit owners for damages depends on the governing documents. If the association initially paid for repairs, some of these items can be charged back to the owner of the unit that was damaged as that owner is considered to have benefitted from the insurance funds. Though this may seem fundamentally unfair, it is how most governing documents are written. However, the owner who was charged back for the master policy deductible can often file that amount under their own insurance policy.
There are specifics both in governing documents and in insurance policies that dictate what will and will not be covered. For example, limited common areas like decks, balconies, or windows, while exterior elements of the building, may not fall under the master policy. In instances like these, a question of maintenance vs. insurance arises. It must be determined whether damages occurred as a result of a specific event or if they're the result of long-term neglect. With water, this can be particularly difficult to determine. It is important to note, maintenance responsibilities and insurance coverage are two separate issues.
Issues arising from big storms are easy to determine - an insurable event took place. However, if slow leaks cause damage, it could be potentially due to neglect. For example, say an older hot water tank on the 10th floor of a building bursts and the leak makes its way down to the first floor. Though several units have received damages, the faulty water heater not the responsibility of the association. Associations can request that owners keep items in their homes well-maintained and up to date, but there is no way to force unit owners to do such. But, regardless of whose responsibility this becomes, the association ultimately has the obligation to repair damages that result from the water damage from the busted hot water heater.
Deductibles are the portion of cost that the insured party is responsible for before the insurance company will release funds. Though this may sound pretty cut-and-dry, there are many instances where levels of responsibility can vary. You need to refer to the Declaration of Condominium to determine who is responsible to pay the deductible. It can be the owner(s) that received the damage to their unit(s), the condominium association for the common areas and possibly to the units(s), or it can be both the association (common area) and the unit owner(s) (units).
Condominium associations also have the right to not include improvements or betterments in repairs. If this is the case, the obligation to repair will often only be to repair the unit to its original condition. For example, if the unit originally had carpet and linoleum but the owner has since made upgrades to much more expensive flooring, the obligation will only be to restore the unit to the cost of the original flooring. Anything above that will need to be insured by the individual owner. Before situations such as this arise, it is crucial that the board communicate all insurance requirements to the membership. This will, in turn, eliminate any confusion when it comes time to make a claim.
Deductible amounts, of course, must be handled in some manner and how these costs are addressed, divided, or passed along to owners will be laid out in the governing documents. Though some boards may hesitate to charge back the deductible on the idea that it adds insult to injury, this is inconsistent with the board's fiduciary duty to the association. The whole group doesn't want to be responsible for one unit's claim, right? It is essential for the board to adopt a clear policy on deductible charges to avoid any confusion.
When it comes to deductibles, setting them very low can end up being injurious to the association. If you have a deductible of a thousand dollars, it is probably too low. With these low deductibles, you're risking your insurability due to loss history. Now, the risk to insurability isn't due to the size of the claim itself, but rather the repeated history of claims as this can make your condominium a "bad risk" in the eyes of the insurer and you may face non-renewal or even be unable to get a quote.
It's advisable to make deductibles as high as reasonably possible and these deductibles may be suggested by the insurance company due to your loss history. Boards should always work with their insurance agents to use deductibles to manage risks and protect losses. Where there are large deductibles in the master policy it is advisable to have a separate reserve fund to cover these deductibles.
HO-6 Policies & Dwelling Coverage
These policies are coverages on unit owners' personal property. In addition, building coverage can also be added to help cover portions of the unit and limited common areas that are not covered under the master policy and the master policy deductible – what they cover will be policy-specific. Also, betterments, improvements and things of that nature should be covered separately on the HO-6 or dwelling policy so that if damage occurs, the owner can repair their unit to the level of the betterments and improvements they made.
Bill back processes are specific to each condominium and often include language about proving misconduct. Back to our water heater example, if the association had repeatedly requested that an owner install a new, upgraded tank and they fail to do so, this can be considered misconduct and may not be covered by the master policy.
There are a few things that all master policies on condominiums should include. One is Ordinance and Law coverage which comes into play if there's a total loss of a building. In the time from which the building was constructed to the present-day, building codes will have changed which in turn creates an increased cost to rebuild and bring the building up to current codes. If you don't have this type of coverage, the insurance company is not going to pay the actual cost to rebuild and the burden will fall on the association.
How frequently should boards be talking to their insurance agents? Once per year is the minimum recommendation, but boards can take advantage of having an insurance expert on hand by using them as a resource for any questions or concerns. Insurance agents can even attend meetings to provide guidance as they have a duty to the board - there is typically no cost associated with this as you're already paying the agent under the insurance policy.
Obligation to Pursue Claims
If there's a claim that will fall under the master policy, the board is under obligation to pursue it as not doing so creates risk for the association. If your condominium is considered high risk or is having a repeated issue, solutions must be sought out. This could be in the form of conducting more frequent and thorough property inspections or raising the deductible. Refusal to explore such options opens the board to liability - claims could be denied for not proceeding appropriately when the issue in question arose. It's also recommended to always place claims because if you don't place a claim, future claims could arise out of the same occurrence and a claim might become necessary. Or, say your repairs have been made but you come to find the water issue wasn't completely mitigated, mold grows, and an owner gets sick. If you didn't make the initial claim, future claims will likely be denied.
As you can see, water leaks and insurance policies and coverage can get extremely complicated. As a best practice, boards should be familiar with what their governing documents say about such as well as familiar with their insurance policies and applicable state laws. However, it's also imperative to remember you're not alone. Utilizing the professional expertise of insurance agents, attorneys, and community managers will help position board members in their associations to handle water issues in the best way possible.
Questions about handling water damage in your condominium? Reach out to the experts at CAMS today via our website or at 877.672.2267 for Trusted Guidance.