Fiduciary Responsibility

UNDERSTANDING INSURANCE COVERAGES

by Ken Direktor / Published November 2014

QWe just had an electrical fire in our condominium building, but fortunately no one was injured or killed. However, we are looking at major repairs. What should we be thinking about right now?

AMost insurance policies provide coverage for the emergency services needed in the aftermath of a casualty event, and the carrier will issue some upfront funds to cover emergency repairs. The problem arises when the association enters contracts and allows services to be performed before the insurance company’s adjuster has authorized repairs. More importantly, agreements for these services are often made before the policyholder has had the benefit of advice from a legal or adjusting professional that works directly for the policyholder. It is essential to separate truly urgent repairs, which require expedited approval and handling, from those that will impact the association long term, which must be approved in a more deliberate process to protect the association.

When emergency services are necessary after a casualty loss, contractors routinely require a contract with the policyholder that obligates the policyholder to pay, and assigns the rights to insurance policy benefits for such services. That assignment of benefits carries with it the rights to deal directly with the insurance company and, if necessary, to sue the insurance company to assert those rights to the extent of the services provided. The policyholder will likely have had little or no say in the emergency services deemed necessary by the contractor. In many cases, the insurance adjuster has not met with the restoration contractor either and has not approved the extent of the services proposed to be performed for payment. If the claim has been assigned 

in order to ensure payment for the services, though, the policyholder may not even be authorized to discuss the services rendered by the contractor with the insurance company—only the contractor will have that right. Surrendering control over your insurance claim or the manner in which reconstruction is undertaken is never advisable.

QI have served on my board for the last four years, and when it comes to our insurance coverage, I am at a loss. What am I expected to read or understand when it comes to our insurance policies?

AWhen a community association is the policyholder, the board undertakes a fiduciary obligation to obtain appropriate coverage to protect the community. It is not essential that the board members understand every nuance of the policy, but it is essential that you understand what your documents and the applicable statute require, that you make sure the coverage limits are appropriate to the level of risk, and that the scope of coverage is appropriate to your community. For example, in a community with older structures, property damage insurance without law and ordinance coverage is highly inadvisable. Essentially, the insurance policy is an asset acquired by the association that the board has a duty to maximize and to manage as a valuable asset.

Understanding and using the policy’s benefits usually exceeds the capabilities of a volunteer board of directors of a community association, even with the assistance of an experienced association manager. The board doesn’t have the expertise to understand the operation of the policy and know when the insurance adjuster is honoring the contract’s terms covering the proposed reconstruction activities, and managing the reconstruction can overburden even the most diligent association manager.

To best protect itself, the association should have a relationship with a lawyer and other professionals before a loss occurs, who can be prepared to advocate to ensure proper insurance benefits are available after a loss and to argue policy terms to force the insurance company to pay what it owes. The policy usually holds sufficient benefits to restore the policyholder’s property—but policyholders have to be prepared to advocate for them.

QWe are reaching the age where many of the plumbing fixtures in the units are reaching the end of their useful lives, and we are seeing more and more leaks. What are our obligations in the event of a leak from a pipe or a water heater in a unit?

AJob one is to find the source of the leak and make the repairs necessary to stop the leak. There may be resistance from the owner, but the better course is to repair the leak and, if the repair was an owner responsibility under your documents, pursue the reimbursement later, but not at the expense of allowing the leak to continue. Next, you must deal with the water that resulted, whether on the common elements or in the unit. Otherwise, your damage will worsen as mold develops. The association removes the water from the common elements, and the owner is responsible for removing the water from the unit. Try to get the owner to authorize the water removal in writing and contract directly with the water extraction contractor, but do not allow an owner’s failure to cooperate to place the building at risk of a mold infestation. Again, it is better to remove the water and seek reimbursement where the owner is liable for the expense.

Of course, once the leak is discovered, you must notify your insurance carrier and arrange an inspection by an adjuster appointed by the carrier. The adjuster will focus on the areas for which the association is responsible. Any owner whose unit is damaged must notify his or her own carrier. The statute pertaining to condominiums clearly delineates the portions of the property insured by the association as well as those for which the unit owner is responsible. If an owner fails to undertake repairs (often because he or she does not carry insurance), the owner’s repair obligations must be enforced just as you would enforce any owner’s obligation to perform required maintenance and repair of his unit.

The situation can be further complicated if the leak was caused by an act of negligence, in which case the uninsured portions of the repairs should be the responsibility of the negligent party. It is very important that you have a protocol for dealing with leaks, as this column only scratches the surface, and that you involve your carrier and your counsel to protect your rights and mitigate your losses.