Condo Corp Conundrum: When the Board Has to Pay for a Claim
The number one question I always receive from condominium boards and property managers, in particular after reviewing by-laws and attending both board meetings and Annual General Meetings (AGMs), is simple: in the event of a loss, particularly where a unit owner is negligent, why can’t the unit owner be held responsible for all costs associated with the loss. While any given situation can be different from another, the general rule of thumb is typically the same.
For most people, it can be difficult to understand claim responsibility as it relates to an individual owner or the board itself. By comparing the relationship to a family home environment, it might help paint a picture a little easily.
For property managers, boards and unit owners trying to better understand, here goes:
The Analogy: Understand Board Responsibility
Follow this story… In the case of a claim caused by a negligent unit owner, it is helpful to compare the structure and set up of the board’s insurance policy as one covering a single large home, with many family members living under one roof, each occupying their own room.
Context for the Analogy
In your very big house, many people (the individual unit owners) occupy different rooms (the individual units). The home is owned and insured by Mom and Dad (the Board). Mom and Dad have a teenage son and daughter that live under their roof, as do Grandma and Grandpa.
The Event that Causes a Claim
The teenage son, like many teenagers, is a rebellious kid. He recently took up the nasty habit of smoking cigarettes. Home alone and in a rush, he butt out a cigarette in the garbage can next to the desk in his room. Right after doing so, he left the house to visit with a friend next door.
The cigarette , not quite out, smolders for a bit before igniting a fire inside the garbage can. This fire spreads into the room. Luckily, Grandma was home and smelled smoke. Acting quickly, Grandma grabs a fire extinguisher and puts out the fire. Her quick thinking and quick action ends up preventing the whole house from setting on fire. Nevertheless, the teenage son’s room is completely damaged from the fire.
The Claim and the Penalty
Considering the amount of damage the son’s actions caused, as well as the cost of the repairs, Mom and Dad submit a claim to their insurance company in the amount of the cost to repair the room only. In other words, they do not feel that they should replace the burned furniture or their sons own personal property (his iPod and book collection burned too) because they feel that his irresponsible actions were both negligent and careless. Further, mom and dad feel that their son needs to learn something from all of this and so they decide to cancel his allowance for 3 months as a penalty and to help recover the cost of the insurance deductible.
What Does it All Mean for Board Responsibility?
In the example above, Mom and Dad – essentially the condo board – are responsible and place insurance coverage on the structure as a whole – the house. Grandma and Grandpa, the young daughter and the teenage son each represent individual unit owners in our analogy.
Assigning Responsibility in a Claim
The teenage son – one of our unit owners – is responsible on his own for the repair and replacement of his own property, because it is his own property that was destroyed in the fire. In most cases, the unit owner is also responsible for any unit owner improvements made to the space as well, unless specifically addressed within the condo corporation by-laws.
Mom and Dad, the condominium corporation, are responsible for any damage to the original structure (flooring, drywall, etc.).
The condo corp. can decide to make a claim against the insurance policy or simply arrange repair and replacement of the damage made to the original structure from the reserve funds, but they are responsible for the damage to the building caused by the fire. Again, they are not responsible for the personal property, possessions or improvements made by the unit owner.
The “Must Have” Excel Recommendation:
Condo Board Responsibility and Peace of Mind
As a penalty, the deductible (or allowance in the example above) can be assigned to the teenage son, the negligent unit owner in the analogy.
In order to assign deductibles to negligent owners, Excel Insurance Group highly recommends that the condominium corporation by-laws be amended to include a clause that specifically directs the responsibility of the insurance deductible to a negligent unit owner.
Many by-laws are adopting this approach and, in a market that evolves quickly, the approach enables condo corporations to embrace a higher deductible. Higher deductibles typically results in lower premiums. This is another major upside.
From a claims frequency standpoint, this type of clause also helps individual unit owners, who now know they would be responsible to cover a deductible, act with a little more responsibility and care.
In addition, many condominium unit owners’ policies also contain coverage for loss assessments and/or difference in deductibles, thus providing greater protection under their personal insurance for this assessment. For help with how to address this issue within your condo association, crafting the clause or simply to have a professional review your by-laws, reach out to me.
Quick Summary:
Unit Owner and Board Responsibility
Hopefully this article helps to clear up misunderstandings with respect to where a condominium corporation’s insurance policy responds in claims situations and how individual unit owners can be held responsible for their negligence.
In closing, I hope the recommendation that your condo association ensures its by-laws maintain a deductible clause has become something you ensure your board makes a priority, if not presently included within your by-laws.
