Deciphering Property Damage Insurance in Condominiums: A Bullet List of the Basics

Deciphering Property Damage Insurance in Condominiums: A Bullet List of the Basics

By: Brendan Bunn

A dishwasher in an upper-level condo unit breaks suddenly and without warning -- and water floods the kitchen floor and then cascades to the two units immediately below causing damage to ceilings, floors and furniture.  What to do?  Call a remediation company?  Call the property manager and demand that the association make a claim on the condo master policy?  Call the unit owner’s insurance carrier?  After all it was their dishwasher that broke.

Too often, this situation results in the condo association denying all responsibility and telling all the owners involved to call their own carriers -- and then hope for the best.  In fact, many associations believe that if a loss emanates from a unit component, this automatically means that the association is uninvolved.  Wrong.  In fact, in most situations involving a casualty loss (a sudden impactful event, like a burst pipe or broken hose), the condo association is necessarily involved – both because of provisions in the bylaws and the way insurance works in most condominium communities. 

Here is a bullet list of some of the basic rules for dealing with sudden damage events in a condominium setting, at least in most condominiums:

• Association Master Policy Covers Entire Condominium.  In most condominiums, the Bylaws require that the association purchase a “master” all-risk casualty policy that covers the entire condominium in case of “casualty” losses – both units and common elements. For most casualty losses (sudden events such as fires or burst pipes), the master policy is actually primary, even if the loss emanates from one unit – and even if that unit owner was culpable or negligent in causing the loss.
• Is This Arrangement Fair?  Some boards and managers find this arrangement unfair. After all, if a resident puts something improper down their sink or fails to properly check their washing machine hose, why should there be a claim on the association policy?  While it might seem counter-intuitive, we must remember that condo unit owners pay for the master policy through their assessments and that policy almost always covers the units, as well as common elements. Thus, they should therefore enjoy the benefits of that coverage. As for a “culpable” or misbehaving unit owner who causes the loss, they often may be held responsible for the deductible on the master policy (which can be considerable in today’s market) -- but they remain entitled to the basic coverage provided by the master policy.
• Unit Insurance Policy Also Implicated.  Keep in mind that most master condominium policies cover unit restoration only to builder grade level and do not cover upgrades or improvements made by the owner. Also, most master policies do not cover losses to personal property (furniture, clothes, computers) or relocation expenses if an owner must move out of the unit during repairs. These items are usually covered by a homeowner’s condominium unit (HO6) insurance policy, rather than the master policy.  Please note that for DC condominiums, DC law requires each unit owner to carry a unit insurance policy is required by DC law – and it is often required by more modern condominium bylaws.
• Bylaws Usually Require Associations to Supervise Repairs.  Under most modern condo documents, when a casualty loss occurs, the association is required to arrange for repair/restoration of the damaged units and common areas (or to reimburse an owner if the bylaws require them to do so). Either way, the bylaws usually contemplate that a claim will be made on the master policy, that should provide most of the funds for the repairs, with an adjuster from the carrier assisting in making estimates for the restoration work. However, if an association chooses not to make a claim on the master, this does not relieve the association of its responsibility for repairs (often referred to as the association “self-insuring” for a particular loss event).
• Bear in mind that because a unit owner’s HO6 policy covers unit upgrades and improvements, the HO6 and master policy carriers may have to work together to properly adjust the claims so the unit can be fully restored.
• Dealing with the Master Policy Deductible.  All insurance policies have deductibles, and a master condominium policy is no exception.  In fact, many master policies have deductibles ranging from $10K to $50K due to today’s difficult insurance market.  Under many sets of bylaws, an association may be forced to “eat” the master deductible for insured casualty losses. However, under some bylaws, an association may be able to assess the master deductible against a unit if that owner was negligent and caused the loss (e.g., smoking in bed or failing to properly maintain their unit). Whether the master deductible can be assessed against an owner usually depends on the bylaws. However, under DC law, when the bylaws do not address responsibility for the deductible then if the cause of damage originates from a unit, that unit’s owner is responsible for master policy deductible up to $5,000.  Meanwhile, many unit HO6 policies have an endorsement that covers the owner for their potential liability for the master deductible – so associations should remind owners to make sure they have enough coverage for this potential liability.
• Insurance Only Applies to Casualty Losses – Not “Slow Drip” Maintenance Issues.  There is often confusion as to when a condominium association must become involved in a water damage event that starts in a unit. The general rule is that when there is “sudden” unexpected event – a “casualty loss” – the bylaws generally require the association to become involved through making a claim on the master policy and making repairs to the damaged units/common elements. But if the damage is created by a non-casualty situation – like a slow leak due to a caulking failure or a drip-leak from a dishwasher that occurs over time – this is typically not a casualty loss, and insurance is not implicated. In this circumstance, an association can look to its bylaws to determine who is responsible for the damage – and it is often an owner who was supposed to maintain the leaky component.

As usual in condominiums, one must first consult with the particular bylaws to chart a roadmap in addressing a casualty loss. Hopefully, in addition to the bylaws, this bullet list can be a good starting point for both understanding how insurance works in condominiums and how to respond when a water or fire event makes a mess in a condominium setting. And educating homeowners about how their HO6 policies work in conjunction with the master policy can help as well.