SUBROGATION. And All That Jazz

Transcription

1 SUBROGATION And All That Jazz

2 Subrogating Losses in Common Interest Communities Brad W. Breslau Cozen O'Connor th Street, Suite 3100 Denver, CO (720) (toll free) (720) (fax)

3 Condominium Ownership of a condominium unit is a hybrid form of interest in real estate, entitling an owner to both the exclusive ownership and possession of a unit and an undivided interest as a tenant in common with the other unit owners in the common areas. It is a creature of statute.

4 Cooperative A cooperative is a common interest community in which the real property is owned by an association, each member of which is entitled by virtue of such member s ownership interest in the association to exclusive possession of a unit.

5 Documents Affecting the Condominium Project Articles of Incorporation. By-Laws. Declaration or Master Deed. Rules and Regulations.

6 Insurance Coverage for Property Losses Section Insurance of UCIOA (1994) provides, in pertinent part, with respect to the requirement for the Unit Owners Association to purchase property insurance: (a) Commencing not later than the time of the first conveyance of a unit to a person other than a declarant, the association shall maintain, to the extent reasonable available: (1) Property insurance on the common elements and, in a planned community, also on property that must become common elements, insuring against all risk of direct physical loss commonly insured against, or in the case of a conversion building, against fire, and extended coverage perils. There is no requirement in UCIOA that the Unit Owner purchase insurance.

7 Primacy of Insurance Coverage If multiple policies provide insurance coverage, which policy is primary with respect to the damaged real or personal property? UCIOA (1994); UCA (1980). Declaration or Master Deed. Insurance policy.

8 Definition of Common Elements The definition of a common element is contained in Section Definitions of UCIOA (1994): In the declaration and by-laws (Section 3-106), unless specifically provided otherwise or the context otherwise requires, and in this [Act]: (4) Common elements means (i) in the case of (A) a condominium or cooperative, all portions of the common interest community other than the units; and (B) a planned community, any real estate within a planned community which is owned or leased by the association, other than a unit; and (ii) in all common interest communities, any other interests in real estate of the benefit of unit owners which are subject to the declaration.

9 Definition of A Unit The definition of a Unit is contained in Section Definitions of UCIOA (1994): A unit is defined as a physical portion of the common interest community designated for separate ownership or occupancy, the boundaries of which are described pursuant to Section 2-105(a)(5)....

10 Where Does the Unit End and the Common Elements Begin? UCIOA (1994) Section Unit Boundaries is instructive: Except as provided by the declaration: 1. If walls, floors, or ceilings are designated as boundaries of a unit, all lath, furring, wallboard, plasterboard, plaster, paneling, tiles, wallpaper, paint, finished flooring, and any other materials constituting any part of the finished surfaces thereof are a part of the unit, and all other portions of the walls, floors, or ceilings are a part of the common elements. 2. If any chute, flue, duct, wire, conduit, bearing wall, bearing column, or any other fixture lies partially within and partially outside the designated boundaries of a unit, any portion thereof serving only that unit is a limited common element allocated solely to that unit, and any portion thereof serving more than one unit or any portion of the common elements is a part of the common elements. 3. Subject to paragraph (2), all spaces, interior partitions, and other fixtures and improvements within the boundaries of a unit are a part of the unit. 4. Any shutters, awnings, window boxes, doorsteps, stoops, porches, balconies, patios, and all exterior doors and windows or other fixtures designed to serve a single unit, but located outside the unit's boundaries, are limited common elements allocated exclusively to that unit.

11 Table 1 Allocation of Repair and Insurance Responsibilities Between Unit Owner and Unit Owners Association Item Walls, floors and ceiling Lath, furring, wallboard, plasterboard, plaster, paneling, tiles, wallpaper, paint and finished flooring and any other materials constituting any part of the finished surfaces thereof All other portions of the walls, floors or ceilings (other than immediately above) Any chute, flue, duct wire, conduit, bearing wall, bearing column, or other fixtures lying partially within and partially outside the designated boundaries of the unit serving only that unit Any chute, flue, duct wire, conduit, bearing wall, bearing column, or other fixtures lying partially within and partially outside the designated boundaries of the unit serving more than one unit or any portion of the common elements All spaces, interior partitions, and other fixtures and improvements within the boundaries of a unit All shutters, awnings, window boxes, doorsteps, stoops, porches, balconies, patios and exterior doors and windows or other fixtures designed to serve a single unit, but located outside the unit s boundaries Unit Owner Yes Yes No Yes No Yes Yes Homeowner s Association No No Yes No Yes No No

12 The differentiation between components constituting common elements and components which are part of the unit is particularly important in light of Section 3-107(a), which makes the association responsible for upkeep of common elements and each unit owner individually responsible for upkeep of his unit. The differentiation between unit components and common element components may or may not be important for insurance purposes under the Act. While the common elements in a project must always be insured, the units themselves need not be insured by the Association unless the project contains units divided by horizontal boundaries. See Section 3-113(a) and (b). In a "high-rise" configuration, however, Section 3-113(a) contemplates that both will normally be insured by the association (exclusive of improvements and betterments in individual units) and that the cost of such insurance will be a common expense. That common expense may be allocated, however, on the basis of risk if the declaration so requires. See Section 3-115(c)(3).

13 Primacy of Insurance Coverage for Property Losses Assuming a loss, the issue next becomes which policy or policies, should respond to the loss. Section Insurance of UCIOA (1994) also addresses also the primacy issue: (d) Insurance polices carried pursuant to subsections (a) and (b) must provide that: (1) each unit owner is an insured person under the policy with respect to liability arising out of his interest in the common elements or membership in the association; (2) the insurer waives its right to subrogation under the policy against any unit owner or member of his household; (3) no act or omission by any unit owner, unless acting within the scope of his authority on behalf of the association, will void the policy or be a condition to recovery under the policy; and (4) if at the time of a loss under the policy, there is other insurance in the name of a unit owner covering the same risk covered by the policy, the association s policy provided primary insurance.

14 Comment 2. to Section Insurance of UCIOA (1994) provides: 2. Subsection (b) represents a significant departure from the present law as to condominiums and planned communities in virtually all States by requiring that the association obtain and maintain property insurance on both the common elements and the units within buildings with "stacked" units. See Comment 3. While it has been common practice in many parts of the country (either by custom or as mandated by statute) for associations to maintain property insurance on the common elements, it has generally not been the practice for the property insurance policy to cover individual units as well. However, given the great interdependence of the unit owners in the stacked unit situation, mandating property insurance for the entire building is the preferable approach. Moreover, such an approach will greatly simplify claims procedures, particularly where both common elements and portions of a unit have been destroyed. If common elements and units are insured separately, the insurers could be involved in disputes as to the coverage provided by each policy.

15 Comment 3. to Section Insurance of UCIOA (1994) provides: 3. The distinction between what is a common element and what is a unit with respect to the insurance coverage required by this section is complex. The definitions of common elements and a unit in Section 1-103(4) and (31) are not sufficient for this purpose. To determine the distinction between the common elements and units, one must refer first to the declaration's section on unit boundaries. That section will define the unit boundaries. If the declaration fails to do so, and if ceilings, walls, or floors are boundaries, the provisions of Section apply. * * * Put simply, if any item is installed, constructed, repaired, or replaced by the declarant or his successor in connection with the original sale of a stacked unit, the item is insured by the association. Clearly, this does not include items of personal property easily movable within the unit or easily removable from the unit (whether or not deemed a fixture under state law), such as a vase, table, or other furnishings. If improvements or betterments are made to a unit by a unit owner, they will typically be covered under the owner's insurance policy, even if the unit itself is generally covered by the association's policy, since most policies exclude "improvements or betterments made by the owner," and the Act does not mandate improvements and betterments coverage. The subject is a complex one, and careful attention should be paid to it by the association's insurance advisor.

16 Based upon the language of Section 3-113(4) Insurance of UCIOA (1994), if duplicative coverage exists, the Unit Owners Association policy is primary as to all losses where duplicative coverage exists. Assuming that the declaration does not alter the provisions of UCIOA (1994), the unit owner would typically have the responsibility to insure his/her Unit and the Unit Owners Association would have the responsibility for insuring the common elements.

17 Who Can You Subrogate Against? Unit Owner Unit Owners Association Contractor Declarant/Affiliate of Declarant/Dealer Management Company Seller of Unit Third Party Product Manufacturers

18 Unit Owner Responsible for the upkeep, maintenance, repair and replacement of his or her Unit. May make improvements or alterations to his unit that do not impair the structural integrity of mechanical systems or lessen the support of any portion of the common interest community. Not liable, solely by reason of being a unit owner, for an injury or damage arising out of he condition or use of the common elements. An action alleging a wrong done by the association, including an action arising out of the condition or use of the common elements, may be maintained only against the Unit Owners Association and not against any Unit Owners. Responsibility for tenant s conduct. Insurance policies issued to the association shall contain a waiver of subrogation against any unit owner or member of his or her household.

19 Unit Owners Association Unit Owners Association is responsible for upkeep, maintenance, repair and replacement of the general and limited common elements. Unit Owners Association may regulate the use, maintenance, repair, replacement and modification of common elements.

20 Contractor Contractors can be liable to the Unit Owner and the Unit Owners Association for construction defects on theories of breach of contract, negligence, breach of implied warranty and breach of express warranties. Contractors can also be liable for service work performed in connection with repair or maintenance of electrical, plumbing and heating, ventilation and air conditioning systems. Claims against contractors and design professionals are subject to statutes of repose in many jurisdictions.

21 Declarant/Affiliate of Declarant/Dealer Declarant is defined as any person or group of persons acting in concert who (i) as part of a common promotional plan, offers to dispose of his or its interest in a unit not previously disposed of or (ii) reserves or succeeds to any special declarant right [, or (iii) applies for registration of a common interest community under Article 5]. Affiliate of Declarant is defined as any person who controls, is controlled by, or is under common control with a declarant. Dealer is defined as a person in the business of selling units for his own account.

22 Section of UCIOA (1994) provides that a declarant impliedly warrants as follows: (a) A declarant and any dealer warrants that a unit will be in at least as good condition at the earlier of the time of the conveyance or delivery of possession as it was at the time of contracting, reasonable wear and tear excepted. (b) A declarant and any dealer impliedly warrants that a unit and the common elements in the common interest community are suitable for the ordinary uses of real estate of its type and that any improvements made or contracted for by him, or made by any person before the creation of the common interest community, will be: (1) free from defective materials; and (2) constructed in accordance with applicable law, according to sound engineering and construction standards, and in a workmanlike manner. that the time (c) In addition, a declarant and any dealer warrants to a purchaser of a unit may be used for residential use that an existing use, continuation of which is contemplated by the parties, does not violate applicable law at the earlier of of conveyance or delivery of possession. (d) Warranties imposed by this section may be excluded or modified as specified in Section an declarant. (e) For purposes of this section, improvements made or contracted for by affiliate of a declarant (Section 1-103(1)) are made or contracted for by the (f) Any conveyance of a unit transfers to the purchaser all of the declarant's implied warranties of quality.

23 When a declarant is liable to the Unit Owners Association for a condition arising out of the condition or use of the common elements, the declarant is also liable for all expenses of litigation, including reasonable attorney s fees, incurred by the association. (Section 3-311(b) of UCIOA (1994)).

24 Property Management Company Often, a Unit Owners Association will choose to have a professional property management company manage the condominium property on a day to day basis and delegate responsibilities: Selection of insurance coverage. Handling of insurance claims. Collection of common interest assessments. Upkeep, maintenance, repair and replacement of common elements. Beware of property management contract.

25 Seller of Unit Section of UCIOA (1994) specifically provides that express warranties made by a seller to a purchaser are created in the following circumstances: (1) any affirmation of fact or promise which relates to the unit, its use, or rights appurtenant thereto, area improvements to the common interest community that would directly benefit the unit, or the right to use or have the benefit of facilities not located in the common interest community, creates an express warranty that the unit and related rights and uses will conform to the affirmation or promise; (2) any model or description of the physical characteristics of the common interest community, including plans and specifications of or for improvements, creates an express warranty that the common interest community will conform to the model or description; (3) any description of the quantity or extent of the real estate comprising the common interest community, including plats or surveys, creates an express warranty that the common interest community will conform to the description, subject to customary tolerances; and (4) a provision that a purchaser may put a unit only to a specified use is an express warranty that the specified use is lawful.

26 Section 4-113(a) of UCIOA (1994) provides that [n]either formal words, such as "warranty" or "guarantee," nor a specific intention to make a warranty, are necessary to create an express warranty of quality, but a statement purporting to be merely an opinion or commendation of the real estate or its value does not create a warranty. Section 4-113(c) of UCIOA (1994) provides that [a]ny conveyance of a unit transfers to the purchaser all express warranties of quality made by previous sellers.

27 Third Party Tenants. Invitees. Owners of adjacent properties. Occupants of adjacent properties. Utility Companies.

28 Product Manufacturers Electrical appliances Natural gas appliances Materials that may spontaneously combust Plumbing products and materials etc.

29 Summary Determine the identity and character of the damaged property. Determine the insurance coverage available to both the Unit Owner and the Unit Owners Association for that damaged property. Identify potentially responsible parties. Analyze legal barriers to pursuing subrogation.

30 Subrogating Losses in Common Interest Communities Brad W. Breslau Cozen O'Connor th Street, Suite 3100 Denver, CO (720) (toll free) (720) (fax)