Condo Claim Denial for Damage Caused by Leaking Appliance

VU Faculty

Abstract Condo association bylaws say that any damage arising from a unit owner's fixtures or appliances make him or her liable for damage to the common areas. Our insured's appliance malfunctioned and flooded a common area and the unit below. The adjuster says there is no coverage because the insured was not negligent and the appliance just broke.

"Condominium association has in its by-laws that any damage caused by a unit owner or by the unit owner's fixtures et al. will make him liable for damage for the common areas damaged. The unit owner's insurance carrier states that there was no negligence on the part of the unit owner, the appliance just broke and flooded some of the common area and the unit below. Seems to be some form of a contractual agreement here as the unit owner signed the master deed and the by-laws. By the way the damage to the common area was below the association policy deductible."

We don't know how or why the appliance failed, causing water damage, so it's impossible to say whether the unit owner was "negligent" or not. Keep in mind, too, that the HO-6 covers "legal liability," not just negligence and contractual liability coverage (by way of an exception to an exclusoin) is very broad. Below are some thoughts from the VU faculty.

The key word is “caused.”  If the insurer is right, it was not caused by the unit owner and the Association needs to fix the property.

The HO-6 excludes contractual liability except contracts that directly relate to the ownership, maintenance or use of an “insured location” or liability assumed prior to an occurrence. It sounds like the insured’s liability is based on a contract, not negligence. I think the carrier owes the payment.

The condo association should characterize this as an assessment as the HO-6 will pay those per the additional coverage below:

7. Loss Assessment 
   We will pay up to $1,000 for your share of  
   loss assessment charged during the policy  
   period against you, as owner or tenant of  
   the "residence premises", by a corporation
   or association of property owners. The
   assessment must be made as a result of
   direct loss to property, owned by all
   members collectively, of the type that
   would be covered by this policy if owned by
   you, caused by a Peril Insured Against under
   Coverage A,

Many associations have a provision in their bylaws that make the unit-owner who had water escape responsible for damage it causes, authorizing “assessments” for the damage. The ISO policy currently reads that only $1,000 of Loss Assessment coverage is available for assessments related to the Association’s deductible, but ISO is removing that limitation in their 2011 revision to the Homeowners program. 

The insured can also argue that the other property is covered under Coverage A, which includes:

c. Property which is your insurance
   responsibility under a corporation or
   association of property owners agreement;

If the association does not want to characterize the repair costs as an “assessment”, the insured can argue that they’re contractually liable, even if they’re not negligent and liable in tort (which is what the insurance company is maintaining). The exclusion reads:

Coverage E does not apply to:
1. Liability:
   a. For any loss assessment charged against
      you as a member of an association,
      corporation or community of property
      owners, except as provided in D. Loss
      Assessment under Section II –
      Additional Coverages;
   b. Under any contract or agreement entered
      into by an "insured". However, this
      exclusion does not apply to written
      contracts:
      (1) That directly relate to the ownership,
          maintenance or use of an "insured
          location"; or
      (2) Where the liability of others is
          assumed by you prior to an
          "occurrence";
      unless excluded in a. above or
      elsewhere in this policy; 

The policy still excludes damage to property “owned” by an insured, so the company can still argue that the common areas were “owned” property and consequently not covered. 

The insured may also find coverage under the $1,000 Damage to Property of Others Additional Coverage as negligence isn’t required, only causation. It also excludes damage to owned property, though.

Contractual liability is a form of "legal liability" which Section II covers. Legal liability is broader than just "negligence."

I'm not clear on the question, but it seems totally within the insurance company's right to refuse to settle this liability claim unless the association can prove negligence. Liability insurance is a lawsuit coverage. Insurance companies often settle cases out of court when they think it's in their best interest, but they're not obligated to do so. Assuming that the loss is covered in the first place, the insurance company is within its rights to refuse voluntary settlement and require that the other party prove its case in court. Not knowing all the facts I'd tend to side with the insurance company in this decision.

What do you mean the appliance just broke? Did it break because it was not maintained? Even if it was due to wear and tear, isn't it the owner’s responsibility to make sure that the appliance has regular maintenance? Failing to repair and replace worn out parts that cause the appliance to leak and then damage property of others would make them legally liable to compensate the owner of the property.

The liability section of the policy will pay for damage to property of others arising out of an occurrence. Unless the carrier can show that a specific exclusion eliminates coverage they don't really have a reason to just deny. In addition, ISO's HO policy has an exclusion for contractual liability, however, there is an exception for written contracts which relate to the ownership of an "insured location."

The old “We don’t think he was negligent” ploy. The policy responds to “legal liability.” Negligence is just one of many ways someone can be legally liable. Tell the adjuster to read the exception to the contractual liability exclusion. It clearly covers his liability under the condo CC&Rs. In addition, there is some coverage under Damage to Property of Others. Aside from that, the exclusion for damage to property the insured owns is disturbing because he has an ownership interest in the common areas. Hopefully he would have coverage at least for the interest he doesn't have but this is an interesting issue to consider.

The bylaws make him contractually liable. The policy cover contracts made with regard to the premises and ANY nonbusiness contract effected prior to loss. Don’t people read policies anymore?

Last Updated:  August 27, 2010

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