While there are many similarities between co-ops and condos, are the two very different when it comes to things like insurance and liability?

The answer is both yes and no. There are similarities, but some significant differences as well. One such difference, for example, is simply the kind of ownership residents have over their living spaces. In a co-op, shareholders are essentially stockholders in a private corporation whose shares entitle them to live in the corporate-owned building. In a condo, unit owners are owners of real property that just happens to be stacked on top of other real property, rather than a freestanding development.

Differences and Commonalities

Is it possible then that the ramifications of lawsuits and insurance claims against co-op and condo buildings can differ significantly? Well, all of this might sound like a lot of legal mumbo jumbo, but you don’t need a law degree to comprehend it; it’s actually pretty easy.

Two laws in New York State basically govern the liability assumed by co-op shareholders and condo unit owners—the Business Corporation Law or BCL, and the Condominium Act. So it’s important to understand why knowing the hows and whys of insurance and liability would even be of importance.

To illustrate what we’re talking about, let’s say it’s cold and icy in the middle of winter and Mrs. Jones slips on some ice on your condo building’s sidewalk and falls, breaking her hip. Although the building employs a maintenance staff member to clear snow and ice off the sidewalks, perhaps he or she missed a spot. As a result, the injured Mrs. Jones sues your building because the ice should have been taken care of.

R. Bruce Freeman, a partner at Woehling & Freeman, LLP in Westfield, New Jersey says a board of directors typically has a general liability policy and a package of insurance coverage to support its decisions, whatever they may be. “The board could be sued for not properly managing the entity,” says Freeman, “but the board would be covered by a general liability insurance policy. The standard package of insurance coverage includes property loss—which is a risk to the property; general liability for slips and falls, and directors and officers liability insurance which covers the board members and the association for what is known as wrongful acts.”

But what if Mrs. Jones’ accident happened in the parking lot of a cooperative; would the shareholders worry about any financial impact? “This also applies in a co-op, although there is no statutory explanation of that,” says Freeman. “The shareholders also can’t be sued.”

To protect both entities, co-ops and condos need to be covered under a general liability policy, and a slip-and-fall would be referred to under this policy. Liability covers the co-op or condo if it’s named in a lawsuit, but the amount of coverage generally required for each building under ‘liability’ can differ.

According to industry professionals, since a condo association doesn’t carry an underlying mortgage, the bare minimum coverages for a condo building are property and liability. Property insurance covers the building in the event of a claim, and liability covers the building if it’s named in a lawsuit. Liability is particularly important since a condo association may be held responsible for what happens in its common areas. If someone slips and falls, or is mugged or assaulted in those spaces, the board can be sued for negligence or mismanagement.

Risks for Residents

But let’s revisit the case of Mrs. Jones and her unfortunate slip-and-fall. Should the unit owners fly into a monetary panic? Will the unit owners have to pay for part or all of Mrs. Jones’ settlement?

According to Freeman, the short answer is no. The Condominium Act says that a unit owner shall have no personal liability for any damages caused by the association or in the connection with the use of the common elements. “Unit owners are not liable,” says Freeman.

In addition to the Condominium Act, there are also legal precedents that protect condo unit owners from having to pay big settlements out-of-pocket. The 2004 case of Pekelnaya v. Allyn is probably the most recent and most influential. In a nutshell, the case came to trial after a section of chain-link fence blew off of the roof of a condo on 106th Street in Manhattan and struck two men passing by on the sidewalk below. The men—a father and son—sued the condo, claiming that they had both suffered severe head injuries as a result of the mishap, and that the condo was responsible for it. The condo’s insurance policy covered about $2 million in damages, but the plaintiffs claimed that figure was insufficient—they decided to go after each of the unit owners in the building to cover the rest of the judgment.

One can easily see how such a move could be disastrous for a small building with owners on fixed incomes, or owners with only modest insurance coverage—individual residents could be on the hook for tens of thousands of dollars to make up for what their building’s umbrella policy couldn’t cover.

But that’s not what happened. Despite a ruling for the plaintiffs in the initial court proceedings, the decision was reversed by a higher court in October of 2005. In the end, the court ruled that the condominium board in the Pekelnaya case had obtained substantial insurance coverage, and the although the law affords a means of recovery, it need not guarantee that the defendant will have sufficient resources to provide full compensation for any and all losses sustained by an injured person.

According to Peter James Johnson, Jr., president of the Manhattan-based law firm of Leahey & Johnson PC and a lead defense counsel in the Pekelnaya case, “This case is especially important because in it, the court addressed the public policy issue of whether condo unit owners should be financially liable, just because their building’s board of managers has an inadequate amount of insurance coverage.”

So although individuals typically can’t be sued in a general liability case thanks to the Condominium Act and the Pekelnaya reversal, that’s not the end of the story. Individual shareholders and unit owners can be sued if they are on the board of directors of their building. Although board members volunteer their time, there is always the possibility they can make a mistake during the course of their term on the board—and occasionally, those mistakes can lead to litigation.

“There are so many more directors and officers’ lawsuits than before,” says Alan Rappaport, a senior director at Dewitt Stern Group in Manhattan. “A new insurance product is the independent directors and officers’ policy, so you can have your own personal D&O policy to pick up where the co-op or condo board’s policy may have failed.”

While a building’s own D&O coverage protects the board as a decision-making unit, individual D&O policies shield each board member themselves from personal liability and financial loss arising out of wrongful acts committed—or allegedly committed—in their capacity as corporate officers and/or directors.

According to Bruce Cholst, an attorney and a partner with the Manhattan-based law firm of Rosen & Livingston, “It’s absolutely imperative for condo associations to evaluate the scope of their liability coverage and obtain appropriate umbrella protection. Condo boards might also consider the advisability of amending their declarations and bylaws to require owners to maintain homeowners insurance.”

Protecting Your Own

It’s also important that building residents—whether in a co-op or condo—have a homeowner’s policy to protect their own items. Unit owners might not be able to be sued individually for damages, but if the building fails to have enough insurance protection, the unit owners can be assessed to recoup the difference.

“For example, let’s say the building is insured with a $1 million policy, but the building is sued for $2 million,” says Rappaport. “The insurance pays the one million, and now the other million must be paid for by someone. Each unit owner could be assessed their portion. There is such a thing as assessment insurance, but it’s minimal. The directors and officers need to do what’s right for the building as far as insurance is concerned [and make sure the building has enough.]”

Although some insurance products have been created as a result of certain events, cases such as Mrs. Jones have not shaped how buildings and their residents are held responsible for injuries and thefts on their property.

“The vast majority of most liability cases are limited to dealing with the relationships between the apartment and unit owner and the entity,” says Freeman.

If the shareholders and unit owners are unsure if their co-op or condo has enough insurance, or the right kind of coverage, it is permissible to request to see the documents.

“Yes, there’s no question that you can see these documents—you paid for them,” says Freeman. “These coverages and policies are paid out of the maintenance fees, and clearly shareholders and unit owners have a right to see what they are. They have no right to change them, but you have a right to see even if you’re are not on the board. When you purchase a unit, you are going to want to make sure there is adequate coverage for the association as a whole.”

The bottom line in insurance is that it’s not about differences in co-ops and condominiums…it’s simply about having enough of the right kind of insurance for the right kind of protection. n

Lisa Iannucci is a freelance writer living in Poughkeepsie, New York. Additional research for this article by Associate Editor Hannah Fons.