The world of insurance, although not necessarily simple, is usually cut and dry, not the stuff of excitement. While condos and co-ops have insurance for the common areas like roofs, stairways, lobbies and often the apartments as well, the practice of individual unit owners buying homeowners' insurance is more and more common.

Developments and units can be insured, among other things, for fire, theft, natural disaster and water damage. Most boards' dealings with insurance companies, including its agents, brokers, claim examiners and underwriters, are routine and predictable.

"Water damage, kitchen fires, pipes breaking, those are the ones we see regularly," said David Spiro of Spiro Risk Management in Valley Stream. However, every once in awhile, a co-op board or condo association must be prepared to deal with out-of-the-ordinary claims that involve more than just the predictable insurance issues.

Discrimination Coverage

Bruce Cholst, an attorney with the law firm of Rosen & Livingston in Manhattan, for example, tells of a case involving a condo and the "right of first refusal," or the right to determine who can live in the development. One person who had been turned down by a condo that he represented charged racial discrimination in a complaint before the New York City Human Rights Commission.

"We filed a claim with the insurance company, asking them to provide us with a defense and coverage," he says. "There are two aspects to a directors' and officers' liability claim. Will the insurance company provide a defense free of charge and provide counsel free of claim, and if a case is tried and it turns out badly, will they cover any judgment, defense [legal costs] and indemnity [for the individual board members]?

"There's a famous and very basic legal principle that the duty to defend is much greater than the duty to indemnify," he says. In this case, the insurance carrier said it had no obligation to either defend the co-op or cover it financially because discrimination wasn't part of its policy.

After Cholst "dissected the language" in the policy and found that issues other than discrimination were involved in the case, the company retracted its original denial and offered a legal defense with reservation.

Cholst says this basically meant, "OK, you're right, the verbiage in the charge before the Human Rights Commission goes beyond simple discrimination, and you are entitled to a defense. We will appoint counsel and pay for his billing. But we reserve to the right to disclaim any obligation to cover any damages the commission may award in the event of an adverse determination."

Cholst and the co-op accepted the defense, and decided to fight the battle over coverage later. In the end, the Human Rights Commission exonerated the board, and coverage wasn't an issue. "The insurance company paid my defense bills," Cholst concluded.

Frozen Pipes—Who's Responsible?

Andy Anderson of the New Jersey-based Anderson Insurance Agency, with offices in Haven Beach and Manahawkin, New Jersey, once dealt with a condominium association in which one unit owner on the first floor, an attorney, didn't leave adequate heat on during the winter months. The pipes froze and burst, and the water ran for a long period of time because no one was checking on the apartment. When the burst pipe was discovered, his insurance company denied coverage because the unit owner failed to maintain adequate heat.

"The unit owner was a rather elderly attorney who didn't have much fight in him," recalls Anderson, "so his son, who was also an attorney, decided to take up dad's plight and pursue payment. The board of directors of the association did not want to put a claim in under their policy because they saw this as a problem created by, and isolated to, the unit owner."

With the association refusing to file a claim, repairs were not made. When the summer came around, mold started to form. "Then," says Anderson, "everyone decided it was in their best interest to get the moldy sheetrock and cabinets out of the unit so everyone wasn't affected."

The board decided to submit a claim under the association's policy, "but only with the idea that it should pay no more than what they should pay for [damage to] the common property," says Anderson. The owner, however, wanted the association to pay for everything.

"At the end of the day," says Anderson, who is also the former president of the Professional Insurance Agents Association of New Jersey, "the association only took care of the common property. Heavy reliance was put on the master deed and bylaws. In this case, the master deed and bylaws were well written. They did a good job in defining what was common property and what was unit property."

The total loss, says Anderson, was $120,000. The association's policy paid $20,000, and the rest was "taken on the chin" by the unit owner. One of the lessons, he says, is that board members need to have a good understanding of what the founding documents say so that the association's liability in this kind of claim is clear.

Complicated Legal Questions

The aforementioned David Spiro, who is a former board member of the Insurance Agents and Brokers of New York, told The Cooperatorof two unusual insurance cases. The first involved a unit owner from a Manhattan high-rise co-op who jumped to his death from the top floor.

In doing so, the unit owner crashed through the awning of an owner on a lower floor and landed on that apartment's terrace—this was one of those buildings where the upper floors were set back. "It was a messy situation, to say the least," says Spiro. So was deemed responsible for this 'mess?'

"As it turns out," he says, "the [deceased] unit owner's insurance company paid for the cleanup and the damage."

The case seems simple, but Spiro speculates as to what could have happened if the situation was complicated further. "What if the family of the jumper feels as if it was not a suicide or could have been prevented?" he asks. "What if it was a railing that was loose, or faulty maintenance? Or possibly, the directors were not making the necessary precautions and not managing the building well?"

These potential arguments are far-fetched, he admits—but lawsuits today can stretch almost anything. Any number of factors can therefore complicate what one might guess to be an easily settled claim.

Spiro also describes a case involving a Manhattan condo building that had been poorly constructed. Water was getting into the structure and mold was being formed on the inside walls. Unit owners were getting sick.

And, to make things more complicated, the building's insurance policy had an exclusion for mold - a very common situation (other common exclusions include earthquake coverage or wind coverage).

Spiro, who was not the insurer in this case but a witness, said, "The building denied responsibility. The building's policy and the unit owner's policy both had mold exclusions, so the owner would have to go after the builder or the architect."

Washing Machine Woes

Ralph Perfetto is both the president of the Brooklyn Co-op and Condo Coalition and an ombudsman for the New York City Public Advocate's Office. He describes an out-the-ordinary case that is still in question involving a Staten Island condo where a unit owner had holes behind a washing machine where water was coming through. The management, said Perfetto, sued the individual unit owner for damages—but would not let anyone else inspect the premises.

What observers suspected, said Perfetto, is that the management's insurance company may have already paid for the damages, and that by suing the tenant, management in effect wanted to be "paid" twice for the same problem.

"We [the Public Advocate's Office] are now investigating the situation," he said.

While there is no surefire way to avoid all of these out-of-the-ordinary unpleasant insurance situations, one remedy that may be effective is the one proposed by Spiro—for individual unit owners to have homeowner's insurance. This is becoming more and more common, and may well take some of the worries out of condo and co-op insurance for individual unit owners.

Remember, many co-op and condo boards' insurance policies cover the common areas only. Individual homeowner's insurance is recommended by agents and brokers, and will make condo and co-op owners more secure.

In dealing with insurance claims, boards, once again, should be sure to know what's in a development's founding documents and, of course, the association's insurance policy.

Raanan Geberer is a freelance writer and editor living in New York City.