Prepare for the unexpected...

Why do cooperatives and their shareholders need insurance? How do the insurance coverage and the reimbursement and repair provisions of the proprietary lease work concerning damage and liability claims? And why should board members review these proprietary lease provisions with their cooperative’s counsel and insurance  professionals to improve the insurance provisions of the proprietary lease? These are important questions facing all board members and cooperative shareholders.

Why do cooperatives have insurance? The proprietary lease has two paragraphs that deal with the obligation to repair the building – Paragraphs 2 and 18. The first concerns the landlord’s obligation to repair, and the second discusses the tenant’s obligation to repair.

What happens when damage is caused by a catastrophe that is usually covered by insurance? There is another provision in the proprietary lease that deals with damage to the apartment or the building caused by such events. That is usually found in Paragraph 4 and states that if damage to the building or apartments is caused by a catastrophe that is usually covered by insurance, then the cooperative is obligated to repair the building and those portions of the apartment that are not the specific obligation of the tenant to repair. Boards need to protect themselves against the cost and expense of repairing their building and portions of apartments in the building in the event there is a fire, flood, or other catastrophe that is covered by multi-peril insurance policies. Protection comes from having the proper insurance in amounts needed to perform the repairs. In the absence of appropriate insurance, the board exposes the shareholders to enormous costs to rebuild or repair.

Boards should obtain insurance policies that contain a “waiver of subrogation” clause. Usually, when an insurer pays money to its insured, the insurance company can stand in the shoes of its insured and sue the party whose negligence caused the loss that the insurance company paid for. A waiver of subrogation clause will eliminate the risk that a lawsuit will be brought against the cooperative’s tenant-shareholders who may have caused the damage to recover amounts paid by the insurance company to the cooperative. Most co-op policies have this clause because it prevents the insurance company from suing the co-op’s tenant-shareholders. 

If you don’t have such a waiver clause, you can be certain that, when the situation heats up and the insurer is suing the tenant-shareholder, he or she is going to turn around and sue the co-op, too, and say, “It’s not my fault, it’s your fault.” You need to avoid the cost of litigation, and the waiver of subrogation clause is important because it allows you to do so. 

If your insurance policies have a waiver of subrogation clause, most proprietary leases state that the tenantshareholder who may be responsible for the loss is released from any claim or responsibility for that loss. This means that if the cooperative’s insurance policy had a high deductible – which the cooperative paid – but also had a waiver of subrogation clause, the tenant-shareholder who caused the loss is released from a claim by the cooperative to recover the amount of the deductible that it paid towards repairs. The co-op is barred from suing its own tenant-shareholder to get the deductible amount back. 

Please pay close attention to the insurance and repair clauses of your proprietary lease, and review them with your attorneys and your insurance professionals. Then you will be well protected from large costs arising from unexpected catastrophes.