When the Casualty Clause Causes Chaos …

The casualty clause in a condominium’s bylaws will guide the response of the board when the building (including individual units) suffers any damage from a broken pipe or other accidents. The casualty clause explains who’s responsible for fixing different types of damage after a casualty occurs and how restoration is funded.

Unfortunately, most casualty clauses don’t define a “casualty.” For insurance purposes, a casualty is damage or loss to a person because of an accident. Legally, it’s a disastrous event that occurs as a result of an unexpected, sudden, or unusual cause. Water damage from a broken pipe within the building is considered a casualty because it was sudden and accidental, but damage from water seepage through an exterior wall is not.

When damage is not deemed a casualty, the board would look to the bylaws’ repair and maintenance clause to decide who has the obligation to make the repairs. (Usually, the bylaws say it’s the unit-owner’s obligation to make all repairs to his unit.) But if the damage is determined to be the result of a casualty, then the focus shifts to the casualty clause, which generally places the obligation for restoration on the condominium. This takes a lot of condo boards by surprise.

The extent of a condominium’s legal obligation to restore after a casualty occurs depends on what’s been damaged. The casualty clause typically provides that the condominium must restore the unit, with important exceptions. The primary exceptions are improvements made to the unit by the unit-owner or his predecessor (new kitchen cabinets, floors), decorations (paint job or wallpaper), and damage to personal property. If an owner’s TV is damaged by a broken pipe, or a wall that he had previously added is destroyed, he has to make those repairs himself. But floors, walls, and ceilings that have been in the unit from the beginning will probably need to be restored by the condominium. In other words, the condominium usually has to restore the unit to the condition it was in when it was delivered to the original owner, which excludes having to restore any alterations made by the current owner.

What caused the damage also matters. If a dishwasher hose breaks, the condo might be entitled to indemnification for expenses that it incurs because of the unit-owner’s negligence (other than those paid by the condo’s insurance) if it shows that the owner didn’t maintain the dishwasher properly. This means that unit-owners should always carry homeowner’s insurance on their unit. If the board hasn’t already made this mandatory, the board should consult an attorney about how to make this happen.

Check your bylaws to make sure that the insurance clause contains the same exceptions to what needs to be insured by the condo as the exceptions in the casualty clause to what needs to be restored by the condo. If these aren’t the same, it creates space for a unit owner or his insurance company to seize on the differences in the clauses to try to make the condo pay for something that wasn’t covered by insurance.

The condo also has to decide whether to file an insurance claim. For a relatively small claim, the cost of increased premiums in the future may exceed the benefit you get from insurance after taking the deductible into account. You need to consult with your broker to decide. For a major claim, you may have no choice. Note that if the insurance proceeds aren’t enough to cover the cost of repairs and restoration and the condo doesn’t have enough in its reserves to cover the balance, the board may need to impose a special “loss assessment” on unit-owners to share the remainder of the cost. Most homeowners’ insurance policies will cover that assessment – another reason for owners to carry their own insurance.

In the event of a major casualty that affects a significant portion of the units, the board may need experts to provide emergency cleanup services and environmental testing, prepare demolition and restoration plans, and perform construction. To facilitate this, the board may want to hire its own insurance adjustor. A good adjustor can also provide timely advice on who to go to for emergency services and engineering and environmental testing services. He can also work with the condo’s insurance company to get a cash advance before the total scope of the damage has been determined. That way, the board can start covering costs without paying out of pocket. Finally, an adjustor will help interpret your insurance policies in order to maximize the payout the condo receives.