Homeowner's Insurance

Homeowner’s insurance is not a big-ticket item. But when shareholders or unit-owners allow policies to lapse, big and bad things can happen.Have you seen clients get into trouble because of lapsed policies?

We’ve recently had that happen in two buildings. In one, a fire basically destroyed the interior of one apartment, and the water from the firefighting ended up going down to the apartment below. Smoke also permeated the apartment below and the ones on either side and above. Fortunately, the shareholder who had the fire had very good homeowner’s insurance. The building also had insurance. But the shareholder downstairs did not have insurance, and he had substantial damage to personal property and some appliances.

What happened next?

The co-op got a call from the shareholder downstairs from the fire, and he said he wanted the co-op to cover his losses. And the co-op picked up the phone and called their lawyer, and that was me. I told them their responsibilities are set forth in the proprietary lease, which says the co-op is responsible for the structure of the building – the walls, the systems in the walls – and shareholders are responsible for what's inside their units. Next thing, the co-op gets a letter from a lawyer saying the shareholder wants half a million dollars. I told them to send it to their insurance carrier. That ended up in a lawsuit, which is being handled by the insurance company lawyers.

Let's talk about how the co-op board responded to this lapse in insurance. Did the board take action to make sure this doesn't happen again?

Yes, the board in the past had strongly recommended homeowner’s insurance, but now they wanted to impose a policy and make it more formal. And so there are two options: either amend the proprietary lease, which requires approval of two-thirds of all shareholders, or adopt a house rule that would set forth the same provision, which could be done by the board of directors.

Changing the proprietary lease is a much higher hurdle to clear.

Much higher, and it takes time. You have to call a special shareholders’ meeting. So we decided to go with a house rule. The board then asked me to craft a rule that gave them the ability to require basic homeowner’s insurance, then an umbrella policy, making sure it named the co-op as an additional insured. It also provided for the mechanics for notifying the property manager that the insurance was in place, and it required giving a 30-day notice if a policy was going to lapse and not be renewed.

Is there any way for the co-op to police that house rule?

The managing agent has developed a protocol where they require a certificate issued by the insurance company every year identifying the amount of insurance. The co-op also has the right to see a copy of the actual policy, and they notified all shareholders that the house rule was passed. The insurance requirements are also set forth in application packages. And finally, there’s a provision that says the failure of the co-op to enforce any of the rules is not actionable against the co-op. We want to make sure that if there’s another fire and somebody sues the co-op, they don’t throw in another cause of action for the co-op’s failure to enforce the terms of the proprietary lease. That's really not fair because we're trying to protect everybody.

Would you advise other boards to institute a house rule like this one?

We absolutely recommend it.