Co-Op Boards Face Financial Challenges in the Wake of Accidents

When accidents happen, whether it's fire, flood or casualty, boards often find themselves enmeshed in disputes over the co-op's obligations. The main challenge is almost always over money: Who will pay to make the repairs to both building common elements and the apartments themselves?

REPAIR RESPONSIBILITIES  If there’s a sudden or accidental loss, your insurance company is typically involved. Situations such as burst plumbing, or accidental freezing unrelated to negligence like an unpaid gas bill, are often covered under your policy. However, leaks from facades or failed plumbing may not be, and co-op boards need to understand their obligations under the proprietary lease and the law. In a condo, unit-owners are responsible for repairs to their apartment interiors but under the proprietary lease a co-op board takes on the role of the landlord and is obligated to repair any damage, including to apartments, walls, ceilings, plumbing and electrical systems. The co-op also has responsibilities under the warranty of habitability, the New York City rule stating that all tenants and shareholders have the right to a safe and livable apartment. 

DANGER IN DELAYS  This obligation doesn't disappear because a third party might be at fault for damage. Boards cannot sit back and wait for others to take responsibility, but must act quickly to mitigate the damage. Water damage, for example, spreads rapidly if ignored, leading to more extensive repairs and skyrocketing costs. Delay in addressing these issues can lead to mold buildup and expansion of the damage area, costing much more in the long run. The co-op needs to address the damage and deal with financial liabilities later. If there’s a situation where a leak from a fifth-floor apartment has caused damage in a fourth-floor unit, co-ops often make the mistake of trying to get the shareholders to work it out among themselves. However, the co-op still has a primary obligation to make repairs, irrespective of who pays. There’s nothing stopping the co-op from billing the fourth-floor repair costs back to the fifth-floor shareholder, which would be an enforceable charge-back.

FIGHTING COVERAGE DENIALS  Insurance companies frequently — and increasingly —  deny claims on the basis that the proprietary lease does not require the co-op to make repairs to shareholder apartments. Wastewater backups are being excluded; in a recent case, this exclusion was extended even to include water damage caused by a faucet inadvertently left to run, which filled and overflowed a sink. With the right counsel, co-op boards should fight these denials. Water damage alone can result in hundreds of thousands of dollars in losses, and without insurance coverage, boards may be forced to assess shareholders to fund the repairs, which is never popular. Additionally, insurance policies generally cover abated maintenance of shareholders, so failing to fight a denied claim could result in significant financial loss for the co-op.