Insurance Headaches Arise When Proprietary Lease Is Worded Certain Way

This story begins with a hole in the pipe directly under my sink, which leaked (probably over the course of several days or weeks) through to my neighbor's ceiling. I never saw the leak, because the pipe is hidden by my dishwasher (a terrible design), which is positioned directly under the kitchen sink. I had the pipe repaired the day after the leak was discovered, paying the super $150 to patch it up.

We are both shareholders, my neighbor and I (let's call her Susan, an attorney by trade), and are both on the co-op board and have been friendly. We share the same insurance company, State Farm. We both put in claims for damages; State Farm denied mine, saying I was not legally liable based on the wording in my proprietary lease, but it honored Susan's. She had her ceiling repaired for over $4,100, which State Farm covered, all but the $1,000 deductible. Susan insists that it's my obligation to pay for her deductible since the pipe was within the walls of my apartment.

Enemy of the State Farm

I exchanged a number of e-mails between my attorney and my adjustor for State Farm. My attorney sent the adjustor several precedents and argued that State Farm should cover the claim or, at a minimum, discuss "subrogation" with Susan's attorney. Subrogation refers to circumstances in which an insurance company tries to recoup expenses for a claim it paid out when another party should have been responsible for paying at least a portion of that claim. In law, it is referred to as "the transfer of right" of the creditor to the third party who pays the debt of the debtor.

Susan's premium is likely to go up because she claimed, and she's angry at me about that. Our relationship did become acrimonious, and of course it all boils down to money; as bad as I felt, I was not legally obliged to reimburse her, but I did feel the moral obligation. We were squabbling over the deductible, $1,000, which in less economically challenged times we would probably not be so sensitive about. She threatened Small Claims Court.

The 50 Percent Solution

Upshot? We agreed to settle 50/50; I'm out $650 because I had to pay the super, and she will be out $500. I spoke to my accountant; I can't get a break at tax time because a casualty loss would have to exceed 10 percent of my income in order to be deductible.

The topics here worthy of discussion with your co-op or condo board are:

(1) What happens when neighbors share the same insurance agent?

(2) Just because you pay monthly or quarterly premiums to an insurance company to cover these kinds of damages (I've been paying State Farm since 2005) doesn't mean they will cover the damages to your neighbor's apartment — much depends on the wording in your proprietary lease. Who knew? And to this day, I'm not sure how that section in the proprietary lease should be written in order to get an insurance company to cover such a claim. And how many shareholders would know about what wording would compel the agency to cover this kind of damage? Shouldn't the board make it clear to them?

(3) Who is really the responsible party in my case? My attorney argues that State Farm should have covered my claim. He also argues that it's the co-op's responsibility. That may be so, but I didn't want to go that route.

(4) Finally, what is the difference between legal and moral obligation?

I don't have the answers, but I think all boards should consider these issues. I certainly did.

Photo by Jennifer Wu

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