Ian Brandt, Wagner, Berkow & Brandt

Let's say an apartment is destroyed because of a leak. Does the co-op have to pay for the repair?
Every proprietary lease that I've ever reviewed has the same language concerning a co-op board’s obligations to its shareholders after a water, fire, or other loss that destroys common areas and one or more apartments. The leases all say the co-op shall repair or replace the walls floors, ceilings, wiring conduits. The shareholder is responsible for the furniture and fixtures, including repainting after walls are restored and usually any refinishing of floors that have been repaired. The walls, floors and ceilings are the co-op’s obligation; the contents in the apartment are the shareholder’s responsibility.
This seems to be a typical scenario: there’s a leak, the property manager is called, and the manager tells the resident to call their insurance company.
Right. The insurance company has to be on notice for you to have any possibility of recovery. But the co-op also has to put its insurance company on notice. No matter who put the floors in, the co-op still has to indemnify the shareholder and pay for the replacement. It does not matter whether the floors are so-called "original to the building," which is the common phrase that people think has some sort of meaningful distinction. Whether the floors were installed during the building’s construction or during the conversion to a co-op, the co-op has a basic obligation to repair it. Improvements, alterations and upgrades made by shareholders at any time do not change the rights of the parties. The board still has to replace that floor.

Now, if the shareholder had a floor that's $20 a square foot because they installed bird's eye maple and it looks like a palace, the co-op does not need to insist that its insurance company pay for the $20 or $30 a square foot. But that's where the language of the lease comes in, which is actually more than the habitability requirements. It says “then customary.” And I know a couple of judges in New York who said “then customary” means at the time of the accident. So if it's customary in this building or similar buildings, you can pick a neighborhood and think of it that way, the board will have to replace it.

Usually the easiest solution for this is just to select oak if we're talking about floors, because that's kind of what people expect is a baseline in a co-op, but that's something that the co-op is obligated to do under the contract under the lease. Now, where does insurance come in with this? The co-op’s general liability policy and its commercial property policy are basically the two components of an insurance policy, and boards pay a lot of money per year to maintain these policies. The indemnities are tens of millions of dollars, if not more, but just with respect the property losses.

That proprietary lease is an insured contract under the co-op’s general liability and commercial property coverage. So the carrier has, if it's a covered loss again, we're talking about sudden accidental losses. If a building has slow leaks because of a facade that hasn't been properly maintained or a roof that's beyond its useful life. Those things aren't covered by insurance. You're not covered for those losses, but if you have these sudden and accidental losses, like when you have apartment shareholders complaining about leaks, the co-op’s carrier is supposed to pay for them.

And the difficulties become when the property manager passes this information of a leak from a shareholder on to its broker. The usual response from the co-op’s insurance company, or the adjuster that they hire to handle the claim, is, “No, we don't cover that new flooring, we're not paying for that, that's personal property.”  They’ll say it's not original to the building. Again, it’s in this code language that they use, which everyone assumes is correct. The carrier will immediately try to disclaim coverage for any of that floor replacement that you're talking about. And that's where the board and the property manager or the managing agent really should unite to fight that. Because the lease is an insured contract, they should insist on compliance with the terms of the lease and not confuse furniture, fixtures, and equipment with walls, floors, and ceilings, which is usually where they trying to say, "Well, the shareholder has to pay for the replacement of any losses inside the apartment.” The walls, floors and ceilings are not personal property. They are the components identified in the lease.

If I have upgraded my floors, you're suggesting that the co-op corporation’s insurance has to pay all or part of it. And my own insurance has to pay part of it, right?
That's a good point. No, the co-ops insurance company will need to pay for the price per square footage of the customary floors in the building, which is usually oak. The co-op should then forward the money to the shareholder or offer to make the repairs for the shareholder with the less expensive flooring, the customary floors.
If my floors are $20 a foot, the co-op corporation insurance is going to kick in $10 and my insurance is going to kick in $10?
Most shareholders in a lot of co-ops these days insist on carrying homeowners insurance, which is great. They should, those are reasonable policies, but it really should be cost splitting where the co-ops insurer pays for the first $10, and then the additional $10 is covered under the betterments and improvements provisions under the shareholders policy.
And typically that's not how it happens.
Not in my experience. It's standard for property managers and people in insurance to insist off the bat that anything that wasn't original to the building when it was built be covered by the shareholder because it's not original. And that's where the problems start. It's innocent in the sense that I don't think there are board members out there saying we don't want to cover these things. If you're an owner, you have responsibilities; this should be one of your responsibilities.
It's not malicious. It's just a misunderstanding of the obligations under the lease and the law which boards have. And their managing agents often have been convinced by the insurance companies that if it's not original, the co-op’s general liability carrier should not cover anything inside of the apartment. They actually will do the investigation where the adjusters for the insurance companies won't go and inspect. And then we'll ask, “Well, were these floors here? Did the shareholder replace these? Is there an alteration agreement that shows a replacement?” They're looking for that so they can say, “Ah, we don't have to cover this if there's any evidence of an alteration by a shareholder,”
If I'm a shareholder or a board, I should probably take another look at the proprietary lease. And if this occurs, perhaps adjust my thinking of how things should work.
You have to challenge the insurance company's position for it. It's inexplicable. The people who are affected, the victims, are our neighbors, right? The board has constituents and everyone is theoretically neighbors. And what boards do is they don't challenge the property managers, they don't challenge the insurance company's positions. It has to be challenged and that's where attorneys can come in. But frankly, when you say you have to look at the lease, they all say the same thing. You're not going to find really any variation in that language.