Condo Media - May 2017 - 16

Asked & Answered

Matter of Precaution

Why Condominium Documents Require a Waiver of Subrogation

Q
A

An owner carelessly started a fire in his unit that
caused extensive damage to common areas. The
association's master policy will cover the repair
costs, but the claim will almost certainly affect our
premium. The board, of which I'm a member, thinks
our insurance company should seek compensation
from the owner who caused the damage. Our view:
Let the owner's insurance company pay the claim
and let the owner pay any premium penalty on his
insurance, instead of putting that financial burden
on the whole community. We think this makes
sense, but our insurance company rejected the idea.
Can you explain why?

The one-word answer is, "subrogation." Condominium
documents require a "waiver of subrogation" in the association's master policy. This means the insurer agrees not
to pursue specified third parties (typically other owners,
trustees, and the manager) to recover payments for a
master policy claim. Secondary market rules established
by Fannie Mae and Freddie Mac require this provision
to reduce default risks on the mortgages they purchase.
Their concern, explains Stephen Marcus, a partner in
Marcus, Errico, Emmer & Brooks, P.C., is that if the association's insurer successfully sued a borrower to recover
a large damage claim, the borrower might not be able to
meet other financial obligations-specifically, his/her
mortgage payments.
Marcus says he understands the board's position: "You
have every right to be angry with the owner who caused
the damage. But you can't change the policy language."
Under the terms of the subrogation waiver, "the insurer
can't chase the owner."
HO6 AND TENANT POLICY WAIVERS
The subrogation language Fannie and Freddie require
protects lenders, Marcus notes. It is equally important,
he says, for condominium associations to require subrogation waivers in the HO6 policies owners obtain to insure their units. Without this waiver, he explains, an HO6
insurer could pay an owner's damage claim and then turn
around and sue the association or sue its trustees and
manager individually, asserting that they are responsible

CONDOMEDIA

for causing the damage or were somehow negligent
for not preventing it. As an additional precaution, he
suggests, the waiver language should require owners
"to defend the association, its trustees, and its manager
against any effort by the owner's HO6 carrier to pursue
subrogation against them."
Marcus advises associations to instruct owners who
rent their units to require subrogation waivers in tenant
insurance policies for the same reason-to prevent the
tenant's insurer from subrogating against the association, its board, or its manager.
What happens if tenants or owners fail to obtain a
subrogation waiver, even though the condo documents
require it? Marcus thinks the association could sue
the owner for failing to obtain-or make sure a tenant
obtained-the required coverage. But he also thinks
"there's a strong argument to be made" that the insurer
had "constructive notice" of the subrogation waiver requirement, even if the owner or tenant didn't request it.
Condominium documents are public records, he points
out, and the insurer or the insurance agent should review
them to verify the association's requirements before
issuing a policy. Because the documents provide notice
of the subrogation waiver requirement, he contends, insurers arguably should be bound by it, even if the policy
doesn't include it.

Condo Media - May 2017

Table of Contents for the Digital Edition of Condo Media - May 2017