When damage occurs to a condominium building or Unit, who makes the first insurance claim, who oversees the repairs, when can responsibilities shift, and who pays the deductible?
Association Insurance Responsibilities
The Michigan Condominium Act, MCL 559.154(4) provides that insurance proceeds received in connection with the Common Elements of the condominium are income of the Association. MCL 559.156 provides that the Condominium Bylaws may (not must) require the Association to carry insurance for the benefit of the Co-owners, but cannot prevent the Co-owners from insuring their own Units.
Independent of the statute, because of mortgage regulations, Condominium Bylaws uniformly require the Association to insure at least the General Common Elements of the condominium. Many Condominium Documents extend this to all Common Elements, which includes Limited Common Elements assigned to individual Units. Some go even further and insure parts of the interior of the condominium Units. Sample language may state:
Such coverage shall also include unpainted surface of interior walls within any Unit and the pipes, wire, conduits and ducts contained therein and shall further include all fixtures and equipment within a Unit which were furnished with the Unit as standard items in accord with the plans and specifications thereof as are on file with the Association (or such replacements thereof as do not exceed the cost of such standard items).
Co-owner Insurance Responsibilities
The Michigan Condominium Act specifically requires the Co-owners to maintain insurance in one situation: when they make exterior improvements or modifications to facilitate access. The normal examples are wheelchair ramps or elevators. In that case, MCL 559.147a(3) provides that the Co-owner must maintain insurance on the improvement or modification, naming the Association as an additional insured, and covering personal injuries caused by the improvement or modification.
Condominium Bylaws will at least recommend that the Co-owners obtain additional insurance on their Units. Sample language may state:
Each Co-owner may obtain insurance coverage at his own expense upon his Unit. It shall be each Co-owner’s responsibility to determine by personal investigation or from his own insurance advisors the nature and extent of insurance coverage adequate to his needs and thereafter to obtain insurance coverage for his personal property located within his Unit or elsewhere on the Condominium and for his personal liability for occurrences within his Unit or upon Limited Common Elements appurtenant to his Unit, for improvements to his Unit or Limited Common Elements appurtenant to his Unit, and also for alternative living expense in the event of fire or other catastrophe, and the Association shall have absolutely no responsibility for obtaining such coverages.
Some newer Condominium Bylaws affirmatively require the Co-owners to obtain their own insurance, usually an HO6 Condominium Owner’s Policy, and provide proof of insurance to the Association.
Overlapping Responsibilities
There may be overlapping coverage between the Association’s insurance policy and the Co-owners’ insurance policies. Newer Condominium Bylaws may specifically address priority. For example, the Co-owner’s policy is primary when the damage is to the Unit, its contents, another Unit, or Limited Common Elements that the co-owner is responsible to repair. The Association’s policy is primary when damage is to the General Common Elements or Limited Common Elements that the Association is responsible to repair. For Condominium Bylaws without language addressing priority, it is likely that both the Association and Co-owner will make claims, and the insurance companies will negotiate the allocation between them.
Making the First Claim
When damage clearly originates from outside a Unit, such as a fallen tree, then the Association makes the first insurance claim. If it becomes apparent that that there is damage to Units not covered by the Association’s insurance, then individual Co-owners may make their claims.
When damage first appears within a Unit, such as a water leak, then the Co-owner makes the first insurance claim. If the Co-owner’s insurance adjuster determines that there is damage to Common Elements that the Association insures, then the Association may make a claim.
Conducting Repairs
If the damage is only to a Unit or a Common Element that the Co-owner is responsible to maintain, then the Co-owner is responsible to conduct the repairs.
If there is damage to General Common Elements or items that the Association is responsible to maintain, then the Association conducts the repairs. However, the Co-owners or their insurance policies may still be responsible for costs.
Shifting Responsibility or Deductible: Incidental Damage Clauses
Some Condominium Bylaws contain incidental damage clauses. These may shift responsibility from the Co-owner to the Association when a Common Element causes the damage. Sample language may state:
The Association shall be responsible for the reconstruction and repair of the Common Elements and for any incidental damage to a Unit and the contents thereof caused by such Common Elements or the reconstruction or repair thereof.
Examples may include water damage from a roof leak or water main break. The trend in newer Condominium Documents is to eliminate the clause, or to cap the shift at a specific dollar amount or the deductible on the Co-owner’s own insurance policy.
Shifting Responsibility or Deductible: Co-owner Negligence
Many Condominium Bylaws provide that Co-owners are responsible when the negligently damage or misuse the Common Elements. Sample language may state:
Each Co-owner shall also use due care to avoid damaging any of the Common Elements including, but not limited to, the telephone, water, gas, plumbing, electrical or other utility conduits and systems and any other Common Elements in any Unit which are appurtenant to or which may affect any other Unit. Each Co-owner shall be responsible for damages or costs to the Association resulting from negligent damage to or misuse of any of the Common Elements by him or her, or his or her family, guests, tenants, agents or invitees, unless such damages or costs are covered by insurance carried by the Association (in which case there shall be no such responsibility unless reimbursement to the Association is limited by virtue of a deductible provision, in which case the responsible Co-owner shall bear the expense to the extent of the deductible amount).
- Hypothetical A – Single Shift:
A Co-owner negligently drives a nail in to a General Common Element water line, causing damage to a General Common Element exterior wall. The Association would normally be responsible because the water line and exterior wall are General Common Elements, however:
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- The Co-owner would be responsible because the Co-owner negligently damaged and misused the Common Elements.
- Hypothetical B – Double Shift:
A Co-owner negligently drives a nail in to a General Common Element water line, causing damage to a General Common Element exterior wall. The Association carries insurance on the water line and exterior wall. The Association would normally be responsible because the water line and exterior wall are General Common Elements, however:
1. The Co-owner would be responsible because the Co-owner negligently damaged and misused the Common Elements, however;
2. The Association would be responsible because it carries insurance on the water line and exterior wall.
- Hypothetical C – Triple Shift
A Co-owner negligently drives a nail in to a General Common Element water line, causing damage to a General Common Element exterior wall. The Association carries insurance on the water line and exterior wall. The repair cost is $9,000. The insurance policy has a $10,000 deductible. The Association would normally be responsible because the water line and exterior wall are General Common Elements, however:
1. The Co-owner would be responsible because the Co-owner negligently damaged and misused the Common Elements, however;
2. The Association would be responsible because it carries insurance on the water line and exterior wall, however;
3. The Co-owner would be responsible because there is a deductible, and the Co-owner bears the deductible expense.
Do you have questions about a current insurance repair situation? Do you need to amend your Condominium Documents to address potential future repairs? We are available to advise you regarding administration, or to draft amendments. Please reach out to us at (248) 349-6203 or email us using the form below.
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