“Co-op boards regularly blame shareholders when it comes to water damage issues and say that if the damage is inside the apartment, it’s the shareholder’s obligation to repair, and if it’s outside, it’s the building’s responsibility, but that’s usually not true,” says Ian Brandt, a partner at the Manhattan real estate law firm Wagner, Berkow & Brandt.
Instead of insisting a shareholder’s insurance policy pick up the bulk of the costs when it comes to water damage, Brandt says co-op boards should obtain as much indemnification (insurance reimbursement) as possible from the co-op’s insurance policy where liabilities are addressed.
“Co-op boards have really big insurance policies for tens or hundreds of millions of dollars in coverage and they are spending between $50,000 and $100,000 annually in premiums. They should be using it but often it requires some pushback by the board on the co-op insurance company,” Brandt says.
One concern for boards is that premiums will rise, but Brandt says, "premiums inevitably increase irrespective of whether claims are filed." He points out the purpose of insurance is to receive an indemnity for covered losses, rather than pay for liabilities out of pocket.
Legal obligations
A co-op board has ample legal authority to push back on insurance companies that pressure a board to transfer liability onto a shareholder, Brandt says.
“The warranty of habitability alone mandates that a residential landlord is responsible for keeping your apartment and the building safe and livable at all times,” he says, noting that co-ops are considered landlords in the eyes of the law and have the same apartment repair obligations to shareholders as regular landlords have to ordinary, non-investing tenants.
Brandt recently won $2.5 million in a settlement for a co-op owner because the building had refused to make repairs after a flood.
“It would have cost the building less than $100,000 to rebuild the apartment, but they hoped the shareholder would pay and instead of making repairs, the board faced five years of litigation, ending in a settlement before trial,” he says.
First, fix the problem
Brandt says the best thing a board can do is to assume all of the basic repairs and not to point fingers: “The passage of time is liability and money. Fix it first and if you can pass on liability later, then you can take that route.”
One argument that’s often used by insurance companies to avoid making repairs is that alterations and upgrades were made to the shareholder’s apartment before it was damaged.
The insurance company might say they’ll only make repairs to return it to its original condition but that means, in a prewar building, their repair obligations might only encompass what was installed 100 years ago.
“To say that a shareholder’s contractual rights are diminished if they make upgrades is ridiculous,” says Brandt. “It penalizes you for making improvements. The terms of your lease and the protections afforded to you under the lease don’t change just because you make improvements.”
That said, Brandt says in most cases where a shareholder has installed high-end floors or paid for Venetian plaster rather than a regular plaster finish, boards are not contractually obligated to reimburse the shareholder for the full value of the luxury finishes, but only for the reasonable value of the basic finish.
“Boards have an obligation under the lease to give the shareholder a reimbursement based on the value of the basic components and if the shareholder wants to adjust for the difference, they can, but that doesn’t absolve the co-op from paying for necessary repairs to sheetrock, taping, spackling, and select oak flooring,” he says.
Brandt recently won $450,000 for a client whose two-bedroom duplex endured years of leaks from a parapet. “The building said they didn’t have any obligations for the apartment’s interior. They could have spent $50,000 in 2007 to fix it, but it went on for 12 years and they wound up paying $450,000.” (If the board loses the case they also have to pay a shareholder’s legal fees.)
Brandt notes that the situation is different in condominiums.
"Because there is no leasehold relationship between a condominium association and the unit owners, a condo board has no warranty of habitability obligations to unit owners," he explains. "So if you have water damage in a condo unit, you either have to fix it yourself and later sue a culpable neighbor or the board for the cost of the repairs. To do so, you would need to prove negligence."
Ian Brandt is a partner at the New York City real estate firm Wagner, Berkow & Brandt. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Ian an email or call 646-780-7272.
