By Tom Moriarty
The typical set of condominium
governing documents includes a provision which requires a waiver of subrogation
to be included in one or more of the condominium association’s insurance
policies.
There may be also a provision in the governing documents which
requires an owner or tenant to include a waiver of subrogation in any insurance
policy, including a policy insuring the furnishing and personal property in a
unit. The inclusion of such requirement in the governing documents, however, does
not guarantee that subrogation has actually been waived in the policies
obtained by any of those parties. The key to certainty in this circumstance -
despite the logistical complications - is to ensure that the policies, as
issued, contain the required waivers of subrogation and that they are broad
enough to comply with the directives of the governing documents.
The key to certainty in this
circumstance - despite the logistical complications - is to ensure that the
policies, as issued, contain the required waivers of subrogation and that they
are broad enough to comply with the directives of the governing documents.
Before we get to waiver … what is
subrogation?
Subrogation allows an insurance
carrier that pays a claim to its insured to file a lawsuit against the person
or entity that caused the harm to its insured. The insurance carrier
effectively steps into the shoes of its insured to pursue a claim against the
negligent party. An example of subrogation in this context would be if the
owner of Unit A let its sink overflow and that water caused damage to Unit B,
which damage was covered by insurance, the insurer of Unit B could sue the
owner of Unit A for the money it paid to repair Unit B. The principle has a
sound basis in equity, as it increases the likelihood that the person or entity
that caused the harm will actually bear the financial responsibility for that
harm. However, despite this sound basis, there are good reasons that
condominium associations would want to require an insurer to waive subrogation
in various circumstances. In the first instance, in order for the governing
documents to comply with Fannie Mae and Freddie Mac requirements, there must be
a waiver of subrogation in the association’s master insurance policy.
Furthermore, requiring a waiver of subrogation in a unit owner or tenant’s
policy may protect the association from a liability claim advanced by the unit
owner or tenant’s carrier after it pays out on an insured loss. Finally,
waivers of subrogation decrease the likelihood of conflict and litigation
between and among condominium boards and unit owners, and that is a legitimate
end in itself.
A provision requiring waiver in
the governing documents is not enough.
Despite a tendency to get mired in “legalese,”
sometimes contracts, and the court decisions interpreting same, mean what they
say and say what they mean.
The mere fact that the governing
documents of a condominium require the association to obtain an insurance
policy waiving subrogation does not mean that the policy obtained by the
association actually waives subrogation. The question in such circumstance is
whether an insurer, that is not a party to the condominium governing documents
issues a policy of insurance without a waiver of subrogation, is somehow bound
by the waiver requirement contained in the governing documents. More than one
court presented with this question has held that it is the language of the
insurance policy, and not the governing documents, which controls whether the
carrier has waived subrogation. In a New Jersey case, Community AssociationUnderwriters of America, Inc v. McGillick, the court concluded, that
despite a clear mandate in the governing documents that all policies of
physical damage insurance contain a waiver of subrogation, the actual policy of
insurance contained no such waiver and the carrier’s suit could proceed. See
also Skulkie v.Ceparis, 962 A.2d 589, 591 (N.J. Superior Ct App. Div.2009) (insurer’s
claim barred where the condominium association’s insurance policy actually
contained a waiver of subrogation).
In a more recent Massachusetts
case, Pacific Indemnity Company v. Deming, 828 F.3d 19 (2016), the court took
the same view on a related question. In Deming, the condominium declaration of
trust contained a provision that provided unit owners “shall carry insurance”
and that “all such policies shall contain waivers of subrogation.” Despite this
clear mandate in the trust instrument, the court looked to the language of the
policy to determine if the policy actually waived subrogation. The court
concluded that the insurance policy in question did not, in fact, contain a
waiver of subrogation and that policy was controlling and, at most, the unit
owner breached its obligations under the trust instrument.
The lesson from these cases –
even if there are arguments to be made to the contrary – is that an Association
cannot and should not rely on the obligation imposed in the governing documents
to include a waiver of subrogation in any relevant policy of insurance if it
wants to insure such waivers are in place. An association must ensure that the
policy itself contains the waiver of subrogation.
The waiver of subrogation should
be clearly expressed in the insurance policy.
A condominium association that intends to
include a waiver of subrogation should make sure the waiver is clearly stated.
For those readers who have ever
attempted to read an insurance policy, the suggestion that anything can be
“clearly stated” therein may seem oxymoronic, but it is possible. The
Massachusetts case of Greater New York National Insurance Co. v. Lavelle
Industries, is both an example of language which could have been “clearly
stated” and of what can occur when the language of a policy is less than
precise. In Lavelle Industries, the insurance policy provided that GNY waived
its “right to recover payment from any unit-owner of the condominium that is
shown in the Declarations.” Had the sentence stopped after “condominium” the
parties might have avoided significant costs, years of aggravation and the risk
of an adverse ruling. The problem is that, not surprisingly, no unit owners
were specifically listed or “shown” in the trusts “Declarations." While
the court ultimately got it right (by finding the carrier had waived
subrogation) the language of the policy could have been more specific.
The association’s governing
documents should require the association’s master policy to include a waiver of
subrogation as to the unit owners. So too should the association’s governing
documents include a requirement that owners or tenants obtain insurance
policies that actually include waivers of subrogation. The reality, however, is
that including language in the governing documents is not enough. The waiver of
subrogation must make its way into the policy itself.
Originally posted August 24, 2017
at http://lawmtm.com/waivers-of-submission.html
Tom is a former REBA
President (2010), Co-Chair of both REBA’s Residential Conveyancing and Unauthorized
Practice of Law Committees, and a founding partner of Moriarty Troyer &
Malloy, LLC.
