When Water Damage Goes Wrong

A $30,000 water leak becomes a $300,000 nightmare — all because a board waited too long to act. Ian Brandt, partner at Davidoff Hutcher & Citron, exposes the surprising traps that leave buildings with massive repair bills when disaster strikes. He reveals why insurance companies are denying claims that used to be automatic approvals, including one jaw-dropping case involving nothing more than an overflowing sink. Brandt shares real cases where boards made costly mistakes that could have been avoided and explains how a legal principle most people have never heard of creates unexpected liability. Habitat's Emily Myers conducts the interview

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Emily Myers: Welcome to Legal Talk, a conversation about the governance issues facing New York's co-op and condo boards. I'm Emily Myers with Habitat, the magazine for New York City's co-op and condo board directors, and I'm joined by Ian Brandt, partner at the law firm, Davidoff Hutcher & Citron. When accidents happen, whether it's fire, flood, or casualty, boards often find themselves enmeshed in disputes over the co-op or condo's obligations.

And this is often related to the limitations of the insurance policies. Ian, can you explain the main challenges co-op and condo boards face after a disaster? 

Ian Brandt: The main challenge is always over money and enough money to make the repairs to both building common elements-- the hallways, the space between units, the lobbies, basements-- and the apartments themselves.

And that often involves insurance companies in the event there is a covered loss. Which is not always the case. Things like leaks from facades, things where plumbing rusts out. Those are often not covered losses. But the things that are characterized in the insurance communities as sudden and accidental losses: burst plumbing sometimes when there's a inadvertent freezing that has nothing to do with any failure to pay your gas bill.

Those things are often covered. So insurance companies have indemnity obligations to the co-ops and condominiums in that regard.

Emily Myers: So what strategies can co-op and condo boards employ to better navigate the complexities of these insurance claims? 

Ian Brandt: So the first thing that a co-op needs to do is know what its obligations are under the proprietary lease and the law. And as the owner of a multiple dwelling, the board of directors sits in the place of a landlord. They don't like to think of themselves that way because there are some distinctions between a rental unit and a co-op. But with respect to repairs that need to be made to building common areas and apartments, the co-op is the landlord, and there's no real qualification to that in terms of its build back obligations.

The proprietary leases all say the same thing. Some people will try to say otherwise, but at the end of the day, the proprietary leases say in the event of a casualty event, the co-op shall replace everything in the building that's damaged, including the apartments, and specifically the walls, floors, ceilings, damaged plumbing, and damaged electrical systems.

And that is also with the co-ops obligations under the warranty of habitability. So it needs to know what its obligations are. And then the next question is, who pays for that? Which is a lawyerly way of saying, do we have insurance coverage for this matter? And the real problem here, the snafu often involves the question of, if the insurance company for the co-op doesn't wanna pay for the loss, do we as a board fight that? And unfortunately co-ops often don't fight the decision of the insurance company, which is often a declination of the claim, and which is often a position from the insurance company that the lease does not require the co-op to make certain repairs to the shareholders' departments.

And there's several inexcusable excuses that they give for that, which co-op boards really should be mindful of and should, even if they need to use counsel, fight. Because when you're talking about water damage, you're talking about tens and often hundreds of thousands of dollars in damage and without insurance to help the board get reimbursement for that, including the abated maintenance of the shareholders, which the policies do cover, the co-op could be left holding the bag proverbially, having to pay for those apartment repairs and having to assess shareholders to do so, which is not good politics. 

Emily Myers: Yeah. So you mentioned the warranty of habitability and that's of course the New York city rule stating that all residents have the right to a safe, livable apartment.

And so your advice is that co-ops need to take responsibility for the damage and that involves or can involve fighting hard to get the coverage that they are entitled to. And you're just elaborating on what the risk is, then, if they don't, and the risk is further financial burden. 

Ian Brandt: Right. Well, if a co-op has the funds to make the repairs and money isn't an object, then boards will often do it with or without insurance reimbursements, with or without coverage.

But money is a big problem in these situations 'cause the repairs are expensive. And, oftentimes the co-op will hope that, let's say a leak originates in unit, I'm just making up a number. The fifth floor unit leaks into the fourth floor unit, right? And it came from the plumbing in the fifth floor unit.

No one disputes that the leak came from the fifth floor unit. Co-ops will make the mistake of trying to get the shareholders to work it out amongst themselves. Now, if the fifth floor unit is willing to open up the checkbook and pay for everything, that is great. Fourth floor unit really shouldn't care who pays for as long as someone other than the fourth floor unit owner having to open up their own checkbook, right? So if they can get that done quickly, great. But the primary responsibility, irrespective of whether the fifth floor shareholder is willing or not to make that contribution or reimbursement to the fourth floor shareholder.

The co-op has still a primary obligation to make the repair, irrespective. The law says, a residential landlord is responsible for the habitability repairs, irrespective of whether the cause is a third party or not. The famous case going back decades was Solow v Wellner, and Park West v Mitchell, both the same landlord.

And that landlord said, but the trash strike wasn't our fault. We didn't cause the garbage men to strike that year, thereby letting garbage pile up in the common areas of our building. We can't be held responsible for that under the warranty of habitability. And the court of appeals. The highest court in state in New York said, no, you are on the hook, irrespective of whether it's caused by another party, even if someone else is negligent.

Right? But the fifth floor unit owner left their windows open in January and everyone knows that if you do that you're gonna, pipes are gonna freeze. They're on the hook for that. That might be, vis-a-vis the co-op.

The co-op can take care of the fourth floor shareholder as it's required to do under the law. Nothing stopping the co-op from billing those costs back to the fifth floor shareholder, that would be an enforceable chargeback. But what the cop can't do is sit on its hands and then say it's up to the fifth floor shareholder to do something about that.

And the problem with sitting on your hands, which I see in my practice almost on a daily basis, and it leads to litigation, is that water damage spreads if it's not remediated right away. It causes mold to build up and the water actually expands because it's usually through sheet rock. And the sheet rock just has a sponge.

An area that's 10 square feet of water damage, if left to sit for more than a few weeks, is gonna just spread. So the problem gets bigger if the doesn't act and the costs of repairs go up. So it's always important to act first, and then ask questions about who needs to be charged back later, I guess is the takeaway.

Emily Myers: So how is the current insurance market with perhaps higher premiums and more exclusions impacting this area? 

Ian Brandt: That's a great question, and the answer is the obvious one that people hope isn't the answer, but it is. There are more decline claims. I don't know the number specifically, but I can only tell you through my practice when these things go to litigation.

More and more people are telling me, and I'm seeing more and more cases where they get declinations for all kinds of reasons. Water exclusions are more common. The classic example is, I've litigated this several times now. When drains back up, they used to be covered, by both the co-ops policy and the shareholders' HOA homeowners policies that they have, because shareholders often have insurance and should have insurance.

But that insurance obligation shareholder does not let the co-op off the hook, which is another mistake that co-op boards often make. They say they have insurance, they should take care of it. Irrespective of whether they have insurance, the co-op's primary obligation, to restore never goes away. Those policies used to cover the wastewater backups, but they've all been written out, and they've all been excluded for the most part, and to a really unhealthy extreme, to the point where recently I had a case against a very large carrier, Nationwide, also known as Harleysville, where they have a policy that they issued to a doctor's office in the condo, and it excluded all wastewater backups from a drain. And they used the prepositions from or through a drain and that the court interpreted that from or through a drain to even exclude where someone left a faucet on inadvertently, and the bowl of the sink filled up. The federal court deemed that exclusion to apply because while no water was reversed flow through the drain, it wasn't getting down into the drain, it was just overflowing from a sink. It said overflow from means it includes the situation. In other words, it excludes the situation.

Even though there was no dispute that there was no reverse flow from an actual drain. From was brought up to basically say it's stopping at the drain and reversing from there to the bowl. That's broad enough. In other words, up until recently backups were included. But now even backups where someone just leaves the water on and it over spills the bowl are now excluded.

And one says, but isn't that kind of the hapless negligent stupidity that insurance is supposed to cover? We all have seen the commercials on television where someone does something really stupid and don't worry, the insurance company's got your back. There's slogans for that, but now they're excluding those things. Tough, but it really behooves a co-op to have someone who's experienced with insurance policies to really examine the policy carefully and see if the adjuster who's declined coverage is right or wrong, not just take it at face value. I can't tell how many times I've had attorneys go into court and even say, but our insurance company said it wasn't covered! As if the insurance company is the judge of the court or the arbiter.

They're not. They decline a lot of claims and it leaves co-ops holding the bag. 

Emily Myers: Wow. So in the sink overflow example, the condo was denied compensation. 

Ian Brandt: Yeah. The unit owner was denied compensation even though there was no dispute that someone just haplessly left a faucet on and the bowl of the sink couldn't handle it.

Everyone was shocked when the insurer denied coverage. But we took it to court and we lost on that issue because again, it construed this overflow from a drain to even include that situation where clearly there was no overflow from a drain through a drain. But what the court said if it said through, then you might be right, Mr. Brandt, there should be coverage. But the fact that they used the word from means it's brought up that if it doesn't even get down into the drain and the water spills over, it's not covered. And that was the first of a kind because I've seen situations where there were coverages from, someone leaving a bathtub on.

Emily Myers: And you suggested there that boards shouldn't just accept what the insurance carrier says either. What are the other takeaways then for boards dealing with fire, flood, and casualty claims? 

Ian Brandt: The takeaway is make the repairs as quickly as possible.

Because the lease and the law require it. And then look if you're able to charge people back because of fault, actual neglect or something like that, you do that after you've taken care of the problem. And that's a painful decision. And I know attorneys, some of them who might even be speaking to Habitat, who would take issue with that, but it's dangerous.

 It causes 20, 30, $40,000 repairs to balloon into hundreds of thousands of dollars. And the problem is that if the co-op is wrong or the co-op fails to repair, there can also be legal fee liability from the affected shareholder, seeking reimbursement of legal fees because all proprietary leases give the co-op the right to recover legal fees in the event of a shareholder fault , whether a nonpayment of maintenance or any breach of the lease, the co-op can recover its legal fees from the shareholder. But as a matter of New York law, if that type of lease exists and universally does with the co-ops, co-ops get their legal fees from shareholders, we all know that.

And under Real Property Law 2 34, the shareholder has the reciprocal right to recover legal fees in the event he or she is successful against the co-op, or even successfully defends a claim against the co-op. So not only does a co-op become liable for the repairs, but if an attorney is hired by the shareholder to enforce the rights under the warranty of habitability and or lease, then the shareholder has a claim for legal fees against the co-op and that is not good.

Emily Myers: Gosh, Ian, really helpful information for boards dealing with this particular nightmare. Thank you so much. 

Ian Brandt: You're welcome. 

Emily Myers: Ian Brandt, partner at the law firm, Davidoff Hutcher & Citron.