SUBROGATION SMARTS: HOW ASSOCIATIONS CAN PROTECT THEIR INSURABILITY AND RECOVER DAMAGES

BY: PATRICK PRENDIVILLE, CIRMS, PRENDIVILLE INSURANCE AGENCY

The California insurance market has not seen such a poor climate in decades. Savvy boards know that in order to protect their budget, insurability is critically important. Fundamental to this goal is controlling the rate of claims, but once the claim is filed, what can be done? At the heart of this answer is a very nuanced concept called subrogation. This article addresses that concept and when it can be applied.

Subrogation is a legal term that describes how associations, or insurance companies, can recover the amount of a paid claim. Take the example of an association that had three units suffer severe fire damage. The HOA opens a claim with its own insurance. However, upon investigation, it was discovered that the fire was started by a plumber that caught the building insulation on fire while using a welding torch. Fortunately, the plumber is also insured, and it is expected that their insurance company will pay for the full damage. So, even though the HOA’s property insurance pays to rebuild the units, it is able to subrogate and recover its expense from the plumber’s insurance.

Sounds great for the insurance company, but what about the HOA that initially was forced to pay a deductible? First, assuming full recovery, the full deductible is returned. But, more impactful, the loss is also wiped off the association’s loss run, which helps to protect its insurability and keep premiums low. In this insurance environment, this impact cannot be overstated.

Subrogating against contractors is rather fundamental and straightforward, but what happens if an owner or tenant causes damage or financial loss to the association? Can the insurance company or association subrogate against an individual? This answer is a little more nuanced due to the governing documents of the association.

Many governing documents contain wording that protects owners from subrogation. One common provision reads: “All of the association’s insurance policies insuring against physical damage must provide for waiver of subrogation of claims against owners and tenants of the owners.” This type of wording increases the challenges of successfully recovering damages. However, a fair amount of associations do not contain these limiting provisions and if they do, they may only apply to an owner and not a tenant.

Another example comes from an association with detached garages. A chatty resident was talking to his neighbors about his car’s alternator which had been causing problems. He was trying to fix it himself until it caught on fire and burned the garage structure down. The association took the expected step of filing a property claim and upon rebuilding, the insurance company subrogated (sued) the vehicle owner. In this case, the association’s CC&Rs prevented subrogation against owners, but because the vehicle owner was a renter . . . game on. Fortunately, the renter also had insurance, which paid the entire cost, removing the loss from the claims record and returning the association’s property deductible.

Regardless of the target of a subrogation, the following are some important reminders that may dictate the success of any subrogation efforts:

• Check with legal counsel about any limitations in the governing documents in advance of any claim, to better avoid mistakes and save time when it matters most.

• Take photos of the damage: the more, the better.

• Save the parts: insurance companies often send broken parts in to be tested. If faulty, it is not out of the ordinary to also have a subrogation claim against a parts manufacturer.

• Talk to witnesses: who knows what?

• Collect information on all vendors that may have been working on the item at issue, or even in the surrounding area.

• Take copious notes on all of the above items because the subrogation efforts may start months later and memories may fade, witnesses may move, etc.

Understanding subrogation is critical for proper insurance policy management. Associations that can improve their insurance loss ratio will experience better budgets and community harmony while avoiding the pain of expensive insurance premiums.

Patrick Prendiville, CIRMS of Prendiville Insurance Agency can be reached at Patrick@PrendivilleAgency.com