Flooded Condominium: “Who’s Going to Pay?”

When it comes to who pays for water damage, refer to the Civil Code for answers.

By Mark Guithues, Esq.

Let’s get the counter-intuitive part out of the way first while you’re fresh. When it comes to water claims, California law generally does not follow a source rule. So just because the water came from within the upstairs unit does not make the upstairs unit owner responsible for all resulting flood damage. Likewise, just because the water originated from the common area does not make the association responsible for all “consequential” flood damage. Reread this paragraph three times before proceeding, or the rest of the article will be nonsensical.

Civil Code §4775(a) tells us, paraphrased as follows, who pays for pipe repairs and subsequently occurring water damage: “Unless otherwise provided in the governing documents, the association is responsible for repairing, replacing, and maintaining the common area, and the owner of each separate interest is responsible for repairing, replacing, and maintaining that separate interest…” The association’s CC&Rs and condominium plan define what is common area versus separate interest. Usually, they say something like the unit is “bounded by and contained within the unfinished interior surfaces of the perimeter walls, floors, ceilings, windows and doors of said element, and the airspace encompassed thereby.” Think drywall. Owners generally repair from the paint inward, while associations generally remediate and repair the drywall outward (including ceilings). As to the pipe repair, your CC&Rs might state each owner is responsible for “pipes and all utility lines solely serving the unit” or it might make all pipes (except the “outlets thereof within the unit”) the common area responsibility of the association.

WHAT ABOUT NEGLIGENCE?

If an owner or the association is clearly negligent in maintaining a broken pipe or another water source, they can become legally responsible for the resultant damage. Making that party legally responsible generally means proving to a court that they: (i) had a legal duty to repair; (ii) knew or should have known that the leak was occurring; and (iii) chose not to make the repair. It is difficult to do and the cost to go to court to prove your action often exceeds the value of the water repair.

WHAT ABOUT INSURANCE?

Insurance appears to change things, but it really doesn’t. When an association or owner opens a claim with the association’s insurance, then the carrier will scramble and appoint a claims adjustor who reads the policy and CC&Rs and determines what repairs are “covered” under the policy and therefore paid for by insurance.

The breadth of that policy should match or be greater than that coverage required by the CC&Rs. It’s a straight contract review and it shouldn’t matter who owns the property to be repaired, as both the owner and the association are co-beneficiaries under the insurance contract. (And because the owner and the association are co-beneficiaries, the board should be very wary about unilaterally “canceling” an owner’s claim.)

For example, if the association policy covers improvements within the unit along with improvements in the common areas (sometimes referred to in the industry as “walls-in” coverage), it can look a lot like the association “fixed Betty’s unit.” In fact, it’s only because insurance held by the association covered “floor coverings, cabinets and other built-in improvements and fixtures within the unit” that this occurred. If the CC&Rs didn’t require this breadth of coverage, and the board chose to reduce coverage to “walls out” (aka “bare walls”) coverage (after notice to the membership), then the next owner of a flooded unit would not have any such benefit and would be left to make the repairs to the interior of the unit themselves because the policy covered only the (common area) drywall outward.

If that owner carried property insurance, it will generally be “secondary” to the association’s “primary” obligation to insure as stated in the CC&Rs. In that situation, the owner’s adjustor will often require the owner to open a claim against the (association’s) primary policy to see what items will be “covered” or repaired thereunder before the secondary starts paying for (the balance of) repairs covered under their policy. In the “walls-out” situation, the primary carrier will simply open a claim and write a “no coverage” letter telling the owner that only the common areas are covered. Conversely, in a “walls-in” situation, the primary claims adjustor will explain what items within the unit are covered under the primary policy, so that the secondary adjustor can focus on repairing the remaining things covered under the owner’s policy. If the owner chose not to carry insurance, that owner simply chose to “self-insure,” acting as their own adjustor, and paying for their own repairs.

WHO “PAYS” THE DEDUCTIBLE?

Your community might have a clear provision in your CC&Rs, or a rule or policy on point. Otherwise, if those documents are silent on the matter, we’ve seen associations and courts assign the deductibles to the person making the claim, the association, or some equitable distribution between the parties such as in proportion each benefitted from the insurance payout. Understand that a deductible is not a sum paid, but a sum deducted from the total payout, so plan your repairs accordingly.

Converse to logic and urban legend, California law does not follow a source rule for water events. It follows the Civil Code, which generally makes owners and the association responsible to repair their individual property. Insurance provides repair money in accordance with the terms of their contract(s). Understanding this from the beginning will help the manager better address the process.

Mark Guithues, Esq. is founding partner of Community Legal Advisors, which serves a portfolio of more than 300 residential and commercial community associations in Southern California.