Burst Pipe? What Condos Need to Consider Following a Casualty Loss 

A dishwasher in an upper-level condominium unit breaks suddenly. Without warning, water floods the kitchen floor and cascades to the two units immediately below. Ceilings, floors, and furniture are damaged. 

Too often, this situation results in the condominium association denying all responsibility and telling the owners involved to call their carriers and hope for the best. In fact, many boards believe if a loss emanates from a unit component, it automatically means the association isn’t involved.

However, in most situations involving a casualty loss — a sudden impactful event like a burst pipe or broken hose — the association must be involved due to provisions in most bylaws and the way condominium insurance works.

Here are some basic rules for dealing with sudden damage in a condominium:

The association master policy covers the entire condominium.

Most bylaws require the association to purchase a master all-risk casualty policy covering the entire condominium in case of losses in both units and common elements. For most casualty losses such as fires or burst pipes, the master policy is primary even if the loss emanates from one unit and that unit owner was culpable or negligent in causing the loss.

Owners are entitled to the association’s coverage.

Some boards and managers find this arrangement unfair. While it might seem counterintuitive, unit owners pay for the master policy through their assessments and that policy covers their units and common elements. Thus, they should enjoy the benefits of that coverage. Unit owners who cause a casualty loss also remain entitled to the basic coverage provided by the master policy even if they’re held responsible for its deductible, which can be considerable in today’s market.

The unit owner’s insurance policy also is implicated. 

Some jurisdictions and some association bylaws require owners to carry an HO-6 homeowner’s insurance policy. Most master condominium policies cover unit restoration to builder-grade level only and do not cover upgrades or improvements made by the owner. Also, most master policies do not cover losses to personal property or relocation expenses if an owner must move out during repairs. These items are usually covered by the HO-6 policy rather than the master policy.

Bylaws usually require associations to supervise repairs. 

Under most modern documents, when a casualty loss occurs, the association is required to arrange for repair or restoration of the damaged units and common areas or reimburse an owner if the bylaws require them to do so. Either way, the bylaws usually contemplate a claim on the master policy that should provide most of the funds with the carrier’s adjuster preparing estimates for the restoration work. If an association chooses not to make a claim on the master policy, it usually does not relieve the association of its responsibility for repairs, often referred to as self-insuring.

Because an owner’s HO-6 policy covers damage to unit upgrades and improvements, the HO-6 carrier may have to work with the master carrier to properly adjust the claims so the unit can be fully restored.

The association may have options dealing with the master policy deductible. 

All insurance policies have deductibles. In fact, many master policies have deductibles ranging from $10,000 to $50,000 due to a difficult insurance market. Due to higher deductibles, an association may be forced to eat the master deductible for insured casualty losses. Under some bylaws or state laws, an association may be able to assess the master deductible against a unit if that owner was negligent and caused the loss. Meanwhile, many unit HO-6 policies insure the owner for potential liability for the master deductible. Associations should remind owners to make sure they have coverage for this potential liability.

Insurance only applies to casualty losses. 

There often is confusion as to when a condominium association must become involved in a water damage event that starts in a unit. The general rule is when there is a sudden event, the bylaws generally require the association to make a claim on the master policy and make repairs to the damaged units or common elements. If the damage is created by a noncasualty situation like a slow leak due to a caulking failure or a drip-leak from a dishwasher over time, it is typically not a casualty loss and insurance is not implicated. In this circumstance, an association can look to its bylaws to determine who is responsible for the damage. It is often an owner who was supposed to maintain the leaky component.

Per usual, one must first consult the bylaws to chart a roadmap to address a casualty loss. Educating homeowners about how their HO-6 policies work in conjunction with the master policy can help as well.

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Understanding Insurance Responsibilities

One of the most common and consequential questions in community associations is about how insurance responsibilities are divided.

Developed with expert guidance from community insurance and risk management specialists, Insurance in Community Associations: Who Covers What? will help board members, owners, and residents understand coverage requirements, options based on risk, the lines where responsibilities intersect, and how communities can make informed decisions.

The guide includes an overview of an association’s core coverage, additional coverage based on operations and risk, what isn’t covered by association policies, and the steps communities should take to evaluate and review their coverage.

>>CAI members receive free access to the digital version. Also available in print.