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BOARD OPERATIONS

HOW CO-OP/CONDO BOARDS OPERATE

More Insurance Shenanigans: An Attorney Exposes an Outrageous Loophole

Bruce A. Cholst in Board Operations

A co-op board admissions committee interviewed a prospective buyer: a 65-year-old father who wished to purchase the apartment for his college-student son. Attending with them was the father's girlfriend, a woman in her 20s. During the course of the interview, the father was asked about his plans for the apartment once his son graduated. The father responded, "I'm not sure. Who knows? Perhaps I will let the bimbo" — referring to his girlfriend — "live in the apartment after my son moves out."

The admissions committee, incensed by these insensitive remarks, rejected application. The father didn't take it well. He wrote a letter to the board indicating that if the seller were ever to sue the cooperative for rejecting him, he would do all in his power to help the seller. The father sent a copy of that letter to the seller's attorney.

Since the threat seemed remote (i.e., not a direct warning that a lawsuit would ensue but merely a statement that, if the seller were to sue, he would assist), and the board did not believe it had any legal obligation to the seller, it did not report the threat to its insurance carrier.

Buyer Number Two

About nine months later, the seller produced a second buyer. Following the board interview, the apartment was sold for considerably less than the original, rejected buyer's price. The seller sued the co-op and its board members personally for the difference between that earlier price and the price it ultimately received. The suit also included attorney's fees for both transactions and reimbursement for the maintenance he paid between sales.

The board immediately notified its insurance carrier of this litigation and requested a legal defense and coverage of the claim. The carrier disclaimed coverage and refused to provide a legal defense on the ground of "late notice." The carrier took the position that the cooperative corporation was on notice of the threat of litigation at the time the father had sent his letter after the initial rejection — even though no one had actually threatened a lawsuit! — and its failure to notify the carrier deprived the carrier of an opportunity to promptly investigate the matter.

The co-op and its individual board members were forced to defend the case without insurance coverage. Ultimately, the cooperative was successful and the case was dismissed. However, the litigation was protracted and the co-op incurred substantial expenses for legal fees and disbursements.

Even though the corporation had prevailed in its litigation against its former owner, it was not entitled to be reimbursed by that owner for the sums it spent defending the claim. To recover its losses, the board sued its insurance carrier for breach of contract.

The co-op prevailed in its litigation against the insurance company, recovering all expenses associated with its defense of the seller's lawsuit. However, since the courts have ruled that legal fees incurred in successfully prosecuting a breach-of-contract claim against an insurance company are not recoverable from the carrier, the co-op had to absorb the costs of suing to collect its defense costs. Thus, the co-op was never made whole for all the monies it had to expend in defending the claim. (Recent court decisions, however, suggest that in the future, the prohibition against recovery of legal fees incurred in the successful prosecution of a breach of contract claim against an insurance carrier may be dropped.)

COMMENT All too often co-op and condo boards are loathe to report threats of litigation to their insurance carrier on the theory that the prospective suit seems frivolous, the litigation may never materialize, and the mere notice of possible litigation will result in a premium increase.

No threat of litigation, however remote or frivolous it might sound, should go unreported to carriers, and the report should be made as soon as the threat is received. It has been our experience that the act of filing a claim does not automatically trigger an insurance premium increase. Moreover, boards purchase insurance for a reason — to insulate the association and its directors/managers from litigation threats. Boards can always consult counsel as to the necessity for reporting a threatened claim to the carrier, but when in doubt, make the report immediately, as insurance companies love to use "late notice" as a pretext for avoiding their coverage and defense obligations.

Had timely notice of this threat of offering to help in case any litigation might, maybe, possibly ever arise — as bizarre and remote as that seems — been communicated to the carrier, the insurance company would have had no plausible basis for denial of a defense and coverage, and the co-op wouldn't have suffered any out-of-pocket loss.

 

Bruce A. Cholst is a partner at Rosen Livingston & Cholst

Adapted from Habitat November 2009. For the complete article and more, join our Archive >>

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