New York's Cooperative and Condominium Community

Habitat Magazine Business of Management 2021

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ARCHIVE ARTICLE

What's My Risk?

As with most New Yorkers, when Joseph Colbert hears the word "disaster," the first thing that springs to his mind is the September 11th attack on the World Trade Center. It's hard for it not to. For all New Yorkers, and probably for most Americans, the cataclysmic event fundamentally altered their definition of what it meant to feel safe.

And in the shock waves that continued in the aftermath, Colbert, who had had an office on the 85th floor of the north tower, fielded dozens of phone calls from frightened cooperative and condominium board members, wanting to know what they could do to protect their shareholders and their buildings.

"Right after, we had a whole bunch of boards come to us and say, 'What do we do in the event of a disaster? What can we do about security?'" recalls the attorney, who had himself been forced to flee the building's plaza that day. Most of the calls came from buildings where shareholders were subleasing or sponsors were renting and the board members were now worried about strangers coming in and out. "A number of boards were asking us, 'How do we control this?'" says Colbert, a partner with the law firm Rosen & Livingston.

That was then. This is now.

These days, the attorney is worried that not enough boards are calling to find out ways to keep their buildings safe, and that they don't seem to appreciate that the definition of disaster has numerous permutations, and that not all of them are on the scale of a terrorist attack.

When it comes to disaster planning in a building, board members who stick their heads in the sand, or assume that "disaster" only means terrorism, don't realize they are opening themselves up to potential liability in not having an emergency plan in place. And juries are not inclined to be sympathetic toward boards that could have averted a crisis and did nothing.

"If there is a pre-existing notice that there was a problem in the building, and they did nothing to correct it, that's the issue where the board can get into difficulty," says Michael Spain, president of the Michael Spain Agency, an insurance broker. "If they have any type of notice that something is a problem, and they do nothing to fix it, their liability exponentially increases."

That was the situation that a condominium board ran into, to disastrous effect, in 1980, when a unit-owner installed new lights outside her home after she was burglarized in the spring. After waiting five months to cover the issue at a meeting, the board ordered the woman to remove the lights because they hadn't been approved. The owner complied. A week later, she was the victim of a rape. She subsequently sued the board for not remedying her security problem, or allowing her to correct the security problem. The case went to the California Supreme Court, and the court found for the plaintiff.

A LIFE LESS ORDINARY

While it may be unreasonable to expect that a condo or co-op board should know what to do in case of a chemical gas attack, the fact of the matter is that most disasters arise from ordinary situations: failing to fix the broken back door, not following up on the smell of leaking gas, or letting an elderly resident collect newspapers and other junk until the structural integrity of the floor joists is dangerously compromised.

"Right now, in this country, especially in the wake of Enron and WorldCom, there is a heightened sensitivity to executive liability and it doesn't take a crystal ball to see this dovetailing into [investigations into] negative performance anywhere else," points out Bill Coffin, editor-in-chief of Risk Management, the magazine of the Risk and Insurance Management Society.

When it comes to legal liability in disaster planning, "it's no different than regular liability," points out Alan Schreibman, a principal in the Los Angeles-based Integrated Risk Management, an insurance and risk management company. While co-op and condo boards have a little less liability than for-profit organizations, "if a disaster causes bodily injury, the association would be responsible if the injured party could prove negligence."

So what's a board to do?

At minimum, a board of directors needs to be familiar with New York City's administrative code mandating fire safety. Updated in 1999, the code requires that all multi-dwelling residences have a fire safety plan on file with the local fire department and that all residents have a map of the fire exits in their building. Some co-ops and condos go even further, handing out new batteries each year to their shareholders and running fire drills to make sure they can evacuate a building safely.

Other co-ops have taken the added precaution of inviting fire safety experts or security professionals to come in and talk with the board members about ways to make their building more secure.

Some boards are prepared and have a written plan in the event of a disaster, but often, it's the more mundane or "simple" disasters, as Clifford Treese, a risk management consultant based in Hawaii, calls them, that catches a board by surprise. "What happens when the lights go out? Or 24 inches of snow falls and you weren't planning for it? What's going to happen is more and more people will work at home, and when they get impacted by disaster that hadn't been planned for, this issue [of liability] will come up. They will not put up with a loss of income that could have been prevented."

Catching a problem early can save a board from headaches later on.

During a recent party on the 26th floor of a Manhattan condominium, a guest stepped out on the balcony to smoke a cigarette. Thinking he had stubbed out the cigarette in a planter, the guest returned to the party. But the cigarette smoldered, the planter caught fire, and the conflagration quickly spread to the party room. While no one was injured and the damage was mostly minimal, the condominium board didn't wait for an opportunity for a similar crisis. All smoking was banned in the public areas of the building.

"It's the absence of window guards; smoking where smoking shouldn't be done; leaving a door open and knowing that a potential intruder might gain access; an intercom that might not be working; a night doorman who might be sleeping: those are conditions that could lead to disaster. Boards need to think about these things," warns Colbert. And fix them.

WHO'S LIABLE?

But what happens when a board comes up with a disaster plan, and it goes awry? Is the board liable? Anyone can get a lawyer and sue a board, risk management consultants and insurance brokers point out, but as long as a board acted reasonably, it is unlikely that it will be held liable.

"Under the Business Judgment Rule, if a board is acting in good faith, it should be protected," says Dan Shapiro, an attorney with the Los Angeles-based law firm Wolf Rifkin Shapiro & Shulman. For example, as long as a co-op or condo board takes reasonable steps to cure problems - for example, fixing the back door that is not closing properly, making certain all the stairwells are clear of obstacles or locating the source of the smell of gas - courts will usually give boards the benefit of the doubt. However, if the board has specific knowledge in a building that there is a problem "and the board doesn't act to resolve the problem, they may have created a liability for themselves that they otherwise didn't have," Shapiro warns.

Not having enough insurance and/or not following the suggestions of an insurance company are other areas where boards often run into trouble, observes Spain. For instance, a board hires an insurance company to offer an estimate and the company recommends the installation of emergency lighting "and it's very expensive. The board may take the position, 'Let's find another insurance carrier that doesn't demand this.' The board is [now] on notice this should be done, but they don't want to spend the $25,000." If there were a fire and someone were injured, "the board could be in a bad position later on. It would be difficult for them to duck extreme liability."

"It's my experience that most times a disastrous occurrence happens, people get sued. That's a manifestation of the litigious society we live in," maintains David Kuperberg, president of Cooper Square Realty. "So whether a board makes its best efforts to plan for a disaster and therefore to mitigate, as best as possible, loss or chooses not to, they are going to get sued anyway."

The real concern for boards, Colbert maintains, is not whether they will be sued, but whether they will be found liable. When it comes to any type of disaster, from fire to power outage to flood, "if it happens once, it can happen again," and if boards don't do anything, "they will be on the wrong side of a lawsuit."

When in doubt, boards should err on the side of caution and develop an emergency plan. "Once you have had a situation like 9/11, you can't close your eyes and say, 'It's not going to happen again,'" points out one New York-based risk management consultant. "Once someone gets in, you can't take the position, 'We never expected it to happen.'"

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