When Water Spills In and Ambiguity Reigns …

Water damage to an apartment and its contents often presents confounding problems to co-op boards: the boards must determine who is responsible for which damages that a flood may cause.

There are five controlling factors determining responsibility:

1. The proprietary lease, which has provisions relating to the co-op’s maintenance obligations, the shareholder’s responsibility for the shareholder’s personal property, and provisions governing the disposition of insurance proceeds;

2. Contracts between the shareholder and the co-op, such as alteration agreements;

3. Common law principles of negligence;

4. Statutes affecting residential property, including the warranty of habitability; and

5. The extent and nature of the insurance coverage held by the co-op, its shareholders, and their various contractors.

Under the proprietary lease, the co-op is responsible for the maintenance of the structural integrity of the building and its apartments. The co-op must stop any flooding but that does not make the co-op responsible for “consequential damages” to the shareholder’s property from a flood. The proprietary lease makes the shareholder responsible for the furnishings, appliances, fixtures, personal property, and decorative items such as custom tiles and expensive wallpaper within the apartment. The proprietary lease usually contains provisions that determine who receives proceeds of the co-op’s insurance after a flood; however, those provisions do not change the allocation of responsibilities between the shareholder and co-op with respect to the shareholder’s personal property as set forth in the other provisions of the proprietary lease.

Alteration agreements often do transfer some of a co-op’s obligations under the proprietary lease to a shareholder. For example, a shareholder who installs a new bathroom may become responsible for maintaining new plumbing lines within the walls that are installed by the shareholder’s contractors.

The statutory warranty of habitability obligates the co-op to maintain an apartment in a livable condition. It does not impose on the co-op financial responsibility for damages caused by conditions such as water penetration that may interfere with the habitability of the apartment.

Under general principles of common law, a person or company is liable for their own negligence. But the mere fact that a flood has occurred is not evidence of negligence: old pipes break, roofs wear out. “Negligence” requires a finding that a plumbing repair or roof repair was incorrectly done or that the co-op or shareholder had knowledge of a problem and failed to take the action that a reasonable person would have taken to fix the problem. If a co-op is negligent in doing repairs and that negligence causes a flood that damages personal property in an apartment, the co-op would be responsible for those damages. If an upstairs neighbor leaves a bathtub running overnight, there may be grounds to find the shareholder negligent and responsible for the resulting damages.

The best way for a co-op to sort out and deal with the complexity of determining responsibility for a flood is to rely on insurance companies. This will work only if all involved parties are covered by applicable insurance: the co-op, the owner of the damaged apartment, the contractor who performed relevant work in the building, and the next-door neighbor who may have been negligent. If all parties are covered, there is a high probability that the insurance companies will sort out their respective obligations, especially if those policies have provisions waiving subrogation. That is, the insurer whose client receives insurance proceeds for damaged property should not be permitted to sue another party in the name of its insured client.

Many co-ops do not have rules that require all shareholders to have property and liability insurance. Enacting such a rule, either as a house rule or by amendment to the proprietary lease, is probably the most efficient way for a co-op to avoid being entangled in a long fight over responsibility for damages caused by a flood.