Legal liability is liability imposed by the courts or by statute on any person or entity responsible for the financial injury or damage suffered by another person, group, or entity. Legal obligations, or legal liability, can arise from intentional acts, unintentional acts, or contracts.
When the potentially liable parties are mutual beneficiaries and users/occupiers of the same location, the need for each party to be properly insured is of paramount importance. Residential condominium associations and individual unit owners are prime examples of this need to close all gaps in liability protection.
Essentially there are three legal liability possibilities following bodily injury or property damage at a residential condominium property. Legal liability is placed on: 1) the condominium association; 2) the unit owner; or 3) jointly on the association and the unit owner.
When legal liability is assigned to only one party, whether it be the association or the unit owner, defining coverage is easy. The cost of the bodily injury or property damage is covered, subject to policy limits, by the at-fault party's insurance policy:
- The association's commercial general liability (CGL) coverage pays if the association is found to be solely negligent; or
- The unit owner's HO-6 pays if legal liability is solely placed on the owner.
The unit owner's liability coverage (most commonly provided by the HO-6) is generally first dollar protection. Likewise, the association's CGL may be written providing first dollar protection; however, many associations utilize a deductible or self-insured retention (SIR). If the association's deductible is high, or there are several liability claims against the association, the unit owner(s) may suffer an out-of-pocket expense because of the association's decision to use a deductible or SIR.
Unit Owner Assessments
When the association is subject to a deductible or SIR, it generally collects the resulting out-of-pocket expense by assessing all the unit owners a share of the deductible/SIR (however such division is calculated). The unendorsed HO-6 provides the insured with $1,000 for such assessment with two main requirements:
- The loss must be one that would have been covered under the HO-6; and
- $1,000 is all the policy will pay for assessment in aggregate (regardless of the number of assessments for losses occurring during that policy period).
Obviously, the association's choice of a deductible/SIR can be detrimental to the unit owner. But, the unit owner does have the opportunity to increase the coverage for assessment by purchase of the HO 04 35 (Supplemental Loss Assessment Coverage). However, the attachment of this endorsement may not solve the unit owner's deductible/SIR assessment problem – depending on the endorsement's edition date approved and used in the unit owner's state.
Attaching Insurance Services Office's (ISO's) HO 04 35 allows the insured unit owner to incrementally increase the loss assessment limit up to $50,000 (relatively inexpensively). But the limit of coverage for an assessment related to the association's use of a deductible/SIR has been historically limited to $1,000 – even when the HO 04 35 endorsement was attached. This limitation was removed in ISO's 05/11 edition of the endorsement. The HO 04 35 05 11 extends the full amount of loss assessment coverage purchased to all assessments, including those resulting from the association's use of a deductible/SIR.
However, the new endorsement may not yet be approved in the insured unit owner's state (and may not be for some time), or the insurance carrier providing coverage may not be using the new wording (depending on the rules of the state). Agents cannot make assumptions, the insured's policy must be reviewed to confirm which loss assessment wording is in use or available. The difference between the old and new endorsement language can mean hundreds or even thousands of dollars to the properly insured unit owner's bank account.
If both the association and unit owner are held jointly liable for the injury or damage, court involvement will likely be required. The first problem to be addressed is the amount of liability assignable to each party. Once liability has been assigned, the second question to be considered is - what happens when liability limits differ (which they most likely will)?
Both questions can and might be governed by the legal concept of joint-and-several liability, along with how each state applies this concept. Losses are shared equally or unequally among tortfeasors based on the facts of the case, each tortfeasor's level of "fault," and statute. The concept of joint-and-several liability is designed to assure that the victim is fully compensated for their injury or loss.
Joint means that any one tortfeasor can be held responsible for the entire amount (each tortfeasor is responsible for all others). Several means that each is responsible only for its share of the fault. Each state applies the joint-and-several liability differently:
- Nine states apply pure joint-and-several laws: Each defendant is responsible for the entire amount regardless of its amount of fault;
- 27 states utilize modified joint-and-several laws: One specific tortfeasor is potentially responsible for the entire only if they are judged at-fault beyond a specific level or amount. Additionally some of these states bar recovery if the injured party is found to be a certain percentage liable; and
- 14 states employ pure several laws: Each party shares the financial consequences based on its amount of fault.
Generally, there is a wide gap between the association's CGL limits and the unit owner's HO-6 liability limits; maybe as much as $900,000 ($1 million in the CGL vs. $100,000 in the HO-6). Because of this gap, the association may be called upon to cover more than their share of damages in pure and modified joint-and-several liability states. To avoid this potential gap, the association may decide to require each unit owner to carry relatively high limits of liability coverage (maybe even an umbrella).
Many state laws related to condominium ownership prevent an association from subrogating against the unit owner if the unit owner's negligence leads to a liability loss. Again, this could be very costly for the association from an insurance perspective; and it's even more costly if the association does not have enough protection to cover the cost of the injury or damage.
Deciding Which Party is Legally Liable
Disclaimer: This section shall not and cannot be construed as legal advice. Any ruling of negligence and legal liability must be made in a court of competent jurisdiction. The following is simply a guideline that may be useful in determining which party and therefore policy may be called upon to cover the cost of injury or damage suffered by a third party.
Where did the Injury/Damage Occur?
Arriving at the more correct answer to the question: which party (the association or the unit owner) may be ultimately responsible for paying the cost of injury or damage suffered by a third party? Knowing where the injury occurred provides clues as to who is most likely going to be held financially responsible.
Like analysis of the property coverage, analysis of the liability coverage requires knowledge of and a deep understanding of three definitions: common elements, limited common elements, and unit property. The definition of each indicates which party (the association or the unit owner) is responsible for the care and upkeep of the property; and also who is responsible for any injury or damage suffered on the property.
- Common elements are owned by and benefit, to some extent, all members of the association. Land (including trees, shrubs, plants, etc.), parking lots, association roads, and the building's structural foundations and load-bearing walls are examples of common elements. Also included in this definition are club houses, pool houses, pools, fences, gates, playground equipment, tennis courts, and other property owned by and allocated to all unit owners.
- Limited common elements are beneficial to more than one but fewer than all unit owners. Common hallways or corridors providing access to several units, walls and columns containing electrical wiring or sprinkler piping serving or protecting multiple units, or a plenum enclosure providing heating and cooling to multiple units are examples. Doorsteps, stoops, decks, porches, balconies, patios, exterior doors and windows, or other fixtures designed to serve a single unit but located outside the unit's boundaries are often categorized as limited common elements because the appearance and safety of these fixtures directly affects multiple unit owners although connected to just one unit.
- Unit property is defined by the association's declarations or statute and is limited to and benefits only the unit owner. The inside of the exterior walls, interior partition walls, counter tops, cabinetry, plumbing fixtures, appliances, and any other real property confined to the unit are examples. The definition of unit property can vary widely with no universal designation.
Injury or Damage on or Caused by a 'Common Element'
Because a common element benefits all unit owners, the association is nearly always going to be ultimately responsible for covering the cost of any bodily injury or property damage that occurs in or on a common element. This is true even if a unit owner in some way contributed to the injury or damage.
When written correctly, and depending on the state, condominium liability policies generally include unit owners as insureds or name them as additional insureds using the CG 20 04 (Additional Insured – Condominium Unit Owners). This endorsement grants all unit owners additional insured status for liability arising out of any portion of the premises not reserved for the unit owner's exclusive use or occupancy. This means that the unit owner is an insured for any injury or damage on or caused by a common element. Further, as an insured, the insurance carrier cannot seek recovery from the unit owner if he/she is somehow responsible for causing the injury or damage on the common element.
Injury or Damage on or Caused by a 'Limited Common Element'
Assigning financial responsibility for an injury or accident occurring on a limited common element is a little more complicated. Largely, the rules that apply to common elements apply to limited common elements (meaning the association will most commonly be held financially responsible); however, there are gray areas.
Of particular interest and problem are those defined limited common elements that benefit only one unit owner, such as stairs, stoops, balconies, decks, etc. Although these elements benefit one unit owner, often the association is responsible for the care and maintenance of these features. Might there be joint negligence or liability assignable to both parties?
Picture a unit owner and his guests sitting on the deck enjoying the evening. They decide to move the party inside nearer the food. As one of the guests crosses the threshold from the deck into the unit he trips on "something" and breaks his arm in the fall. Which party will be held responsible?
The injury occurred leaving a limited common element and moving into unit property. Based on statute, the associations bylaws, and policy wording, who knows? Some situations may require court involvement.
As stated previously, most situations involving limited common elements will follow the rules for common elements. But some may end up in a court of competent jurisdiction to decide if one or both parties will be held responsible for the injury or damage.
Injury or Damage on or Caused by Unit Property
Like assigning responsibility for injuries that occur on or caused by common elements, it is pretty simple to assign financial responsibility for injury occurring within a unit or caused by unit property. The unit owner will be held responsible and his HO-6 will be called upon to pay for any injury or damage within the unit or caused by defined unit property.
When working with a residential condominium association or the unit owner, each party's potential legal liability must be considered, not just the property exposure. As detailed in this article, the agent must review certain key points when considering liability protection, such as:
- Where did the injury or damage occur?
- Does the association require unit owners to carry relatively high limits of liability coverage?
- How great is the difference between the association's and unit owner's liability limits?
- Does the unit owner carry additional loss assessment coverage? What version of the endorsement is being used?
- How does the state in which the association is located apply the concept of joint and several liability?