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Waivers of Subrogation: Button them up in the Policy

The typical set of condominium governing documents includes a provision which requires a waiver of subrogation to be included in one or more of the condominium association’s insurance policies. There may be also a provision in the governing documents which requires an owner or tenant to include a waiver of subrogation in any insurance policy, including a policy insuring the furnishing and personal property in a unit. The inclusion of such requirement in the governing documents, however, does not guarantee that subrogation has actually been waived in the policies obtained by any of those parties. The key to certainty in this circumstance - despite the logistical complications - is to ensure that the policies, as issued, contain the required waivers of subrogation and that they are broad enough to comply with the directives of the governing documents.

The key to certainty in this circumstance - despite the logistical complications - is to ensure that the policies, as issued, contain the required waivers of subrogation and that they are broad enough to comply with the directives of the governing documents.

Before we get to waiver … what is subrogation?
Subrogation allows an insurance carrier that pays a claim to its insured to file a lawsuit against the person or entity that caused the harm to its insured. The insurance carrier effectively steps into the shoes of its insured to pursue a claim against the negligent party. An example of subrogation in this context would be if the owner of Unit A let its sink overflow and that water caused damage to Unit B, which damage was covered by insurance, the insurer of Unit B could sue the owner of Unit A for the money it paid to repair Unit B. The principle has a sound basis in equity, as it increases the likelihood that the person or entity that caused the harm will actually bear the financial responsibility for that harm. However, despite this sound basis, there are good reasons that condominium associations would want to require an insurer to waive subrogation in various circumstances. In the first instance, in order for the governing documents to comply with Fannie Mae and Freddie Mac requirements, there must be a waiver of subrogation in the association’s master insurance policy. Furthermore, requiring a waiver of subrogation in a unit owner or tenant’s policy may protect the association from a liability claim advanced by the unit owner or tenant’s carrier after it pays out on an insured loss. Finally, waivers of subrogation decrease the likelihood of conflict and litigation between and among condominium boards and unit owners, and that is a legitimate end in itself.

A provision requiring waiver in the governing documents is not enough.
Despite a tendency to get mired in “legalese,” sometimes contracts, and the court decisions interpreting same, mean what they say and say what they mean.

The mere fact that the governing documents of a condominium require the association to obtain an insurance policy waiving subrogation does not mean that the policy obtained by the association actually waives subrogation. The question in such circumstance is whether an insurer, that is not a party to the condominium governing documents issues a policy of insurance without a waiver of subrogation, is somehow bound by the waiver requirement contained in the governing documents. More than one court presented with this question has held that it is the language of the insurance policy, and not the governing documents, which controls whether the carrier has waived subrogation. In a New Jersey case, Community Association Underwriters of America, Inc v. McGillick, the court concluded, that despite a clear mandate in the governing documents that all policies of physical damage insurance contain a waiver of subrogation, the actual policy of insurance contained no such waiver and the carrier’s suit could proceed. See also Skulkie v. Ceparis, 962 A.2d 589, 591 (N.J. Superior Ct App. Div.2009) (insurer’s claim barred where the condominium association’s insurance policy actually contained a waiver of subrogation).

In a more recent Massachusetts case, Pacific Indemnity Company v. Deming, 828 F.3d 19 (2016), the court took the same view on a related question. In Deming, the condominium declaration of trust contained a provision that provided unit owners “shall carry insurance” and that “all such policies shall contain waivers of subrogation.” Despite this clear mandate in the trust instrument, the court looked to the language of the policy to determine if the policy actually waived subrogation. The court concluded that the insurance policy in question did not, in fact, contain a waiver of subrogation and that policy was controlling and, at most, the unit owner breached its obligations under the trust instrument.

The lesson from these cases – even if there are arguments to be made to the contrary – is that an Association cannot and should not rely on the obligation imposed in the governing documents to include a waiver of subrogation in any relevant policy of insurance if it wants to insure such waivers are in place. An association must ensure that the policy itself contains the waiver of subrogation.

The waiver of subrogation should be clearly expressed in the insurance policy.
A condominium association that intends to include a waiver of subrogation should make sure the waiver is clearly stated.

For those readers who have ever attempted to read an insurance policy, the suggestion that anything can be “clearly stated” therein may seem oxymoronic, but it is possible. The Massachusetts case of Greater New York National Insurance Co. v. Lavelle Industries, is both an example of language which could have been “clearly stated” and of what can occur when the language of a policy is less than precise. In Lavelle Industries, the insurance policy provided that GNY waived its “right to recover payment from any unit-owner of the condominium that is shown in the Declarations.” Had the sentence stopped after “condominium” the parties might have avoided significant costs, years of aggravation and the risk of an adverse ruling. The problem is that, not surprisingly, no unit owners were specifically listed or “shown” in the trusts “Declarations." While the court ultimately got it right (by finding the carrier had waived subrogation) the language of the policy could have been more specific.

The association’s governing documents should require the association’s master policy to include a waiver of subrogation as to the unit owners. So too should the association’s governing documents include a requirement that owners or tenants obtain insurance policies that actually include waivers of subrogation. The reality, however, is that including language in the governing documents is not enough. The waiver of subrogation must make its way into the policy itself.

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Should you have any questions, please do not hesitate to contact Thomas Moriarty at 781-817-4900 or email tmoriarty@lawmtm.com.

Tom Moriarty