Ruling Means Condo Owners Should Review Insurance
Home ownership is often a risky proposition. With condominiums, though, there’s the added factor that individual owners don’t have much control over the common areas and management of the governing condo association. Despite this lack of control, condo owners may find themselves liable individually for injuries that occur, say, in the lobby, stairs, elevator, or any place outside their individual units.
Many condo owners these days are worried about a recent court case that holds condo owners liable for judgments exceeding the insurance policy limits of the condo association. This ruling by the 4th District Court of Appeal in Ruoff vs. Harbor Creek Community Assn. cleared the way for a slip-and-fall victim to sue each and every member of the 152-unit Harbor Creek condo project in Dana Point. If other California courts decide to follow the 4th District, condo owners could find themselves saddled with all sorts of liabilities--unless Sacramento legislators pass a bill to basically reverse Ruoff’s ruling.
“I was alarmed when I first learned about this case,” said Lainie Sadoff, president of the 120-unit Encino Towers Homeowners’ Assn. Sadoff’s association has been in contact with its lawyer and they’re still studying what to do. The best option for now is to beef up the association’s insurance. More insurance has its own risks, however. “If you over-insure, you invite lawsuits from plaintiffs in search of deep pockets,” Sadoff said. “You’re kind of damned if you do and damned if you don’t.”
Cathy Castro, a property manager at Bowker & Roth Inc. in Sherman Oaks, advises her condo association clients to carry additional umbrella--or wraparound--insurance, and the cost runs about $5 a month per unit. This extra insurance protects the association and its members, but she warned that not all the associations can afford to properly insure themselves.
Insurance coverage accounts for anywhere between 5% and 20% of the monthly association fees charged to condo owners, Castro said. Monthly fees at the 12 Valley condo projects managed by Castro already range from $130 to $590. At Encino Towers, for example, about 10% of the $590-a-month association fees goes to pay for routine insurance. “The added costs can only hurt,” Castro said.
Individual condo and townhome owners should ask their own insurance agents about extra coverage for any liability that may result from common area injuries, Castro advised. And, condo owners can purchase loss assessment coverage, which basically protects individual condo owners if they’re assessed extra fees by a condo association for unforeseen expenses such as a lawsuit.
Another possible way to protect individual condo owners from common area liability is to change the way condo owners hold title to the common areas, such as the condo owners deeding over their interest in the common areas to the association. Another option is incorporating the common areas and issuing condo owners shares in the corporation--much like a co-op. Both ideas could easily run afoul with owners who might not want to go along with the change in title, and lenders who already look askance at many condo and most co-op projects.
“To change a recorded map and to get approval from all owners and lenders is next to impossible,” said James P. Lingl, a Camarillo-based condo attorney who says he represents more than 400 homeowner associations in Southern and Central California. Also, he said, “Co-ops are very difficult to sell because you’re not really selling real estate. You’re selling stock in a company.”
Daniel C. Shapiro, a Northridge resident and partner at the L.A. law firm Wolf, Rifkin & Shapiro, agreed with Lingl that changing condo owners hold title to the common areas probably won’t help individual condo owners very much. Besides, he said, “transferring the . . . the common area from the individual homeowner to the homeowner association may trigger a real property tax reassessment. In addition, it is possible that this transfer would result in a documentary transfer tax being imposed.”
Shapiro thinks that beefing up insurance coverage is probably enough. “The insurance will take care of any possibility that property values will be impaired by the liabilities of individual condo owners,” he said. “Everybody’s very uptight, but it’s very rare that there’s a judgment for more than a $1 million.”
Maybe the best thing condo owners can hope for is a legislative remedy, said Chris A. Carlson, a real estate attorney at West L.A.-based Manatt, Phelps & Phillips. Lenders, property managers and realtors could also be hurt if the Ruoff decision is allowed to stand. “It is unfair to hold individual condo owners responsible for common area mishaps when they have no control over the management and maintenance of those areas,” Carlson said. “The thing to do is make the legislative change now.”
While current condo owners may have to wait for the law to change, would-be condo buyers can protect themselves by reviewing association records and talking to neighbors, advised Jan Hickenbottom, owner of Condo Consulting Services in Thousand Oaks and director of condo management at The Yousem Co. in West L.A. “If you’re purchasing in a community association, take the time to do your homework,” she said. Buyers should be particularly wary of condo projects that aren’t being properly maintained or that are occupied by a high percentage of renters, she said.
“The first thing I would do is look at the financial statements of the association,” said Encino Towers condo owner Sadoff. “I would want to see what type of expenses the association incurred, whether the reserves are adequate, how much insurance the association carries and how many claims there have been against the association in the past,” she said.
“Most people buy a condo because it looks pretty and the realtor tells them what a great place it is,” Sadoff said. “When you buy a condo, however, you become a partner with all these other people.”
