1. The Problem
In a normal condominium development, the most prevalent claims by owners against their association are those arising from water leaks. The typical allegation is that water entered through the roof, a broken pipe inside a wall, or a planter adjacent to a first floor unit, resulting in damage to the resident’s furnishings, decorations, finishes, flooring, wall coverings, personal property, and the like.
Clearly, the association has the legal duty to repair the common area component so it no longer leaks. Legally speaking, it is far less clear which party is responsible to pay for items that were damaged inside the unit.
The basic rule is that owners are responsible for their own separate interests, thus they must remediate their own unit if it is in disrepair, just as the Association must repair the common areas when such work is needed. As for what constitutes the “unit,’ and thus is the responsibility of the owners, it includes the unfinished surfaces of the flooring, ceiling and walls and everything inside those unfinished surfaces such as carpet, hardwood floors, paint, wall coverings, cabinetry, showers, sinks, and toilets
Despite the general rule stated above, there are times when it is inapplicable because another party is legally responsible for causing the damage. The trick is to identify when someone else is legally responsible.
2. The Law
Responsibility for interior unit damage was historically murky if the CC&Rs did not address the issue in a clear manner, as was often the case with old CC&Rs. Anyone who owns real property can be strictly liable for any damage caused by the defective condition of the property. Although there are exceptions – most often found in Planned Developments (single family home tracts), in the typical condominium or townhome building, the association is not a landowner: It does not own the common areas, they are owned by the members as tenants-in- common.
A case from 1992 called Ruoff v. Harbor Creek Community Association is enlightening. A woman fell on a common area staircase and suffered catastrophic head injuries. The injured party sued not only the association, she sued each owner. The trial court ruled in favor of the owners, finding that they delegated the duty to maintain the common areas to the association, thus they had no responsibility for the condition of the common areas. The Court of Appeal reversed, holding that the individual homeowners were legally liable because they, not the association, were the owners of the common areas and it is impermissible to escape landowner responsibility by delegating the duty to maintain to an association.
Parenthetically, owners are now protected by a statute which was adopted after, and in response to, the Ruoff decision. Under Section 5805 of the Civil Code, owners are now insulated from liability so long as the association maintains the requisite amount of liability insurance.
The point remains, however, that there is no landowner liability on the part of the association arising from the condition of the common areas, because they do not own the common areas. The association’s duty is limited to what is required of it by the CC&Rs: To exercise reasonable care to maintain the common areas. The failure to exercise reasonable care is negligence.
Based on the foregoing, historically, most lawyers recognized that even if the CC&Rs were silent, the Association was not liable for interior unit damage caused by a leak in the common areas unless the damage was caused by its negligence. Negligence was the legally recognized theory upon which the burden could be shifted away from the general rule that an owner is responsible for his or her own unit. Still, while this was the prevailing belief, there has never been any definitive legal authority on the subject so if your CC&Rs are silent, there is still uncertainty and thus a risk for the association.
3. The Solution
Since the 1980s, and especially in the past 25 years, this problem has been minimized because it became automatic that CC&Rs would always include a “limitation of liability” clause in favor of the association. Such clauses were found to be valid in Franklin v. Marie Antoinette Homeowners Ass’n, 19 Cal. App. 4th 824 (1993).
In the Marie Antoinette case, the plaintiff alleged that her hardwood floors were damaged as a result of a leak in the common area plumbing system. The CC&Rs included the following limitation: “[T]he Association . . . shall not be liable for damage to property in the project . . . resulting from . .. water . . . which may leak or flow from outside of any unit or from any part of the building . . . unless caused by the gross negligence of the Association . . . .”
Today, in nearly all instances, you will find in your CC&R’s an exculpatory clause which is either a “gross negligence” standard (such as the one in Marie Antoinette) or a regular “negligence” standard, as a prerequisite to establishing liability on the part of the Association. In the past 25 years, it is automatic to include one or the other – you would be hard-pressed to find any CC&Rs today that do not provide this kind of protection. HOWEVER, YOU SHOULD CHECK YOUR CC&Rs TO BE SURE YOU HAVE ONE OR THE OTHER. In my experience, it is about a 50/50 split between associations which require gross negligence vs. those that require ordinary negligence.
4. The Options
The distinction between negligence and gross negligence is significant. The latter is a high legal standard that is very close to intentional wrongdoing. Under a gross negligence test, it would be rare for the Association to ever be liable for interior unit damage caused from a common area leak. In such instances, the owner’s insurance would pay for the damage while the Association would repair the common area so the leak did not recur.
In contrast, with a negligence standard, the Association must be vigilant. Liability is not automatic when there is a leak, but the Association will have to prove that it exercised reasonable care to maintain the property and the leak was unforeseeable.
There are a few reasons why such clauses (one or the other) are important. First, without them, the Association might become the guarantor or insurer of anything that goes wrong in the community, and the potential financial implications of such a scenario are serious. For one thing, insurance companies may not cover claims of strict liability, they cover negligence. Thus, there is an increased risk that the Association could be the target of claims that would not be covered by insurance; and even if there is insurance, the mere fact that there is no protection would encourage people to sue. The association would be defenseless.
Second, while most owners do not realize it, those in management and on the board are aware that associations are constantly presented with nuisance-type claims for money (e.g., someone’s car was allegedly damaged in the association’s garage but, other than the owner’s insistence, there is no evidence of where the damage occurred). If there is no protection against such claims in the CCR’s, inevitably the Association will have to pay even if they are bogus or unsupported by any evidence, because it is cheaper to settle than to get involved in a lawsuit. With the exculpatory language, and especially a gross negligence standard, it deters most nuisance claims where someone is just trying to extort a few thousand dollars from the Association.
Third, the Association has no knowledge of or control over how an owner decorates or furnishes his or her unit. What may seem like an ordinarily water leak can turn into a million dollar claim for damage to an expensive painting (for example). Thus, the argument goes, it is easier and fairer to allow the owner to purchase his or her own insurance with knowledge of the coverage he or she needs based on his or her own personal property.
Water leaks in a condominium development have always been, and will always be, one of the most prevalent and complex issues that will regularly confront any homeowner association. Deciding who should be responsible for repairing the damage requires a policy decision that every association must make, since that responsibility can be allocated different ways. Whatever your association decides should be expressly addressed in the CC&R’s leaving nothing to inference.
It bears remembering, however, that the Association is merely a fictitious “front” for all the owners combined. What affects the Association financially impacts every owner. The Association’s money comes from the owners, and if the Association needs additional funds for any reason, including money to pay an uninsured claim, it will also have to come from the owners. Thus, you should think carefully before making the association responsible for all damage caused by water leaks originating in the common areas regardless of whether the association was at fault.
If you want to protect the association, the key is making sure that your CC&Rs are updated and that they contain a clause limiting the Association’s liability. Your association can decide whether to adopt the “gross negligence” standard or the “ordinary negligence” test, but to eliminate any possible uncertainty, your association should have one or the other and it should be stated in the clearest possible language