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Community Association Underwriters of America, Inc. v. McGillick

2010 WL 5467673 (U.S. Dist. Ct. D. N.J.2010) (Unpublished)

CONDEMNATION; INSURANCE; SUBROGATION — The provisions of a condominium association’s public offering statement do not represent a contractual agreement between a unit owner and the association and even if a waiver of subrogation were required to be in the association’s policies and it is not, the insurance company retains the right of subrogation even though a unit owner who is sued may retain a contractual claim against the association for failure to obtain the waiver of subrogation.

Tenants at a condominium unit allegedly caused a fire that damaged eleven adjacent condominium units. The association recovered its repair costs from its insurance company and the insurance company became subrogated to the association’s claims against the tenants and the unit owner who had leased its unit to the tenants. Both the tenants and their landlord moved to have the insurance company’s lawsuit dismissed on the grounds that the association’s public offering statement (POS) and the association’s bylaws “both contained a waiver of subrogation claims against unit owners.” The insurance company opposed the request for a summary judgment because the association’s policy “itself [did] not contain a subrogation waiver and because any alleged subrogation waiver [did] not apply to tenants or unit owners.” Because subrogation is a common law doctrine, the Court applied New Jersey law. According to the New Jersey Supreme Court, subrogation is “a device of equity to compel the ultimate discharge by the one who in good conscience ought to pay it.” Even though insurance companies are entitled to subrogation, “the rights of a subrogated insurer can rise no higher than its insured.”

The association’s insurance policy did not appear to contain a subrogation waiver. So, the unit owner and the tenants could not point to the insurance company’s agreement not to sue them. Therefore, they attempted to rely on the waiver or subrogation found in the association’s POS and its bylaws. The Court, however “conclude[d] that the POS [did] not hold any contractual effect, [but] the genuine issues of material fact remain[ed] as to the effect of the bylaws.” The POS specifically said that it was for “INFORMATIONAL PURPOSES ONLY.” Further, under New Jersey law, a POS “does not represent any contractual agreement between a shareholder and the cooperative,” and the Court extended this concept to relationships between a unit owner and a condominium association. Consequently, the Court could not “conclude that [the POS] in and of itself constitute[d] a subrogation waiver, nor [could it] conclude that it [bound] the association with the force of contract.”

The same waiver language was contained in a single section of the bylaws. This gave rise to two questions: “(1) whether the Bylaws contractually require[d] [a] subrogation waiver in any insurance policy owned by the association; and, if so, (2) whether the Bylaws operate[d] to preclude the [association’s] insurer from bringing suit.” The Court dismissed the argument that the association could choose or not choose to obtain property insurance and therefore rejected the argument that obtaining a waiver of subrogation would be optional. As to “whether the requirement of waiver in the Bylaws operate[d] to bar [the association’s] suit, was less clear.” Nonetheless, the Court pointed out that the insurance company was not a party to bylaws and therefore inherited the association’s claims under the bylaws as a subrogee. According to the Court, “[h]erein [lied] the circularity of trying to apply the Bylaws to the insurer: only by stepping into the shoes of the insured by virtue of subrogation [did] the insurer become a party to [the] Bylaws that require waiver of the very same subrogation.” This meant that the unit owners could “counter-claim for breach of contract,” but the alleged breach by the association “in failing to waive subrogation [did] not preclude the insurer’s suit.”

Once the Court concluded that the POS and bylaws did “not operate to bar suit against the unit owners,” the Court declared that “it would seem to follow almost as a matter of course that neither document would bar suit against the [tenants].” Independently, the tenant argued that the subrogation waiver in the documents precluded “recovery not only against the unit owners but against the ‘policy of insurance issued to the unit owners,’” under which at least one of the tenants was also covered (as the son of the unit owners). The tenants also argued that “public policy reasons for [a subrogation waiver] appl[ied] equally to tenants, given their status as intended beneficiaries of the restrictive covenants in condominium association documents.” The Court disagreed with both arguments, opining that even if the bylaw provision was given contractual effect, “nothing on its face suggest[ed] that it applie[d] as against all individuals included on a unit owner’s insurance policy. To the contrary, the following provision, entitled ‘Unit Owner’s Insurance,’ state[d] that ‘Unit Owners may obtain insurance on their own account and for their own benefit.’” The Court read these provisions to mean that the bylaws considered homeowner’s policies to be both beneficial and confined to the unit owner’s benefit.

The Court also found the tenants’ resort to public policy unpersuasive. It looked at the New Jersey case law presented by the tenants in support of the tenants’ public policy argument. It found nothing in that case indicating that parties other than the actual unit owners, such as tenants of those unit owners ,could rely upon. Consequently, the Court held that “to the extent that [the] subrogation waiver [was] required by the Bylaws, such [a] requirement [did] not accrue to the benefit of tenants.

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