Limiting Your Association's Liability
Takeaway: Boards may have an opportunity to limit the association's liability to unit owners, but they often don't take full advantage of it.
Where do you find the possible protection? Check your governing documents, especially your covenants. "Limitation of liability" provisions, as they are known, are a useful tool that associations often overlook or do not employ consistently.
What do these provisions do? Limitation of liability provisions are exculpatory clauses that are included in most association governing documents. The provisions allow an association to avoid responsibility for damages in certain circumstances by shifting liability from the association to the owner. A typical limitation of liability provision may read:
The Association shall not be liable for any failure of any services to be obtained by the Association or paid for as a Common Expense, or for personal injury or property damage caused by the Association elements or by any Owner, or any other Person, or resulting from electricity, water, snow or ice which may leak or flow from or over any portion of the property or from any pipe, drain, conduit, appliance or equipment, or any secondary or consequential damages or any type.
The key concept here is that one unit owner can claim damages from another unit owner whose pipe breaks, but cannot make the same kind of claim against the association, if the pipe that breaks is common property.
What about in my jurisdiction? Limitation of liability clauses in association governing documents have been upheld by courts in the District of Columbia, Maryland and Virginia.
In a leading case in DC, for instance, the Court of Appeals held that limitation of liability clauses in association governing documents are valid and enforceable. In this case a unit owner sued the condominium and its management company for damages resulting from a common element pipe which froze and burst. The association’s bylaws stated that the association was responsible for the maintenance of the common element pipe; however, the bylaws also specifically provided that the association was not liable for any damage or injury "caused by the elements or from any pipe, drain, conduit, appliance or equipment." The court found that this provision was enforceable.
However, it is important to note that the court also said that if in the past the association had paid for damages in similar cases, the association would have waived the protection of the limitation of liability provision. In other words, the association needs to be consistent.
The Virginia Supreme Court has also held that limitation of liability provisions are valid and not contrary to public policy if they are included in the recorded governing documents for the association, as all owners are put on notice of the provisions before they purchase a property. Maryland courts will also enforce limitation of liability provisions, but in Maryland, the courts will generally construe the provisions narrowly and will not read the provisions to cover situations beyond their express terms. So if your documents provide that the association isn't liable for water damage from an overflowing drain, the court may still find your association liable for water damage from a broken pipe.
What does a limitation of liability clause not cover? It is important to note that although a limitation of liability provision may absolve an association from additional liability to an injured unit owner, the association may still be responsible for performing repairs under the governing documents.
Conclusion: Consistently applying and enforcing the limitation of liability provision in the governing documents can help associations avoid liability for insurance deductibles or other damages in many cases. In order to ensure that your limitation of liability provision is consistently applied, talk to your lawyer and consider adopting a policy resolution that restates the provision and outlines under what circumstances the association will rely on the provision. Additionally, a policy resolution will provide notice to all owners of the association’s position relating to limitation of liability.