by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
LANDLORD/TENANT; RESIDENTIAL; INSURANCE: Residential landlord has duty to insure premises for replacement value, and the "marine rule" should not be applied to residential premises, especially where there are protected tenants and co-ops involving substantial investment. Bernard v. Scharf, 634 N.Y.S.2d 919 (Civ. Ct. 1995). The building, a partly sold-out co-op, with some stautory tenants, had been severely damaged by fire. Tenants and unit owners were disputing with the coop sponsor/landlord.
The property probably would cost more than half its previous value to restore. The owners were underinsured, and consequently would have to pay a substantial amount themselves to restore the property. The owners wanted the court to apply the marine rule, which has been used for determining remedies and damages for insurance of a plaintiff's leasehold interest in a commercial building and has also been applied in landlord/tenant disputes. The marine rule states that if the cost of restoration is more than + the value of the building prior to the fire, there is deemed a total destruction. The court found that the rent control and warranty of habitability statutes establish a public policy in New York that generally should require that a landlord restore a building. It did not indicate where the limit of this duty would be, but clearly it did not find the limit exceeded here.
The owner claimed that it was economically unfeasible to restore the building, and that therefore requiring its restoration would amount to overreaching under the rent control law and a taking. The court determined that, where, as here, the building owner knowingly underinsured the building, a claim of economic infeasibility could not be made to avoid restoration obligations, and requiring restoration would not be an unconstitutional taking.
Finally, the court also commented that there was a duty to the coop purchasers to maintain insurance at the amount set forth in the offering brochure - $3 million. The owner had been advised by its original insurer that $3 million was not enough to restore, but nevertheless had reduced its coverage to $2 million with another insurer.
The court ordered the owner to restore the premises.
Comment: Perhaps the owner got what it deserved in this case, but the notion that an owner is always required to maintain replacement insurance as a consequence of the implied warranty of habitability, under penalty of rebuilding at a permanent loss, probably is news to many landlords. Ironically, it is not clear from this case whether the duty arises here out of the general habitability duty to tenants or out of the fact that there were rent controlled tenants in the building. (It clearly would not arise only in the context of a co-op.)
Many older buildings would be extravagantly expensive to replace, and conventional wisdom would be that replacement insurance would be similarly extravagant and therefore inappropriate. Where some units are rent controlled but others are not, the landlord would be able to raise the return on the rent controlled units incrementally to cover part of the cost of super high insurance, but perhaps would not be able to raise the rent on the non-controlled units enough to make up the difference. In any event, why should there be a rule that would require insurance that the marketplace otherwise would view as economic waste?
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