Condo Associations Don't Have to Pay for Damage To Units, Md. Court Says

Maryland's highest court this spring ruled that condominium associations aren't required to pay for damage to individual units, a ruling that may please association directors but not individual unit owners.

For years, lawyers and the insurance industry have interpreted the Maryland Condominium Act as requiring that associations obtain what is known as "single-entity property insurance." This means that the insurance coverage for an association would include not only the common elements but also the individual units.

Typically, the insurance coverage for the association -- the "master policy" -- would protect the association and the unit owners from damage caused by smoke, water or fire, whether the cause stemmed from inside or outside the unit. The only exception to coverage was what are called "betterments." If a unit owner -- or previous owners -- added items to the unit, such as a parquet floor or wallpaper, or if the original cabinets, fixtures or appliances were replaced, these betterments would not be covered under the master policy.

However, the Maryland Court of Appeals found differently in Anderson v. Gables on Tuckerman Condominium, a case based on circumstances in two Washington area condominiums.

In the first instance, Dianne Anderson owned a two-level townhouse at the Gables on Tuckerman Condominium in Montgomery County. Her upper-level water heater leaked in 2004. "Water flowed through the ceiling into the kitchen," causing more than $6,000 worth of damage, according to legal documents.

In the second, Cindy and Charles O'Carroll owned a townhouse unit in the Bridgeport Condominium in Prince George's County. A grease fire in 2003 caused the ceiling sprinkler system to turn on. Smoke, fire and water damage to the unit cost more than $12,000 to repair.

In both cases, these owners had insurance coverage for their unit, called an HO-6 policy. Their insurance carriers paid the claims, less the deductibles. Then the owners and their insurance companies sued their respective condominium associations. When their claims were rejected by circuit court judges, the cases were consolidated under Anderson's name and presented to the Court of Appeals.

The state high court affirmed the lower-court rulings in a 37-page decision. It examined the legislative history of the Maryland Condominium Act, especially language the judges found ambiguous. One section of the act [11-114(a)(1)] requires the association to maintain insurance on the entire property -- "the common elements and units."

Yet another section of the same act [11-114 (g)], " only imposes the duty that 'any portion of the condominium damaged or destroyed . . . be repaired or replaced promptly by the council of unit owners,'" the decision said.

The court concluded, "It becomes clear that the master insurance provision was intended to cover only damages sustained to the common elements or the structure of a condominium." Responding to the arguments presented by the plaintiffs, the court simply stated that the legislature "could have fashioned the statutory language accordingly."

This case is applicable only in Maryland, although I suspect that similar lawsuits will be filed throughout the country.

Questions remain about the meaning of this case. For instance, it involved townhouse-style units, where no damage occurred to other units. How would a court decide if a leak from one unit caused major damage to the unit below?