By Benny L. Kass
Saturday, July 26, 2008
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?
Typically, as the appeals court suggested, a unit is defined as a "block of airspace surrounded by walls, a floor and a ceiling." The association's declaration contains the definitions, and usually the unit's boundaries are the "finished side of the interior sheetrock, ceilings and floors." If damage occurs between the walls of two units and causes drywall damage inside the units, who is responsible for that repair?
"This decision might be interpreted to mean that associations are no longer required to purchase and maintain property insurance coverage to include the interior of individual units. However, it does not stipulate that associations are statutorily prohibited from purchasing and maintaining such coverage," said Steve Dickerson, senior vice president at USI Insurance Services in Falls Church and a recognized expert on community association insurance issues.
"A basic purpose of single-entity coverage is to assure with a reasonable degree of certainty that sufficient property insurance is purchased and maintained to protect the financial integrity of condominium associations and unit owners. We are not comfortable that this reasonable degree of certainty can be accomplished by eliminating the single-entity coverage," he said.
Why? According to Dickerson, this would require associations to "rely on multiple unit owners individually to purchase adequate property insurance coverage for all structures and components within the interior walls, ceilings and floors of their units."
What does this case mean for condominium associations? They have to carefully consider the type and scope of their master insurance policy. Dickerson's company and other insurance experts continue to recommend that Maryland associations maintain -- rather than reduce or eliminate -- their single-entity coverage policies.
What does this mean for condominium unit owners? First, make absolutely sure that you have an HO-6 policy to cover your unit. Whether the master insurance policy will or will not cover you, the HO-6 will provide at least some protection in the event of an unforeseen casualty.
Next, find out the amount of the deductible in the master policy and make sure that your HO-6 policy provides coverage and is at least in that amount. Condominium owners should talk with their insurance carriers to make sure that they have adequate coverage.
It is also recommended that the HO-6 policy be issued by the same company that issued the master policy . Often, insurers point fingers at each other; each company says, "This is not our responsibility -- look to the other policy." If that happens, you can tell the insurer to work it out internally.
It remains to be seen whether the Maryland legislature will review the law in the light of the court decision and whether courts in other states will follow the Maryland model.
Clifford Treese is the founder of Association Information Services, a California organization that assists community associations on issues including insurance. According to Treese, "There is a large public policy issue here: Should all owners [and tenants] be required to obtain personal insurance . . . or suffer whatever might be the consequences?"
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site,http://www.kmklawyers.com.
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