Maryland Court Wrong in Condo Association, Unit Owner Coverage Ruling

How the Court Overstepped its Bounds and Affected Current Policies and Future Claims

A firestorm of confusion and comment was created by a recent Insurance Journal report detailing a recent Maryland Court of Appeals ruling regarding a condominium associations’ requirement to pay for property damage confined to one unit. Two previously separate circuit court cases were combined and heard by the Court of Appeals in Dianne Anderson, et. al. v. Council of Unit Owners of The Gables on Tuckerman Condominium, et. al.

Individually the circuit courts ruled that unit owner associations are not responsible to repair or required to pay for property damage originating within and confined to a single unit. These individual findings were upheld by the Maryland Court of Appeals in the combined case. The appeals court’s combined verdict has compounded the already complicated legal and insurance questions surrounding the proper methods for insuring condominium associations and the individual unit owners.

Overall, the Maryland Court of Appeals misapplied the state’s condominium law but it was partially correct in its decision. Sounds like pandering to both sides but a review of a case facts helps explain.

Case Facts

Neither of the subject claims exceeded the particular association’s deductible; and the damage in both incidents originated in the owner’s unit. In the case involving the Gables condo complex, the amount of damage was only $6,358.23 and the association’s deductible was $10,000. Damage resulted from the overflow of a water heater located on the top floor of the two-story unit. In the other case from a Bridgeport condo association, the amount of damage was $12,257.14 and the association’s deductible was $25,000. A grease fire “caused” by the unit owner led to fire and smoke damage.

Since neither loss exceeded association deductibles, the court may be correct in its finding that repairing damage initiating in and confined to an individual unit is not the responsibility of the particular association but rather a choice on the individual association. Maintenance and repair issues are different than insurance issues.

Certain ambiguous wording in the statute regarding maintenance and upkeep of individual units make this finding somewhat reasonable, yet still suspect based on insurance requirements found in the law. Additionally, if the association were required to pay for the above damage, it would have the right to assess all unit owners since the cost of the damage is below the deductible. This would create a pooling arrangement making each unit owner an insurer of all others. However, to extend that reasoning to insurable losses exceeding the deductible, or causing damage to multiple units or commencing outside a particular unit is a misapplication of Maryland’s statutory provisions.

Unit Owner Responsibility

A certain amount of responsibility is placed upon unit owners to insure their personal belongings, the parts of the unit for which they are responsible (such as improvements and betterments) and to garner liability coverage (liability protection is not extended from the master policy to the unit owner for his individual actions). But requiring unit owners to provide the coverage necessary to rebuild the entire area defined as a “unit” is dangerous for the association, unconscionable for the legislature and wrong of the courts to expect. If the unit owner does not have insurance and cannot pay the cost to repair the unit, what will happen to the value of the building itself and the association as a whole? It is best for the association to maintain and pay to repair damage to ALL real property for the good of the entire association.

Real Property Coverage

Maryland statute regarding real property and condominium ownership reads in GS 11-114 Required insurance coverage; reconstruction: (a) Commencing not later than the time of the first conveyance of a unit to a person other than the developer, the council of unit owners shall maintain, to the extent reasonably available: (1) Property insurance on the common elements and units [emphasis added], exclusive of improvements and betterments installed in units by unit owners [underlining added], insuring against those risks of direct physical loss commonly insured against, in amounts determined by the council of unit owners but not less than any amounts specified in the declaration or bylaws.

Statute clearly requires the master property policy to cover statutorily-defined units. The only “real property” the association is not responsible for insuring is improvements and betterments made by the unit owner. The unit owner replacing the original laminate countertops with granite is an example of an improvement or betterment. In such a case, the association is only responsible for the cost of laminate countertops not the cost or putting back granite countertops. Improvements and betterments must be specifically insured by the unit owner in states that apply this and similar wording.

Such statutory or contractual wording is defined as an “original specification” requirement. It is the same wording found in the Uniform Condominium Act and is similar to the insurance requirements found in the Uniform Common Interest Act.

Two nationally designed reference codes and the state-specific code seem amply clear regarding the requirement of the association to insure the unit as real property. The court was wrong in its ruling.

Misapplied Statutory Provision

In an attempt to strengthen its position, the court pulled one statutory phrase out of context and completely misinterpreted both its intent and its actual application. Following is the passage taken directly from the published court opinion:

Maryland Code (1974, 2003 Repl. Vol.), Section 11-114 (c) of the Real Property Article:

Viewed in context of the statute, it is obvious that this subparagraph relates to the liability (bodily injury and property damage to third parties) protection extended to the unit owner by the master policy. This sub-section has no bearing on or relation to property coverage; it simply relates the coverage extension requirements of the master policy regarding who is an insured for liability purposes. The court erred in the use of this provision as support for its findings.

Bylaws and declarations are the governing documents of all condominium or unit owner regimes. These documents supersede statute as per the statute itself. Division of ownership and insurable interest is dictated by these documents. Statutory wording is only the “default setting” if the bylaws or declarations are silent on the issue.

Insurance requirements were specifically spelled out in the bylaws of both associations. The Gables’ insurance requirements essentially mirrored the statute; again leaving no doubt that the association is required to provide coverage on an “original specifications” basis. Bridgeport’s contractual insurance requirements were even broader than those necessitated by statute, mandating that the association insure the real property at “full replacement cost,” including the defined units.

Conclusion

In an insurance professional’s, non-legal opinion, the Maryland Court of Appeals misread and misapplied the Maryland Condominium Act as it relates to insuring real property; and overstepped its bounds affecting the settlement of future claims (intentionally or unintentionally). Hopefully, this can be rectified by a higher court or legislatively before too many claims are incorrectly settled.

Topics Property Maryland