A firestorm of confusion and comment was created by a June 3, 2008, InsuranceJournal.com exclusive 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 as: 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 combined verdict has compounded the already complicated legal and insurance questions surrounding the proper methods for insuring condominium associations and the individual unit owners.
Before diving into the specifics of insuring condominium associations and unit owners (covered in an upcoming article), I would like to editorially comment on this recent case. Overall, the Maryland Court of Appeals misapplied the state’s Condominium Act, but was partially correct in their decision. Sounds like pandering to both sides, but a review of a few case facts will help explain the duality of the statement.
Neither of the subject claims exceeded the particular association’s deductible; and the damage in both incidents originated in the owner’s unit.
• Dianne Anderson, Individually, et al. v. Council of Unit Owners of The Gables on Tuckerman Condominium, No. 2719 04, Circuit Court for Montgomery County: 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 ; and
• Erie Insurance Exchange, et al. v. The Council of Unit Owners of Bridgeport Condominium, No. 0372 4, Circuit Court for Prince George’s County: 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 was required to pay for the above damage, it would have the right to assess all unit owners for the expenditure since the cost of the damage is below the deductible. This would essentially 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 the unit owner 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 the unit owner 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. Improvements and betterments made by the unit owner is the only “real property” the association is not responsible for insuring. The unit owner replaces 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 its 1) intent, and 2) its actual application. Following is the passage taken directly from the published court opinion:
“When we examine the context of the entire Condominium Act, it becomes clear that the master insurance provision was intended to cover only damage sustained to the common elements or the structure of a condominium. Section 11-114 (c) of the Act defines “insured person” under the council of owners’ master policy, providing in part: Insurance policies carried pursuant to subsection (a) of this section shall provide that:
(1) Each unit owner is an insured person under the policy with respect to liability arising out of his ownership of an undivided interest in the common elements or membership in the council of unit owners . . . .
Maryland Code (1974, 2003 Repl. Vol.), Section 11-114 (c) of the Real Property Article.
Each owner is not an insured person with respect to his or her individual interest in his or her own property, but rather, is insured under the master policy only as to his or her collective undivided interest in the entire condominium property. Thus, the master policy is meant not to insure each owner’s property or individual unit, but to protect the common interests of all owners as co-owners of the entire condominium.”
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.
In an insurance professional’s, non-legal opinion, the Maryland Court of Appeals misread and misapplied the 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.
The next article will focus on the different definitions of associational insurance responsibility and how they compare with the two nationally adopted reference codes. Each state adopts its own laws regarding the formation and governance of condominiums making this a country-wide issue with many different answers.
Maryland Insurance Administration Weighs In
Today, the Maryland Insurance Administration issued a bulletin regarding the issues and potential coverage gaps created by this ruling. Below is a link to the Administration’s Bulletin 08-15:
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