04/20/2018 : Problem in your condo unit? You might have to pay the deductible.
By Benny L. Kass
April 20, 2018
Many condominium projects in the Washington area are old, having been converted from previous rental apartment buildings. Pipes periodically break or leak, often causing thousands of dollars in damage. Who pays? The unit owner or the association?
Every condominium association has insurance coverage, typically called the “master policy.” This is in addition to the policy every owner in this area must carry for their own unit, called an HO-6 policy.
When damage occurs, the master policy usually covers certain repair costs. But every insurance policy has a deductible – an amount that must be paid upfront or deducted from the insurance proceeds. This can range from $5,000 to $25,000 or more. And until recently, the bylaws of many associations stated that the deductible is a “common expense.” In other words, it has to be paid by the association.
Association boards do not like to pay the deductible every time there is a problem; such expenditures are typically not plugged into the annual budget, and often at the end of the year an association may have to significantly increase the monthly assessments to make up for any shortfall.
A few years ago, the Maryland legislature gave every association a significant break. It enacted what is called “strict liability.” If the cause of any damage to the condominium started from within a unit, regardless of whether there was negligence, that owner must pay the deductible up to $5,000. And the law is not limited to plumbing problems; any incident that occurs in the unit that triggers payment by the master policy is covered under that law.
Maryland lawmakers then did something highly unusual. Almost all bylaws then in existence merely stated “owners may want to get their own insurance coverage.” Typically, to amend association bylaws, a super-majority vote (two-thirds or even three- quarters) of all owners is required. However, since the strict liability provision would financially affect Maryland residents, a law was passed allowing associations, with only a simple majority, to amend their bylaws to require every owner to obtain the HO-6 policy. Why? Because that insurance would pay up to $4,500 of the $5,000 deductible.
Condominiums in the District were facing the same problem: Pipes were breaking and leaking all over, especially when temperatures dropped below the freezing mark. So all District associations – acting through the Community Association Institute – supported an amendment to the D.C. condo act that essentially is identical to the one in Maryland.
In Maryland, for the association to legally collect the $5,000, the board must – on an annual basis – inform all owners of the amount of the deductible and their obligation under the law should a problem occur within their unit.
In Washington, to be obligated to pay the deductible, unit owners must be advised before any damage occurs. Best practice: The board, through its management company, should advise all owners of this law annually.
Accordingly, deductibles remain a common expense except when there is a problem in a specific unit.
However, nothing in law is simple. Most bylaws written before 2010 state that all deductibles are common expenses, and thus must be paid by the association. To raise the amount that the unit owner is responsible for, the bylaws should be amended to reflect the new law.
And in the District, this will take a super-majority vote from all owners. Interestingly, although the law limits the payment to
$5,000, if the amended bylaws do not limit this amount, a District association may actually recover the entire deductible it has to pay when the insurance claim is filed.
Careful drafting of the bylaws will allow a condo with a larger deductible to collect the full amount from the owner in the unit where the problem occurred.
Amending bylaws is not an easy task. In many associations, it’s hard enough to get a quorum for the annual meeting, let alone get a super-majority vote to make changes to their legal documents.
But all is not lost. When unit owners recognize that such a proposed amendment may significantly curb operating expenses – and thus either lower condo assessments or at least keep them stable – many financially minded owners will support it.
Benny L. Kass is a Washington and Maryland lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. Send questions to [email protected] .