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06/19/09: New Maryland Law On Condo Insurance

Housing Counsel

By Benny L. Kass

Effective June 1 of this year, Maryland condominium owners may be responsible for up to $5,000 dollars if a fire or other hazard causes damage within their own unit.

Equally important, if the proper disclosures about the new insurance laws are not given to prospective purchasers, the real estate sales contract is not enforceable.

A brief background is important. Last year, the Maryland Court of Appeals (the highest court in the state) ruled that the “Maryland Condominium Act does not require the condominium association to repair or replace property of an owner in an individual condominium unit after a casualty loss.” For years, many condominium associations obtained what is known as a “single entity” insurance coverage. The so-called “Master Policy” would pay the association to repair and replace certain damage – both in the common elements as well as within a unit itself, subject to any deductible spelled out in the policy.

When the Maryland court rejected this approach, basically holding that unit owners had to pay to repair their own units, this caused considerable consternation among property insurers, condominium managers as well as board of directors faced with deciding what kind of coverage should be obtained.

Individual unit owners also had questions: do I need insurance coverage and if so, what is the appropriate amount of coverage?

And insurance specialists were informing their clients that the high court did not prohibit associations from maintaining single entity coverage, and that until the state legislature addressed the issue, they should continue purchasing the single entity policies.

The Maryland legislature did act. By a unanimous vote in the House, and with only one dissenting vote in the Senate, the bill entitled “Condominiums – Repair or Replacement or Destruction by Council of Unit Owners” was sent to Governor O’Malley, who signed it into law on May 19, 2009.

This new law specifically overturned the earlier Court of Appeals case. The stated intent of the Maryland Legislature was to “place an affirmative duty on the council of unit owners (which is what a condominium association is called) to (1) repair damage or destruction to the condominium that originated in a unit, and (2) purchase property insurance that reflects this duty.”

But unit owners also have certain obligations. If the cause of any damage or destruction to a condominium originates from the unit – whether or not the unit owner is negligent – the owner of that unit is obligated to pay the association’s deductible, up to $5,000.

A deductible is an insurance concept. If you want complete and total coverage for a loss, your premium will be high. However, if you agree to pay a certain portion of the damage yourself, the premium will decrease proportionately. A typical condominium association deductible can be $5,000 or $10,000 dollars.

In the past, before the Maryland Court case, the deductible issue caused serious financial problems for associations. A plumbing leak occurred in a unit, but since the cost was below the deductible threshold, in many cases the association had to bear the cost. The law in Maryland – as it is in many states – was that unless the governing documents stated otherwise, the deductible was a common expense. This means that all unit owners had to absorb the loss.

The new Maryland law now makes it clear that if the cause of the damage comes from within the unit, that unit owner may need to pay up to $5,000 to the association.

What does this mean for Maryland condominium unit owners? Simply stated, you should have your own insurance policy that will cover the deductible. This is known as an HO-6 policy, and is something that every condominium owner – regardless of whether he/she lives in Maryland – should obtain. The master policy does not provide all-inclusive coverage. For example, if water flooded into your apartment, it would not only damage your floors, but could also ruin your valuable oriental carpet and destroy your expensive 50 inch plasma television set.

The master policy will pick up the cost to repair your walls, but you are on your own regarding any personal belongings. Additionally, most master policies exclude what is known as “betterments”. If you have the original floors installed by the developer in your unit, coverage will probably be available should they get damaged as a result of the flooding. But if you (or your predecessor owner) installed parquet flooring, this is a “betterment” and will not be covered under most master policies. The new Maryland law requires the condominium association to repair or replace that which was installed by the developer, but specifically excludes any improvements added by the unit owner.

Here is where a policy known as an “H0-6” comes into play. This is a separate policy which will cover your personal losses. It should also supplement what the master policy does not cover, such as theft in your apartment, vandalism, and personal liability coverage in the event you are personally sued and a money judgment is issued against you.

The new law now requires potential condominium unit buyers to be put on notice of their responsibility for the master policy deductible. If this notice is not given, the buyer has the absolute right to walk away from the contract. The Greater Capital Area Association of Realtors (GCAAR) has just amended its form “Condominium Resale Addendum for Maryland” (Form 1328) which all sellers must give to their buyers no later than 15 days prior to settlement. What happens if the wrong form is used? Simply put, the contract is not legally enforceable.

To put even more teeth into the new law, condominium associations must, on an annual basis, advise every unit owner in writing, about their responsibility for the master policy deductible, as well as the amount of the deductible.

This is new law in Maryland, and only time will tell how it will be implemented and interpreted.

However, accidents happen. All condominium owners – especially in Maryland – must make absolutely sure they are adequately covered by their own H0-6 policy, and that the coverage includes the $5,000 deductible the new law imposes on them.

– Boilerplate –