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07/21/08: Condo Associations Not Responsible for Unit Damage: Maryland High Court

Housing Counsel

By Benny L. Kass

On April 15, 2008, the Court of Appeals of Maryland – that State’s highest court – held 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.” ( Anderson v. Gables on Tuckerman Condominium ) .

Boards of Directors in condominium associations may be pleased with this result; clearly individual unit owners will not.

For years, lawyers and the insurance industry interpreted the Maryland Condominium Act (“Act”) to require 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 the units themselves.

Typically, the insurance coverage for the association – referred to as 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 of a unit. The only exception to coverage was called “betterments”. If a unit owner – or his previous owner(s) – added items to the unit, such as a parquet floor or wallpaper, or if the original cabinets or fixtures or appliances were replaced, these are “betterments” and would not be covered under the master policy.

Dianne Anderson owns a two-level town home at the Gables in Tuckerman Condominium in Montgomery County, Maryland. . Her upper level water heater leaked, and “water flowed through the ceiling into the kitchen”, causing over $6,000 worth of damage.

Cindy and Charles O’Carroll own a condominium unit (also a town home) in the Bridgeport Condominium in Prince George’s County, Maryland. A grease fire erupted which caused the ceiling sprinkler system to turn on. Smoke, fire and water damage to the unit cost over $12,000 to repair.

In both cases, these two owners have insurance coverage for their own unit – called an H0-6 policy. Their insurance carriers paid the claim, less the deductible, and suits were filed by the owners and their insurance companies against the respective condominium associations. When their claims were rejected by the Circuit Court Judges, the cases were consolidated and presented to the Court of Appeals for a determination.

The high court decision is 37 pages long. It examined the legislative history of the Maryland Condominium Act, especially since they found language which was ambiguous. One Section of the Act [11-114(a)(1)] requires the association to maintain insurance on the entire condominium property – “the common elements and units”.

Yet another section of the same Act [11-114 (g)] makes the association only responsible for repairing or replacing “any portion of the condominium damaged or destroyed.”

After a lengthy review, the court concluded that “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 currently is only applicable in the State of Maryland, although I suspect that similar lawsuits will be filed throughout the country.

The jury is still out on the meaning of this new case. The case involved townhome style condominium units, where no damage occurred to other units. How will the Court decide if a leak from one unit causes major damage to the unit below?

Typically, as the 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 dry wall damage inside the units, who is responsible for that repair and replacement?

Steve Dickerson, Senior Vice President at USI Insurance Services, LLC, ( ) is a recognized expert on community association insurance issues. He speculated that “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”, he added, “it does not stipulate that associations are statutorily prohibited from purchasing and maintaining such coverage.”

Dickerson explained that “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.”

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 for their master insurance policy. Insurance experts, such as USI Insurance Services, are strongly recommending that Maryland associations maintain – and do not reduce or eliminate – their current single entity coverage policies.

What does this mean for condominium unit owners? First, make absolutely sure that you have an HO-6 policy in force to cover your unit. Regardless of whether your master insurance policy will or will not cover, the HO-6 will provide at least some protection in the event of an unforeseen casualty or loss.

Next, find out the amount of the deductible in the master policy and make sure that your HO-6 provides coverage and is at least in that amount. Condominium owners must talk with their own HO-6 carrier to make sure that they have adequate and complete coverage.

It is also recommended that the HO-6 policy be issued by the same company that issued the master policy . Often, fingers are pointed; each company says “this is not our responsibility – look to the other policy.” If that happens, you can just tell the company to work it out internally.

The Maryland Court of Appeals has spoken. Currently, it is the law in that State – and currently only in that State. Whether other Courts will adopt or follow the same view – or whether the Maryland Legislature will want to review – remains to be seen.

Clifford Treese (CPCU, ARM, CIRMS) is the founder of Association Information Services, Inc., a California based organization that assists community associations on a variety of 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.”