Maryland's condo law -- it's not what it used to be!
A recent decision by the Maryland Court of Appeals throws a wrench in long-standing insurance practice. Here, IA&B’s education consultant and coverages expert, Jerry Milton, unearths what happened and what producers need to know moving forward.
In 1981 Maryland revised its condo law to read in part:
(a) Commencing not later than the time of 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, exclusive of improvements and betterments installed in units by unit owners, insuring against those risks of 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.”
Sounds pretty simple to me: The council is required to purchase property insurance on the common elements and all units. However, things can change. And they have! Thanks to two cases.
The first case involved a claim made in March 2003 by Charles and Cindy O’Carroll, who owned a condominium at the Bridgeport Condominiums in Laurel, Md. The unit was rented to Velma Kiawu. Ms. Kiawu was cooking when a grease fire triggered the condo’s sprinkler system. Fire, smoke and water damaged the walls, carpet, cabinetry and microwave. The O’Carrolls filed a claim for $12,157 with the council of unit owners, and the council declined to pay for the damage. The O’Carrolls then filed a claim with their insurer, Erie Insurance Exchange.
The second case occurred in June 2004 when Dianne Anderson incurred water damage to the ceiling, carpet and kitchen of her condominium which was located in The Gables on Tuckerman in Rockville, Md. The damage was caused by a broken hot water heater on the second floor of her condo unit. She filed a claim for $6,358 with the council for the condominium complex. The council refused to pay for the damage to her unit. Ms. Anderson also filed her claim with Erie.
These losses affected the O’Carrolls’ and Ms. Anderson’s individual units and did not damage the common elements of the condominium buildings or any other units.
In the first case Erie and the O’Carrolls sued the Bridgeport Condominiums council, and in the second case Erie and Ms. Anderson sued the council for the Gables on Tuckerman. In both cases the circuit court ruled against Erie and the unit owners.
Both of these cases were consolidated into one in September 2007 and became known as “the Tuckerman case.” On April 15, 2008 the Maryland Court of Appeals upheld the lower courts and concluded that Section 11-114 was ambiguous. In their review of the Maryland Condominium Act, the court concluded that condo councils or associations are required to insure the common elements, but not necessarily the property of the unit owners. The ruling in the Tuckerman case does not prohibit the condo council or association from insuring the individual units, but removes the requirement they do so.
This decision creates numerous problems for condo unit owners and their insurance agents throughout Maryland. For the past 27 years unit owners and their agents have insured the units with the understanding that the association policy would cover the individual units. The Tuckerman case changed all that.
Now the question is, “Who insures the units – the association or the individual unit owners?” The answer depends on the wording of the condominium declarations.
If the declarations state, “The council shall obtain and maintain a blanket policy of property insurance insuring all common elements, but not including the individual units,” the unit owners are responsible for insuring all building items and fixtures that constitute the unit.
However, if the declarations specifically say, “The council shall be required to obtain and maintain property insurance covering the common elements and all of the units in an amount at least equal to the full replacement cost of the property,” the unit owners should not be responsible for any damage to their unit as originally built.
But, what if the declarations are silent on this issue? Based on the Tuckerman decision, the council could pay for any damage to an individual unit if they want to. But they don’t have to!
What is a “unit”? Most declarations have wording that is similar to the following:
“The boundaries of the unit shall be the interior surfaces of the perimeter walls, floors and ceilings. The unit shall not include the utilities running through the unit which are utilized for, or serve, more than one unit.”
The insurance policy purchased by most condominium unit owners is the Condominium Unit Owners Coverage Form (HO-6). The unit owner selects the amount of Personal Property coverage (Coverage C) needed. Dwelling coverage (Coverage A) is automatically included for a specific amount. The Coverage A amount may vary among insurers, but under the Insurance Services Office (ISO) form its $5,000.
This limit of $5,000 may be enough to properly cover the improvements and betterments made by the unit owner, but it certainly is not enough to insure the value of the “unit” as defined in the condominium declarations. How much dwelling coverage is needed to cover the value of the room divider walls, carpeting, paneling, light fixtures, bathroom and kitchen fixtures, built-in appliances, etc.?
You purchased a condominium unit for $300,000. Is that the value of the unit? Certainly not. For that $300,000 you acquired unqualified (fee simple) ownership of the unit and joint ownership with the other unit owners in the common elements, including the land, of the complex. Well then, what is the value of the unit – $100,000, $150,000, $200,000? That’s not always an easy question to answer. If the condominium is a new complex, the developer should be able to give you the answer. But, what if the condominium is 10 years old? The value of the unit could be 35%, 40% or even 50% of the purchase price. Maybe the condominium council can help. If not, an appraisal may be the only answer.
A few final thoughts about the HO-6 policy…
- Coverage A (Dwelling) and Coverage C (Personal Property) are insured on a named-perils basis. These coverages can be changed to a “risks of direct damage, except as excluded” basis by adding the Unit-Owners Coverage A – Special Coverage endorsement (HO 17 31) and the Unit-Owners Coverage C – Special Coverage endorsement (HO 17 32).
- Coverage for any assessment of the individual unit owners by the condominium association for any property or liability loss not covered by the association policy is limited to $1,000. This loss assessment coverage can usually be increased up to $50,000 by adding the Increased Loss Assessment endorsement (HO 04 35). However, if the assessment is due to a deductible in the association’s policy, the maximum amount that will be paid is $1,000.
- If the condominium unit is rented to others, the Unit-Owners Rental To Others endorsement (HO 17 33) must be added to cover the personal property when regularly rented to others and to provide liability coverage when the unit is rented.
The Tuckerman decision has certainly changed the way insurance may be written on condominium associations and condominium unit owners in Maryland. However, Maryland has now joined numerous other states that have the same provisions regarding condominium insurance. That is, who insures the individual units – the association (council) or the unit owners? Read the declarations!
Jerry Milton, CIC, contributed this resource. The legal profession recognizes him as an expert on insurance coverages. He is also an education consultant for IA&B, working with CISR, CIC and continuing education programs.