HOA Insurance v. Condominium Owner Insurance. How CC&Rs can Affect Coverage Decisions and How a HOA can Help
By Rene’ Turner Sample, Esq.
Condominium Owner Insurance (COI) policies are designed to insure everything inside the condo, while recognizing the Home Owners’ Association (HOAs) are going to insure the common areas. Although the concept sounds simple, insurance companies are known for making things complicated and since HOAs are usually caught in the middle of the disputes between the COI company and the unit owner, this article will attempt to arm the HOA with the information they need to avoid the dispute, and if unavoidable, arm their unit owner with the information they need to fight their insurance company.
Coverage for the Unit Owner usually depends on the wording of the CC&Rs. COI policies typically rely on the language of the CC&Rs for determining what is being insured. For example the standard Allstate COI Policy provides “We will cover items of real property pertaining directly to your residence premises which are your insurance responsibility as expressed or implied under the governing rules of the condominium.” This type of insuring language is purportedly intended to ensure the unit owner isn’t forced by the HOA to pay twice for the same coverage, once with the HOA dues and then again when they purchase their own policy. Whatever the intent, this language puts the COI claims adjuster in the position of reviewing the CC&Rs for each claim to determine whether he/she interprets those particular CC&Rs as making the claimed loss the unit owner’s “insurance responsibility as expressed or implied under the governing rules of the condominium.” With every set of CC&Rs and governing documents being different, and every claims adjuster having different training, workloads and intent, this type of insuring language leads to many inappropriately delayed and/or denied claims, with the COI claims adjuster often instructing the unit owner to seek reimbursement from the HOA. It should be noted it is uncommon for insurance companies selling such COI policies to review the CC&Rs and/or “governing documents” prior to selling the coverage to the unit owner, and therefore the unit owner typically has no idea what their COI company interprets as being covered until the unit owner makes a claim.
The easiest way to understand how to best assist your unit owners with these type of disputes is by tracking the handling of an exemplar claim by a condominium unit owner.
Smith is a unit owner at condominium complex managed by HOA. The CC&Rs provide the HOA shall purchase insurance to cover the common areas. The CC&R’s then provide the HOA “may, but shall not be required to, purchase a blanket policy of insurance covering the residential improvements,” and notes “if the Board carries a policy of insurance on the residential improvements owned by the Owners, such policy shall not prejudice the right of an Owner to insure his or her property for his or her own benefits.”
The HOA also provided unit owners with an Insurance Disclosure Statement which set forth the blanket insurance they chose to purchase had a $5,000 deductible, but noted “even if a loss is covered, you many nevertheless be responsible for paying all or a portion of any deductible that applies depending on your governing documents. Association members should consult with their individual insurance broker or agent for appropriate additional coverage.”
Accordingly, Smith purchased her own COI policy with a $500 deductible, which on her limited income was the highest deductible she could risk. When Smith had $15,000 in water damage from a leak in a hot water valve coming out of the wall in her unit connecting to her washing machine, she made a claim to both the HOA’s blanket policy and her own COI policy. The HOA blanket policy paid for the loss, less the $5,000 deductible. The claim adjuster for Smith’s COI company requested copies of the CC&R’s and “governing documents.” The claims adjuster reviewed the CC&Rs and determined since the CC&Rs did not specify who was to pay the deductible when the HOA policy covered a loss, then the HOA was responsible for paying the deductible. Smith’s COI company refused to pay the water restoration company the $5,000 balance owing, and told Smith to have the HOA pay it. The HOA refused to pay the deductible, and Smith afraid of being sent to collections and not knowing how to fight her insurance company, emptied her savings and paid the $5,000 bill.
Most HOA deductibles are in the $5,000-$10,000 range, which although may be financially devastating to a unit owner, is not enough in dispute to typically justify the expense of a lawyer. Using the fact pattern above, here are some things a HOA should know to help avoid these disputes, and how to respond when the disputes comes to their Board meetings.
Make the CC&Rs and/or governing documents clear about who has insuring responsibility. All CC&R’s deal with the insuring responsibilities of the HOA, but few specify what the unit owner is to insure. COI policies which define their coverage based on the CC&R’s and other “governing documents” can use that lack of specificity to delay or deny coverage. Smith’s CC&R’s certainly anticipated the unit owner would purchase insurance for the interior of her unit and therefore had “implied insurance responsibilities” for the interior of her unit, but the lack of a specific statement regarding insuring responsibilities, created either real or feigned confusion on the part of the COI claims adjuster allowing him to deny Smith’s claim. A HOA can assist their unit owners by a Board resolution which refers to the CC&R’s section setting for the HOA’s mandatory insuring obligations and clarifying everything else is the unit owner’s insuring obligation.
Make the CC&Rs and/or governing documents clear about who is to pay the deductible. The vast majority of CC&Rs do not specify who is to pay the deductible on an HOA policy claim, but it is commonly understood in the industry that if a loss originates in a common area, the HOA will pay the deductible, but if the loss originates in the unit and is confined to the unit, the deductible is paid by the unit owner. Whether or not the CC&R’s specify who is to pay the deductible is not a legitimate basis for denying Smith’s claim in that the sole issue should be “insuring responsibility,” but unit owners seldom are skilled in interpreting insurance contracts. A HOA can assist their unit owners in preventing these types of baseless denials by a Board resolution which refers to the CC&R’s section setting for the HOA’s mandatory insuring obligations and setting forth the responsibility for deductibles in the different type of HOA policy claims.
“Other Insurance.” Address potential double coverage issues with unit owners when claims are made on an HOA policy. Smith’s COI policy did limit its coverage to the unit owner’s “insurance responsibility as expressed or implied under the governing rules of the condominium,” but it also contained a standard “Other Insurance” provision which provided “If at the time of the loss there is other insurance in the name of the condominium covering the same property which is covered by this policy, the insurance afforded by this policy will be excess over the amount recoverable under such other insurance.” Often times just telling your unit owner to look for the “Other Insurance” provision can arm them with the words they need to get their deductible paid.
Recognize the limited training, experience and motivation of a claims adjuster to assist a unit owner in resolving a claim. Even when a claims adjuster intends to do the right thing, they can make mistakes. Most mistakes are found in these smaller claims. Larger claims end up being litigated and court rulings change policies, procedures and training. In smaller claims, insureds often do not have the resources to litigate, so the same mistake can be repeated for years, even decades before something changes. An HOA can assist a unit owner who has been denied coverage sometimes by just encouraging them to question a denial and to speak to an adjuster’s supervisor. Often times just doing a simple computer search can arm the unit owner with information to dispute a denial. For example on the Smith fact pattern above, googling “coverage for deductible of homeowners association policy for condominium unit owner” revealed a helpful site which explained the basics of this type of coverage. http://www.bankrate.com/finance/mortgages/6-condo-insurance-questions-1.aspx. The google search also bought up attorney websites, which although the amount of the deductible may not justify the expense of a lawyer, the attorney websites often provide free articles which can be useful for the insured in understanding their rights.
Bad Faith litigation is a last resort. California recognizes an implied covenant of good faith and fair dealing in every insurance contract. The covenant requires that neither party to the contract do anything deliberately to deprive the other of the benefits of the agreement. Pasadena Live, LLC v. City of Pasadena (2004) 114 Cal.App. 4th 1089, 1092-1094. Where the small amount of an unpaid deductible may not justify hiring of an attorney to force the COI claims adjuster to pay, once the denial has harmed an insured, an attorney specializing in “insurance bad faith” litigation can be consulted. Injured unit owners can be referred to the Consumer Attorneys of Calfornia for attorneys in their area specializing in this type of litigation. www.CAOC.com.
Rene’ Turner Sample is a trial attorney specializing in representing people who have been injured as a result of wrongful conduct. She is a partner at Cornwell & Sample LLP in Fresno, California. She is an advocate for the jury trial system and consumer rights active as a Board Member for both the San Joaquin Valley Chapter of the American Board of Trial Advocates and the Consumer Attorneys of California. www.CornwellSample.com