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Insuring Condominium Property Under a "Single Entity" Insurance Policy

Insuring Condominium Property Under a "Single Entity" Insurance Policy

June 6th, 2018

    One of the primary functions of a condominium's governing documents is to establish the respective responsibilities of the association and the co-owners for maintaining, repairing and insuring everything located within the project. During the early days of condominium development, most governing documents required the association to insure both the common elements and the individual units. In addition, these older governing documents would typically define "unit" to include the original equipment, fixtures and trim that were provided as "standard features" by the developer, thereby adding these "standard features" to the list of items that the association was responsible for insuring.

    When the governing documents assign insurance obligations in this fashion, associations will often procure coverage under a "single entity" insurance policy. In simple terms, a "single entity" policy covers both the common elements and the individual units, and it designates both the association and the co-owners as the "insured" for purposes of interpreting any contractual rights and obligations created by the policy. This "single entity" approach allows the association to fulfill its responsibility to insure the common elements and the units via one insurance policy, while at the same time, it helps avoid "gaps" in coverage or other disputes that may arise when these two types of property are insured under two separate policies (or when a co-owner fails to obtain any insurance coverage for the unit).

    The Rising Cost of Insuring Condominiums

    Over the last 20 years, it has become increasingly cost prohibitive in Michigan for insurance companies to provide property damage coverage to condominium associations. Because of this, most insurance companies no longer offer these types of policies, which severely limits the options that are available to associations in terms of finding the best insurance coverage for the best price. As a result, insurance costs have become one of the largest recurring expenses that most associations will incur. These rapidly-increasing costs, of course, are ultimately factored into the association's annual budget and are paid through a corresponding increase in the rate of assessments paid by the co-owners.

    At the same time, however, it has remained relatively inexpensive for co-owners to insure condominium property through their individual policies -- even if the co-owners are responsible for insuring more than just their own unit upgrades and personal property. Moreover, submitting a property damage claim against a co-owner's individual policy will often have little or no affect on the co-owner's insurance premiums; whereas submitting just one claim against the association's "master" policy can cause the association's premiums to increase dramatically.

    The "net" result is that most condominium associations and co-owners will save on their collective insurance costs if the governing documents "shift" these responsibilities so that more of the project's property is insured by the co-owners, while less is insured by the association. This economic reality is reflected in more recent governing documents, which tend to reject the "single entity" approach in favor of assigning more of these insurance responsibilities to the co-owners.

    The Continued Use of "Single Entity" Insurance Policies

    Notwithstanding this general trend toward "shifting" these responsibilities to the co-owners, many associations continue to operate under governing documents that follow the "single entity" approach. As a result, "single entity" policies continue to be used today; unfortunately, these policies have historically ignored the fact that the governing documents will often assign insurance responsibilities one way, while assigning maintenance and repair responsibilities another way in non-casualty situations.

    As a result, even if the damage is caused by a "covered casualty," these differences will effectively prevent either the association or the co-owners -- both of whom are idenfied as the "insured" -- from complying with certain contractual obligations imposed by a "single entity" insurance policy. Similarly, by ignoring the different ways that governing documents assign these responsibilities in non-casualty situations, "single entity"policies often fail to account for the fact that in some instances, one "insured" will have little or no control over whether and/or how the other complies with these contractual obligations.

    For example, in Michigan, it is not uncommon for condominium associations to submit insurance claims for water damage caused by pipes that freeze and burst. These incidents can cause extensive damage to both the units and the common elements, and coverage under any insurance policy will often depend on whether appropriate measures were taken to protect the "covered property" from this type of incident. In this regard, nearly all property damage insurance policies will contain language that limits or excludes coverage along the following lines:

    Except as otherwise specified, we will not pay for loss or damage which would not have occurred in the absence of one or more of the following excluded events regardless of: (a) the cause of the excluded event; (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss:

    Water, other liquids, powder or molten material that leaks or flows from plumbing, heating, air conditioning or other equipment, except fire protective systems, caused by or resulting from freezing, unless:

    (a) Heat is maintained in the building, structure and "unit"; or

    (b) All equipment is drained and the supply is shut off if the heat is not maintained.

    The Reason Behind These Policy Exclusions

    When this type of exclusion is contained in a "single entity" policy, it begs the question: which "insured" is responsible for protecting the "covered property"? Presumably, this exclusion is designed to place the "insured" on notice that the policy will not cover water damage that is caused, in whole or in part, by the "insured's"; failure to protect its own "covered property." At the same time, this exclusion places the burden of "protecting" the property on the party that is in the best position to do so. Under most "single entity" policies, however, this exclusion will not describe these contractual obligations in a way that differentiates between each "insured" and each type of "covered property."

    Stated differently, by simply using the word "insured" throughout the policy to refer to both the association and the co-owners (and the phrase "covered property" to refer to both the common elements and the individual units), this type of exclusion appears to require both "insureds" to protect both types of "covered property."; But what if the governing documents assign different maintenance and repair responsibilities to each "insured" and/or for each type of "covered property"?

    Under most governing documents, the responsibility to heat or winterize the individual units is assigned to each respective co-owner. Moreover, the association is often unaware that a co-owner may not be fulfilling this responsibility until some type of incident occurs; but by then, it’s too late for the association to take action to protect the common elements from the resulting water damage.

    In the above example, the actions of the association did not in any way cause or contribute to the resulting damage, nor did the association otherwise fail to fulfill its maintenance responsibilities under the governing documents; however, under a "single entity" policy, this provision could be interpreted as excluding coverage for damage to the common elements based upon the association’sfailure to heat or winterize an individual unit --; even though it has no such responsibility under the governing documents.

    Instead, a more reasonable interpretation of this language is that the obligation to protect the "covered property," as imposed under a "single entity" policy, only applies to the extent each "insured" has the ability and responsibility to do so under the governing documents. This way, the failure of the co-owner to heat or winterize the unit will not prevent the association, which has otherwise fulfilled its maintenance responsibilities under the governing documents, from pursuing an insurance claim for damage to the common elements.[1]

    Interpreting these obligations any other way would necessarily mean that an association has both the ability and the desire to reassignthese maintenance responsibilities by procuring coverage under a "single entity" insurance policy --; even though reassigning these responsibilities ordinarily requires a co-owner-approved amendment to the governing documents. This would also mean that in the event of a conflict between how these responsibilities are assigned under a "single entity" policy and how they are assigned under the governing documents, the obligations imposed by the insurance policy would control. Frankly, there is nothing that even remotely suggests that condominium associations have the right to amend their governing documents in this manner, let alone that they desire or intend to do so. In addition, to the extent a "single entity" policy insures the individual units, it is not unreasonable to assume that most (if not all) associations lack the ability to monitor unit interiors in order to comply with these types contractual obligations.

    In this scenario, this policy language is, at best, ambiguous, because it could be interpreted both for and against excluding coverage with respect to an association’s claim for damage to the common elements. As a general rule, to the extent a provision in an insurance policy can be reasonably interpreted both for and against coverage, the ambiguity will be interpreted in the manner that affordscoverage.[2] Accordingly, a co-owner’s failure to satisfy a "single entity" policy’s contractual obligation to protect against damage to a unit should not affect an association’s ability to pursue a claim for damage to the common elements caused by the same incident.[3]

    Similiar Requirements that are Typically Found in "Single Entity" Insurance Policies

    This same rationale can be applied to other contractual obligations that are imposed by most insurance policies. For example, nearly all property damage policies will require the "insured" to (1) give "prompt notice" to the carrier of any loss or damage that could potentially result in a claim under the policy, (2) provide the carrier with the date, time and cause of the damage, and (3) take reasonable measures, up to and including the performance of necessary repairs, to protect the covered property from further damage. As was the case in the above water damage example, however, under a "single entity" policy, there may be situations where only one"insured" has the ability to comply these types of contractual obligations.

    For example, if the damage can only be observed from inside the unit, the association may not know of an ongoing problem that could potentially cause damage to the common elements. This delay in discovering the problem could prevent the association from (1) providing the carrier with "prompt notice" of a potential claim, (2) determining when or how the damage occurred, and/or (3) taking action to protect the common elements from further damage.

    While the co-owner’s failure to comply with these contractual obligations will likely result in a denial of coverage with respect to any damage to the co-owner’s unit and/or personal property, this failure on the part of the co-owner should not be "imputed" to the association if the association has otherwise fulfilled its maintenance responsibilities under the governing documents. Here again, this approach is consistent with the intent of these notice provisions; namely, to establish a duty on the part of the "insured" to timely report potential claims to the carrier, since the "insured" is in the best position to discover these problems as soon as they manifest themselves.

    Indeed, nearly all insurance policies --; including "single entity" policies --; contain language that accounts for the fact that there may be a delay between the incident and the discovery of the resulting damage. In this regard, a typical insurance policy will contain a "discovery" provision consistent with the following:

    "Discover" means the time when you first become aware of facts which would cause a reasonable person to assume that a loss of a type covered by this policy has been or will be incurred, regardless of when the act or acts causing or contributing to such loss occurred, even though the exact amount or details may not be known.

    Since the association and the co-owners have different rights and responsibilities under the governing documents with respect to these issues, it is quite possible that a co-owner will have actual or constructive notice of a potential claim long before the association. In other words, the determination of when "a reasonable person" might learn "that a loss of a type covered by this policy has been or will be incurred" must be measured from the standpoint of each "insured," since the association’s ability to "discover" the problem may very well differ from that of an individual co-owner. As a result, when property that is insured under a "single entity" policy suffers damage due to the same "covered casualty," the exclusion of a co-owner’s claim for damage to the unit will not necessarily result in the exclusion of an association’s claim for damage to the common elements.

    Conclusion

    While "single entity" insurance policies give condominium associations the ability to insure both the common elements and the individual units via one insurance policy, these two types of "covered property" may nevertheless be treated differently when they suffer damage --; even when the damage is caused by the same casualty event. This is especially true with respect to any contractual obligations that are imposed by the policy. Even though these obligations may be written in such a way as to seemingly apply to both the association and the co-owners (and to both the common elements and the individual units), associations should not assume that "single entity" policies will afford coverage in the same way to both "insureds" or for both types of "covered property." Instead, the facts and circumstances of each casualty should be closely examined on a case-by-case basis to determine whether there are any inconsistencies between the insurance policy and the governing documents that would justify a "hybrid" result, whereby damage to one type of "covered property" is covered, even though damage to the other type is not.

    [1] Indeed, this same rationale would apply in situations where the association is responsible for insuring only the common elements, while the co-owner is responsible for insuring the unit and its contents. If both policies contain this type of exclusion, under the association’s policy, any water damage to the common elements would not be excluded from coverage, since the association is the only "insured" under its policy (and the association did not otherwise breach any of the contractual obligations imposed by its policy with respect to protecting the common elements).

    [2] If there is an ambiguity in the language of an insurance policy, the ambiguity is interpreted in the insured’s favor. As a result, if the policy can be interpreted in a way that affords coverage, that interpretation will control. Henderson v State Farm Fire and Casualty, 460 Mich 348; 596 NW2d 190 (1999); Auto Club Ins Ass’n v DeLaGarza, 333 Mich 208; 444 NW2d 803 (1989).

    [3] Under this line of reasoning, to the extent a "single entity" policy covers damage to the co-owner’s unit, the co-owner’s failure to heat or winterize the unit would likely result in a denial of coverage with respect to any damage to the unit, thereby honoring the intent of this policy exclusion.

    • Ed Lee is a Michigan Condominium Attorney and an associate at Makower Abbate Guerra Wegner Vollmer PLLC. Mr. Lee focuses his practice primarily in the areas of Michigan Condominium Association and Michigan Homeowner Association law. Mr. Lee is a member of the Community Association Institute (CAI) and Real Property Law section of the State Bar of Michigan.

    Author

    Edward J. Lee
    Edward J. Lee

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