By: Kristie Leff
- Property insurance on the common elements, and on the units in the case of buildings with units having horizontal boundaries or vertical boundaries comprised of shared common walls;
- Flood insurance if the association is located in a defined flood zone;
- Commercial general liability insurance; and,
- Fidelity insurance
By far, among these four types of insurance coverage, the one that garners the most questions and controversies is the first one: property insurance. The association’s property insurance policy is often referred to as the “master” policy because, for associations with units having shared boundaries, the policy covers not only property damage to the common elements, but the units as well.
The intent of the statute requiring the master policy to cover the units is to ensure that the physical structures get properly and uniformly rebuilt in the event of a catastrophic loss such as a fire or hurricane. Otherwise, without the assurance of a master policy covering all the structures, the ability to rebuild would be left up to the whims of individual unit owners who may or may not have their own property insurance, and the whims of individual unit owners’ insurers who may have different coverages and policy exclusions. The result would be a patchwork, with some units rebuilt, and others in ruins, thereby reducing everyone’s property values.
The merits of the master policy scheme are therefore self-evident in the case of a catastrophic loss. However, in the smaller yet ubiquitous cases such as leaks from a unit owner’s aged water heater or pipe freezes due to inadequate heat in a unit that cause damage to one or more units (combined with the trend of property insurance carriers to create more and more exceptions and exclusions to coverage) the merits of the master policy scheme are more elusive. In fact, because any expense necessary to repair damage that is not covered by property insurance is a common expense payable by all unit owners, the master policy scheme can create substantial financial hardship to associations in situations where the insurer denies coverage, the cost to repair is below the deductible, or where the insurer assesses “per-unit” deductibles.
However, there are some ways an association can try to recover some of the common expenses attributable to property damage not covered by property insurance. Connecticut General Statutes Section 47-257 provides a mechanism whereby certain common expenses can be assessed to particular units in particular situations. For example, according to Connecticut General Statutes Section 47-247(c)(1), if the declaration requires, a common expense association with the maintenance, repair or replacement of a limited common element shall be assessed against the units to which that limited common element is assigned. Also, Connecticut General Statutes Section 47-257(c)(2) provides that, if required by the declaration, any common expense benefiting fewer than all the units may be assessed to the units benefited. Note that both these provisions only apply if the declaration states that assessments of these type are required.
Another section of the statute that allows the association to assess some of the common expenses to unit is Connecticut General Statutes Section 47-257(e). This section provides that if a common expense is caused by willful misconduct, failure to comply with a written maintenance standard, or gross negligence, then the association may assess the expense to the unit after notice and hearing.
There is some controversy about whether an association can assess common expenses related to a property damage claim to a unit owner if the association’s declaration allows for assessment of common expenses in the event of negligence by the unit owner (as opposed to the “gross negligence” standard in the statute). There are some attorneys that think that if such an assessment is allowed by the declaration, it is permissible despite the language of the statute. Other attorneys caution that the statutory language prevails over the terms in the declaration. In order to resolve this controversy, some attorneys have suggested that the statute should be changed to allow for assessment of common expenses in the event of “negligence” as opposed to higher standard of “gross negligence”.
Other area of controversy is whether or not a property insurance carrier can legally deny coverage in situations where a unit owner actions caused the loss. We have all routinely seen this happen in situations where, for example, a unit owner failed to heat their unit, or a unit owner failed to fix a leak that caused damage over time. Connecticut General Statutes Section 47-255(d)(3) explicitly states that the association’s property insurance policy shall provide that no act or omission by any unit owner will be a condition of recovery under the policy. This section seems to clearly mean that insurers cannot deny coverage in situations where a unit owner failed to heat their unit or failed to fix a leak. There is controversy among attorneys about whether this section applies to insurance carriers, or whether this section is just meant to inform associations about the type of coverage it must obtain. This is an open question and some attorneys suggest it must be resolved by working with the State Insurance Commissioner to clarify the meaning of section.
The trend with property insurance carriers is to find more and more ways to deny coverage. This results in associations having to pay for the shortfall as a common expense. Given the current state of affairs, in order to avoid financial disaster, associations must use the statutory language, their governing documents and maintenance standards to try to find ways to assess common expenses to units.
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