A dispute over $6,400 in damage to a Maryland townhouse led to an unexpected court decision that has reversed 26 years of standard industry practice, and left insurers, agents, lawmakers and condominium associations unclear as to who pays when individual units in a complex are damaged.
condo-association policies under a basic concept: In the event of a loss, association policies will pay to restore damaged condo units to their original state, and unit owners would then purchase coverage to cover improvements made to the condo - such as more expensive countertops, for example. Insurance and risk management schemes in the state have been based on that logic ever since Maryland revised its condo act in 1981.
But in April, the Maryland Court of Appeals changed all that, ruling that a condo association's insurance policy is not "required" to pay for damage to individual units. The decision reverses more than 26 years of standard industry practice in the state. This seemingly simple reinterpretation has massive implications, say insurers and agents.
There's no easy or quick fix, either. Insurers and lawmakers want to see a legislative solution to more concretely define what gets covered by a condo association and individual unit owners. But that can't happen until at least early 2009, the next time the General Assembly is scheduled to meet.
Until then, many - though not all - of the condo insurers in the state have agreed to continue operating under the old rules for the remainder of the year.
Agents, lawmakers, insurers and condo groups have started holding town hall style meetings to work out what amounts to a gentleman's agreement on how condo insurance will play out until the legislature reconvenes.
Until then, however, it's a wait-and-see game for the industry and condo interests. Or as Jason Ernest, vice president of the Insurance Agents and Brokers of Maryland, put it: "It's going to be a long summer in Ocean City."
What Tuckerman Says
To insurance insiders in the state, it's known simply as the Tuckerman case (Dianne Anderson et. al. v. Council of Unit Owners of The Gables on Tuckerman Condominium, et. al.), a decision by the Court of Special Appeals that centers on two separate claims made under two different "Condocover" policies issued by Pennsylvania-base Erie Insurance Exchange.
Both Erie Insurance and the condo owners filed suits against the respective condo councils for their individual complexes. In both cases, lower courts ruled against Erie. Those cases were consolidated into one back in September.
The first case revolved around a claim made in June 2004 by Dianne Anderson, who owned a two-level condo in a 21-year-old complex in Rockville called The Gables on Tuckerman. The claim was for water damage to her ceiling, carpet and kitchen caused by a broken water heater on the top floor of her condo. It affected only her unit.
The bill for the damage came to $6,358. When the council for The Gables declined to pay for the damage, she filed a claim under her own, Erie-issued policy. Erie and Anderson then sued the council for The Gables to recover the money. A circuit court ruled against Erie and Anderson.
The second case centered on a claim made by Charles and Cindy O'Carroll, who owned a condo at the Bridgeport Condominiums in Laurel, which they rented to a woman named Velma Kiawu.
Kiawu was cooking in the apartment in March 2003, when a grease fire triggered the condo's sprinkler system. Fire, smoke and water damaged the walls, carpet, blinds cabinetry and microwave, requiring $12,157 in repairs. As in the case with Anderson, the damage was only to the O'Carrolls' unit and, again, the council of owners declined to pay for the damage.
Erie and the O'Carrolls sued to recover the money, and, as in the case with Anderson, a lower circuit ruled against them.
In upholding the decision of the lower courts, the Court of Special Appeals traced the legislative history of the state's condo act, and ultimately concluded the intent of the legislation was to ensure condo councils or associations paid for and insured damage to common elements, of a complex. However, ruled the court, the intent of the law was not to make associations liable for damage to property that was owned only by unit-owners. In keeping with that logic, the court ruled that condo association policies are not required to pay for those damages, although they can if they so choose.
Agents See Problems
The decision creates a number of problems for insureds and agents in the state, many of whom have policies written under the understanding that master policies for a condo would cover more than necessary. Now, after Tuckerman, that's all changed.
"One of the big problems right now is that you may have lots of individual condo owners who are underinsured, with policies that only cover $5,000 or so," said Jason Ernest, vice president of the Independent Insurance Agents of Maryland.
Ernest said that means, in the event of damage, a many condo buildings could end up having unit owners who can't pay to repair their units. The end result could be condo buildings that fall into disrepair or slip in value because of damage to underinsured units.
The agents group plans to lobby the General Assembly when it meets in January to modify the state's condo act so that Maryland insurance can go back to the way it was before Tuckerman.
"Everybody realizes there's a problem, and not everyone is quite seeing eye-to-eye yet," he said. "But we think the best to handle is to go back to the way things have always been done. Of course, nothing can be done legislatively until at least January."
Until then, Ernest said, many town hall style meetings have been taking place between his group, lawmakers and insurers, trying to work out a holding pattern for how to handle condo insurance and condo claims.
Reese Cropper, owner of Ocean City-based Insurance Management Group, an agency specializing in master insurance policies for condos, said a revision of the law to codify the way things used to be makes the most sense for condo owners and association.
"Since the appellate case has come along things are very helter skelter," he said. "Most of the carriers I have talked to said they would continue to do things as they have. But when policies come up for renewal, the agents, owners and insurers all need to get together and do some due diligence to figure out the best way to keep insuring condos."
Added David Rosenkilde, chairman of the IA&B of Maryland: "We're optimistic that we can reach a quick and painless resolution."