The condominium association policy deductible and the unit-owner policy loss assessment coverage
Without a doubt, one of the most troublesome loss adjustment issues in dealing with first-party condominium unit-owner losses is whether the Loss Assessment coverage can apply to common elements losses not paid for by the association policy due to the application of a significant deductible under the association policy. Until the case of Grife v. Allstate Floridian Ins. Co.
(see 1, p32), decided earlier this year, there was no known case law guidance on this issue.
Faced with, on the one hand, statutory or contractual requirements that the condominium association insure building property- sometimes including such property within the units- on an open-perils basis, and, on the other hand, the demands of unit owners to keep regular condominium assessments low, associations look for ways to lower their insurance premiums. Insurers act as enablers by offering association policies with large deductibles since the state condominium statutes and governing documents do not usually specify a maximum deductible for such coverage.
Suppose a hurricane causes substantial wind damage to the Admiral's Port Condominium complex in North Miami Beach, Florida. In order to repair the damage to the common areas, the insured's condo association levies a total of $845,801 in special assessments against the unit owners in the complex. The insured is assessed $1,226 based on his percentage of ownership. Most of the $845,801 in special assessments results from the association policy deductible of $719,080. The unit owner then files a claim for the $1,226 under the loss assessment coverage in his unit-owner's policy. These were the facts in Grife.
Under the non-standard policy involved in Grife, the court held that the Loss Assessment provision's total exclusion (see 2, p32) for such association-policy-deductible- related assessment charges was enforceable.
The Grife court admitted that the above-mentioned holding actually disposed of the case. But the court went further. In what can either be characterized as an alternative holding or mere nonbinding dictum, the court proceeded to analyze the effect of the excess clause of the unit-owner policy's Loss Assessment coverage on the claim for coverage of the assessment, saying it was doing so because both parties had fully briefed this issue.
The excess clause stated: "This coverage is excess over any insurance collectible under any policy…covering the association of unit owners." The court read this to mean that the Loss Assessment coverage only covered losses that were incurred in excess of the association policy's limit and which were not subject to the association policy's deductible.
It is difficult to decide how much weight to give this excess clause discussion in Grife when deciding whether the Loss Assessment coverage should apply to claims for association policy- deductible-related assessments under standard unit-owner forms. On the one hand:
- Grife is the only known decision addressing this issue of whether the unit-owner policy's Loss Assessment coverage can apply to assessments resulting from the application of the association policy's deductible.
- While standard forms do not have an excess clause within the Loss Assessment coverage, the policy's general Other Insurance clause, which seems applicable to the Loss Assessment coverage, is similarly worded (see 3, p32).
- The insured argued that amounts subject to the association policy's deductible should not be treated as "insurance collectible" for purposes of the excess clause. The insured argued that if this result was intended, the excess clause should have been worded so as to specifically make the Loss Assessment coverage "excess over any insurance collectible under any policy including any deductible provisions thereof." The court, however, relying on one prior case (Twin City Fire Ins. Co. v. Fireman's Fund Ins. Co., see 4, p32), rejected the insured's argument and concluded that the association policy's deductible amount should be considered primary insurance, which first must be exhausted before the Loss Assessment coverage of the unit owner's policy applies.
On the other hand:
- Unlike the non-standard policy in Grife, the Loss Assessment coverage of the standard ISO HO 00 06 form does not contain a specific exclusion for assessments resulting from the application of an association policy deductible. The Loss Assessment coverage of this standard form is silent as to such assessments.
- The ISO scheme clearly contemplates the possibility of Loss Assessment coverage being applicable to assessments resulting from application of the association deductible. Unit owners can purchase more Loss Assessment coverage by adding the HO 04 35 10 00 endorsement. That endorsement contains a Special Limit which says: "We will not pay more than $1,000 of your assessment per unit that results from a deductible in the policy of insurance purchased by a corporation or association of property owners." Such a Special Limit has been present in all versions of this endorsement at least back through the 1984 version. The presence of this Special Limit indicates that, but for that Special Limit, any scheduled amount of additional Loss Assessment coverage would apply to assessments resulting from application of the association policy's deductible. It must be assumed that the same intent applies to both this endorsement and the underlying basic HO 00 06 form. Coverage is limited to $1,000 for any assessment under the HO 00 06, without any special limit for association-deductible- related assessments. Once the endorsement is added, any additional scheduled amount of loss assessment coverage is available, except that the most additional coverage the insured can get for association-deductible-related assessments is another $1,000.
- To call the amount within the association policy's deductible "insurance collectible" or an "amount recoverable" seems contrary to fact. By its very nature, the deductible amount applicable to a particular policy is not collectible or recoverable by the insured from that insurance policy.
- As recognized by standard insurance texts (see 5, p32), the excess provisions typically found in insurance policies are to be sharply distinguished in effect from true excess insurance policies which never provide primary coverage. The intent of an excess clause is to provide coverage when there is no other applicable insurance. The policy only becomes "excess over" other insurance when other insurance applies to the loss. Thus, arguably, when dealing with a mere excess clause, the policy with such an excess provision will apply to the amount of any loss within the deductible of the primary policy since, as to that amount of the loss, there is no other insurance and the policy with the excess clause acts as primary insurance as to that portion of the loss.
- It is extremely doubtful that in rating a particular association policy the underwriter takes into account the provisions of any state condominium statutes, condominium declarations or bylaws providing whether the association is prohibited from insuring the units, must insure the units, may insure the units but has not in fact insured the units, or may insure the units and has in fact done so. It is at least equally doubtful that a homeowner's underwriter rating a specific unit-owner's policy will take into account the presence or absence of insurance on the units in the name of the association, or the effect of state statutes and condominium declarations and bylaws on the necessity or legality of such insurance. Thus, from the unit-owner insurer's standpoint, the unit-owner's policy is not a true excess insurance policy in that the premiums have not been calculated for the individual insured on the basis of whether and in what amount primary coverage exists in the form of an association policy.
- Those who purchase a unit-owner's policy covering a condominium unit not protected by an association policy probably will pay the same premium for that coverage as a unit owner whose unit is also protected by an association policy. The latter unit owner, however, has also paid his pro-rata portion of the premium for the association policy through assessments paid to the association. If the unit-owner's policy is interpreted as providing no coverage for any amount of loss falling within the deductible of the association policy, the unit owner protected by the association policy will have paid more in insurance premiums and will have two policies covering the same property, but will be afforded less coverage than the unit owner without the association policy. This result is obviously unfair.
The Grife decision thus seems to raise more questions than it answers as to the interplay of the condominium association policy's deductible and the unit-owner policy's Loss Assessment coverage. The issue remains a thorny one for claims handlers dealing with standard forms.
Thomas W. Mallin, J.D., CPCU, is president and chief executive officer of the Property Loss Research Bureau and Liability Insurance Research Bureau (PLRB/LIRB). Mr. Mallin may be contacted at email@example.com.
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KEY INFORMATION POINTS
1- Grife v. Allstate Floridian Ins. Co., No. 07-20160-CIVMORENO, 2007 WL 1847648, -F.Supp.2d-(S.D. Fla. 6/28/07).
2- From Grife, "Any reduction or elimination of payments for losses because of any deductible applying to the insurance coverage of the association of building owners collectively is not covered under this protection."
3- ISO HO 00 06 10 00, Homeowners 6 - Unit-0wners Form, Section I - Conditions, F. Other Insurance And Service Agreement, 2., states: "If, at the time of loss, there is other insurance or a service agreement in the name of a corporation or association of property owners covering the same property covered by this policy, this insurance will be excess over the amount recoverable under such other insurance or service agreement."
4- Twin City Fire Ins. Co. v. Fireman's Fund Ins. Co., 386 F.Supp.2d 1272 (S.D. Fla. 2005), the only case relied on by the Grife court, dealt with other insurance clauses in the context of a dispute between a commercial general liability and umbrella liability insurer over contribution towards a settlement reached with the insured store and the injured party. In a footnote, the court considered whether the primary insurer (Liberty Mutual) and the insured (J.C. Penney) should receive contribution from the excess insurer (Twin City Fire) for the amount of the deductible under the primary insurer's policy. The court concluded that they should not, saying:
Liberty Mutual and J.C. Penney contend that they are entitled to receive their $1 million deductible back before Twin City is reimbursed for the excess portion of the J.C. Penney settlement that it paid. However, it is a well-established principle that an excess insurer does not pay until the primary coverage is exhausted. See supra p. -. Liberty Mutual and J.C. Penney have failed to present any compelling argument or binding case law demonstrating that this principle excludes the deductible. 386 F.Supp.2d at 1280, n. 5.
5- E.g., Williams, Head, Horn, and Glendenning, Principles of Risk Management and Insurance-Volume II, 211-213 (2d Ed. 1981, American Institute for Property and Liability Underwriters- CPCU text).