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07/25/11: New Maryland Law on Condo Insurance

HOUSING COUNSEL

By:   Benny L. Kass

Effective October 1, 2011, condominium owners in Maryland can vote to require that all owners in their complex carry insurance that covers their own unit. What is unique about this new law is that it only requires a vote of 51% of all condo owners.

Traditionally, to amend condominium legal documents, a supermajority vote is required – usually 66 2/3 percent or even 75 percent. In this case, however, the legislature has allowed the bylaws of the association to be amended by only a simple majority.

There is a simple answer as to why this was done.  On May 19, 2009, Governor O’Malley signed a law entitled “Condominiums – Repair or Replacement or Destruction by Council of Unit Owners”.  This new law specifically overturned an earlier Court of Appeals case. The stated intent of the Maryland Legislature  was to “place an affirmative duty on the council of unit owners (which is what a condominium association is called) to (1) repair damage or destruction to the condominium that originated in a unit, and (2) purchase property insurance that reflects this duty.”

But unit owners also have certain obligations. If the cause of any damage or destruction to a condominium originates from the unit – whether or not the unit owner is negligent – the owner of that unit is obligated to pay the association’s deductible, up to $5,000.

A deductible is an insurance concept. If you want complete and total coverage for a loss, your premium will be high. However, if you agree to pay a certain portion of the damage yourself, the premium will decrease proportionately. A typical condominium association deductible can be $5,000 or $10,000 dollars.

In the past, before the Maryland Court case, the deductible issue caused serious financial problems for associations. A plumbing leak occurred in a unit, but since the cost was below the deductible threshhold, in many cases  the association had to bear the cost. The law in Maryland – as it is in many states – was that unless the governing documents stated otherwise,  the deductible was a common expense. This means that all unit owners had to absorb the loss.

The new Maryland law now makes it clear that if the cause of the damage comes from within the unit, that unit owner may need  to pay up to $5,000 to the association.

What does this mean for Maryland condominium unit owners? Simply stated, you should have your own insurance policy that will cover the deductible. This is known as an HO-6 policy, and is something that every condominium owner – regardless of whether he/she lives in Maryland – should obtain. The master policy does not provide  all-inclusive coverage. For  example, if  water flooded into your apartment, it would not only damage your floors, but could also ruin  your valuable oriental  carpet and destroy your expensive 50 inch plasma television set.

The master policy will pick up the cost to repair your walls, but you are on your own regarding any personal belongings. Additionally, many master policies exclude what is known as “betterments”. If you have the original floors installed by the developer in your unit, coverage will probably be available should they get damaged as a result of the flooding. But if you (or your predecessor owner) installed parquet flooring, this is a “betterment” and may not be covered under most  master policies. The new Maryland law  requires the condominium association to repair or replace that which was installed by the developer, but specifically excludes any improvements added by the unit owner.

Here is where a policy known as an “H0-6" comes into play. This is a separate policy which will cover your personal losses. It should also supplement what the master policy does not cover, such as theft in your apartment, vandalism, and personal liability coverage in the event you are personally sued and a money judgment is issued against you.  Let’s quickly understand the makeup of a condominium. It has three separate parts:

Units: This is your space; this is where you live; you own it. You pay real estate tax on your unit and can obtain a mortgage loan using your unit as security.

In order to determine what constitutes your space, you have to read your Declaration. Additionally, the units will be  shown on the condominium Plat and Plans.

Limited Common Elements: (referred to as "LCE") This is a common element and is reserved exclusively for use by one or more, but less than all, of the unit owners in the condominium.  Limited Common Elements may include balconies, roof decks, storage areas and parking spaces.  The Declaration will define Limited Common Elements and the Plats should show where in the complex they are located

General common elements: This relates to those  portions of the property used by all of the unit owners in general.  Everything that is not a unit or a limited common element is a  general common element.  For example, the general common elements include, in addition to the land, such items as  foundations, roofs, slabs, perimeter walls, boiler rooms, corridors, laundry rooms, common stairs, building lobby, trash areas, utility rooms, and water mains.

Every condominium association must have a master insurance policy. The Declaration will spell out the minimum insurance coverage which is required, and many State condominium statutes also require a minium amount of coverage.

The master policy will cover problems and issues relating to the common elements and the limited common elements. For example, if there is a common element water pipe that bursts, causing flooding and water damage to the common halls, elevators and individual units, the master policy will pay the damage claims, subject of course to the amount of the deductible which is in the policy.

However, the master policy does not provide  all-inclusive coverage. In our example, when the water flooded into your apartment, it not only damaged your walls, but ruined your carpet and destroyed your expensive 50 inch plasma television set.

The master policy will pick up the cost to repair your walls, but you are on your own regarding any personal belongings. Additionally, most master policies exclude what is known as “betterments”. If you have the original floors in your unit, coverage will probably be available should they get damaged as a result of the flooding. But if you (or your predecessor) installed parquet flooring, this is a “betterment” and will not be covered under the master policy.

Here is where a policy known as an “H0-6" comes into play. This is a separate policy which will cover your personal losses. It should also supplement what the master policy does not cover, such as theft in your apartment, vandalism, and personal liability coverage in the event you are personally sued and a money judgment is issued against you.

The cost of such insurance is nominal – generally between $250-300 per year.

Several years ago, a Washington, D.C. condominium suffered significant loss because of a massive fire in the building. All of the unit owners had to vacate the property for one full year. I know one owner who  had an HO6 policy  – with coverage for alternative lodging –and he was receiving $1800 a month from the insurance company to pay for his rental of an apartment while his unit (and the building) was being repaired. His neighbor – who did not pay the yearly $300 premium – not only had to pay his mortgage on the condominium unit, but had to shell out a lot of money in order to rent temporary lodging while the repairs were being made.

You should carefully review the terms and conditions of your master policy. Talk with your insurance agent to see what kind of supplemental coverage you need by way of the HO-6 policy.

Shop around; there are many insurance companies that offer this kind of insurance protection. But here’s a suggestion: consider obtaining coverage from the same company that issued the master policy.

Why?

I have often encountered this situation. After a fire (or other casualty) the master policy says that this is not a covered event, but is the responsibility of the individual unit owner. However, the HO-6 carriers says “wait a minute!  This was a common element disaster which should be the responsibility of the master policy

When both the master and the HO-6 policies are issued by the same company, I have simply told the insurance agents: “guys, your company is responsible either under the master or the HO-6 policy, so you get together and decide which arm of your company will pay the claim. We don’t have to litigate the issue when both policies are covered by the same company”.

We often ignore insurance issues until it is too late. But when disaster strikes – such as a fire, flood, or vandalism –you should be prepared, and a good HO-6 policy should be in the possession  of every unit owner throughout this country. Indeed, many condominium associations are amending their legal documents to require such coverage. And thus the new Maryland law.