A Hidden Danger

“Insurance - an ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.”

- Ambrose Bierce

I can't believe I haven't written about this until now.

I spend a lot of time reading condominium cases around the nation. It can be a pretty pathetic life. But, usually this is done outside, at night, with my dog and a cigar, so there are some benefits to this research. And what I discover and learn frequently can and does help associations. This is one such instance.

About two years ago in Michigan, which becomes relevant to New Hampshire by the end of this column, there was damage to a condominium that was covered by the Association's Master Policy. After the deductible, the check to be paid by the carrier to the Association was $40,000.00. All was going to be good. Then Fannie Mae sued.

Fannie Mae held the mortgage having purchased it on the secondary mortgage market. It had also foreclosed on the Unit, so it owned it as well. Fannie Mae's lawyers argued, essentially, that it was a mortgagee, which is more powerful than a condominium association and it should get the money. And it made clear that it was going to take the money, not make any repairs, and just sell the Unit for what it could. Now, I don't know Michigan law, but under the New Hampshire Condominium Act, the condominium association here would still have to make the repairs, so you would be out 40k in proceeds and still have to come up with the money to make the repairs. Ouch.

The matter went to trial. In the course of the trial, the Association made several seemingly logical and good arguments. It argued, for instance, it was not Fannie Mae's policy; it was the Association's policy. Fannie Mae was not the owner; it had never paid condominium fees, part of which went for paying the insurance premiums.

All pretty good points, but not to the Michigan Supreme Court which gave the proceeds to Fannie Mae - on a policy that was not their policy. Double ouch.

The Court noted the primary reason it did so was because there was nothing in the association documents that specifically noted the association would have priority over a bank to funds from an association policy. As bizarre as that sounds, when you look at your documents, usually in the Declaration and usually under a section entitled something like Rights of Mortgagees, in most of the documents I've reviewed, there is language that notes something like this: “No provision of this Declaration of the Bylaws shall grant to any Owner or to the Association priority over any any mortgagee to Association insurance proceeds.” This is dangerous.

How does it affect you and your New Hampshire Condominium? Well, last year I read that Fannie Mae holds somewhere between 40% and 60% of all of the mortgages in the nation. They buy and sell them and guarantee them, so banks don't go under.

In turn, this means that it's more than likely that Fannie Mae holds the mortgage on one or more units in your association. It clearly knows about this case, so if there is an insurance claim in New Hampshire, it will likely make the same argument here that it did there.

What to do? Well, if you find any such similar language in your Declaration or Bylaws, you really should amend your documents to remove it and add some language such as this:

Notwithstanding anything to the contrary in this Declaration or the Bylaws or in any mortgage on any Unit in the Association, nothing shall give a mortgagee the right to proceeds from any Master Insurance Policy claim absent the written approval of the Board of Directors.

But there's a trick to doing this, which your condo lawyer likely knows, and which I don't want put in the paper, so don't do it yourself.

If you do nothing else this coming year with regard to your documents, I would at the very least, recommend you amend your documents to get rid of the noted language. The last thing you want to do is face your fellow owners and let them know you did have a policy, and you did file a claim, but Fannie Mae got the money, and now either all face a special assessment or a huge hit to the Reserves.

You've been warned. And, again, sorry I didn't write about this earlier.