The Problem with Insurance Claims

“A bird in the hand is worth two in the bush.” – Latin proverb dating back to the 13th century, probably written by the world's first insurance agent.

Condominium associations are communities. What is good for one is to be good for all. Assessments are generally spread amongst everyone. Road repairs are done for the whole association, lawns are mowed throughout, and Boards represent everyone. And then there is insurance. Lightening strikes a roof shared by two units. A hole opens up. Water does what it does and creates havoc. The Association contacts its insurance carrier. The carrier determines there is a $50,000.00 in damages. The Association's deductible is $5,000.00, so the carrier cuts the association a check for $45,000.00, leaving the Association $5,000.00 short.

At that point, the determination of what to do about the $5,000.00 needed to complete the $50,000.00 rears its ugly head. Some documents require that the deductible be assessed to the Unit owner. And in some cases, that's fine. I was involved with one case many years ago where the owner left for the winter. When she did, she did not drain the pipes to the Unit. She then shut the heat off for the winter. She then, I'm not making this up, left the window in the kitchen open. Along about February, the pipes burst, and water went from the third floor through the second floor to the first floor. In such a situation, it would be more than fair to assess the deductible to the Owner.

But in other cases, such as when lightning strikes, where there is nothing an owner realistically could have done to prevent the problem, it is not fair to assess the Owner the $5,000.00 and it should be an Association expense. What to do in these cases? The Bylaws should contain a provision that allows the Board to determine, in its discretion, whether what caused the problem can be traced back to the actions or inactions of the Owner. If not, the deductible should not be assessed to the Owner. Sometimes things just happen. That's why we call them accidents, and no one should be penalized for an accident.

If it is the Owner's fault, the documents should provide a provision for allowing the deductible to be assessed to the Owner. In that case, the Owner notifies his or her insurance company, files a claim and the Association is paid all of the $5,000.00 Association deductible, less the Owner's individual deductible, perhaps $250.00.

What if the Owner doesn't have insurance? Change the documents to require them to have it and to provide proof to the Association that the Owner has such a policy. Generally, an Owner's policy costs about $200.00 per year. If the Owner doesn't have a policy you can even adopt language that allows an association to purchase the Owner's policy and assess the Owner the cost of the policy.

As I was once explaining this at an association meeting, one person noted that there was no reason for all of this. Instead, he argued that if the Owner doesn't pay the deductible, the Association can just assess the Owner and then start a collection case. I explained that aside from the added time it would take to file suit, get a trial date, get a judgement and then collect the money via a payment plan, I noted there was the practical matter of collecting $5,000.00 from a person who didn't have $200.00 to purchase an insurance plan.

This is, of course, more work for management companies, but not much more. Good ones won't mind the extra work, and how much work is it really to send a form letter to a Unit Owner asking the Owner to forward a copy of their personal article policy to the Board?

Read the Declaration and Bylaws carefully to see what they require. If they don't give the Board the discretion to decide how the deductible should be assessed, then you should have the documents amended. If not, you're not really doing the job of the Board.