Catastrophic Loss/HOA Liability

Started by DonW3 • 27 replies • 2421 views

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DonW3 (Maryland)
Posts: 9

Posted:

The subject of the complete destruction of a unit or series of units within our Maryland townhome association came up in conversation recently, specifically relating to the HOA's possible liability for the replacement (reconstruction) of such loses in the event the homeowner is not covered by insurance through lapse, cancellation, etc.

In searching the web and looking through a number of governing document packages of similar HOAs, I find nothing which even basically addresses such a situation.

What additions to the HOA's general liability insurance policy should be added to cover such a possibility, if any? Should an amendment to the governing documents be formulated requiring all homeowners to purchase and maintain hazard insurance? If so, how should it be worded?

TimB4 (Tennessee)
Posts: 21,062

Posted:

Is your town home development considered a condominium?

If it is, then the Association would be responsible for rebuilding that which the CC&Rs state is their responsibility. If it isn't a condominium, then this would not be an issue for the Association.

What prompted the conversation/concern?

DonW3 (Maryland)
Posts: 9

Posted:

No, we are not a condo association.

The topic came up in conversation with a new board member, who expressed concern that the issue was not mentioned in our governing documents.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Don

You raise an interesting question.

I can only answer how our SC HOA handles it.

We are standalone homes and HOA our docs call for the HOA to be listed as a co-payee on ones home owners insurance. One thing we do have to "chase" is to be sure we are named as such come insurance renewal time.

Some ask why we are the co-payee?

Say your home burns down, you make a settlement with the insurance company and decide not to make the needed repairs/rebuild. Where does this leave us? It leaves us with a burned out home and no recourse. The co-payee leaves us with recourse, meaning we do not sign off on the settlement unless the home is rebuilt to our satisfacation.

Please you wannabe lawyers, there is no need to tell "us" we cannot do this unless you are a SC Licensed lawyer and have "legally beaten" our HOA, major SC law firm on this issue....LOL

TimB4 (Tennessee)
Posts: 21,062

Posted:

Don,

I'm also in a town home development that is also not a condominium.
We do have language concerning the shared walls and, basically, it's the responsibility of the parties involved. I've attached the Article of our CC&Rs that addresses party walls. Perhaps it will help.

Tim

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DonW3 (Maryland)
Posts: 9

Posted:

Now that is interesting! I'll have to do some research on this, but this is something I've never heard of being done in Maryland, nor have I seen it within any governing documents I've read from other HOAs in the state.

DonW3 (Maryland)
Posts: 9

Posted:

Thank you Tim. We have the same provisions in our CC&R.

DonW3 (Maryland)
Posts: 9

Posted:

John...could you attach an example of the specific Article in your governing documents which covers this requirement? I would be most interested in such an option (if it's legal to do in Maryland).

TimB4 (Tennessee)
Posts: 21,062

Posted:

Don,

If you have the same language, I would think that that should be the end of the issue for that one member who had concerns.

Tim

DonW3 (Maryland)
Posts: 9

Posted:

Quote:

Posted By TimB4 on 06/20/2012 6:18 PM
Don,

If you have the same language, I would think that that should be the end of the issue for that one member who had concerns.

Tim

I would think so as well, but JohnC brought up an excellent point should the homeowner decide to refuse to make the necessary repairs or rebuild. Where, indeed, does such a situation leave the Association?

TimB4 (Tennessee)
Posts: 21,062

Posted:

The Association has no responsibility. The issue would be between the homeowners. If one rebuilds, per the language I previously posted, it's covered under section 3. Section 6, requires arbitration to settle disputes.

Mind you, for us, the Association has zero responsibility for anything on the individual lots. This is all done by the homeowner (including the roofs).

Tim

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Don

Our docs also call for the individual homeowner to carry a specific amount of insurance and if they fail to do so, the HOA can (not must but can) buy a policy for the unit and bill the owner.

I will search for the HOA being a co-payee part and list it. When one has a mortgage, the mortgage holder is usually a co-payee also so co-payees are quite common. It is simply protecting ones interest.

DonW3 (Maryland)
Posts: 9

Posted:

Quote:

Posted By JohnC46 on 06/21/2012 5:25 AM
Don

Our docs also call for the individual homeowner to carry a specific amount of insurance and if they fail to do so, the HOA can (not must but can) buy a policy for the unit and bill the owner.

I will search for the HOA being a co-payee part and list it. When one has a mortgage, the mortgage holder is usually a co-payee also so co-payees are quite common. It is simply protecting ones interest.

Thanks John!! Anything you could provide related to your Association's approach on this issue would be greatly appreciated.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Don
It is a simple one line statement in the CC&R's....

The lot owner acknowledges that the So and So Homeowners Association must be listed as an additional loss payee on the homeowner's insurance policy.

The section on Individual Insurance says (paraphrasing):

Owner acknowledges the association has no obligation to provide any insurance for any portion of individual lots....

Owner shall carry a blanket all-risk casulaty on the lot and all structure thereon and a liability policy covering injury or damage on a lot.

Shall be in an amount sufficient to the full replacement of any repair or reconstruction.

If all risk in not resonably available the owner shall obtain at a minimum fire and extended coverage.

Remember we are standalone homes and the sides of some homes are not more then 15 feet apart.

Hope this helps.

JeanneK3 (Maryland)
Posts: 562

Posted:

Don W:
If your bylaws state that the HOA may not "subjugate", the association's master policy must pay for the whole thing minus the deductible. Should there be some reason why the insurance company is not required to pay, the association is faced with paying for the whole thing. Bummer.

Sorry I can't give you better news.
Jeanne

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Not sure if this helps but:

QUESTION

Have you ever heard of there being any real difference between homeowner associations and condominium associations? I have a condo unit owner that says they are set up as a homeowners' association, but that the documents are "like" a condo association. I know that the statutes are very clear regarding what a condo association is responsible for. Is there anything similar for a homeowners' association?

ANSWER

From an insurance perspective, it's either a homeowners' association or a condominium association, it can't be both; the only way to know for certain is to read the association documents. Once a determination has been made as to the organization, then insurance coverages can be structured. It's critical that a correct determination be made at the time the policy is written, since many residents (and even some association boards) may not know how the body is legally organized.

Types of architecture/ownership.

Some individuals may feel that since the structure they purchased "looks like a townhouse," then they purchased a townhouse within a homeowners' association. While the structure may architecturally look like a townhouse (multi-story, several units in a building, possibly separated by firewalls), it could be legally organized as a condominium association under the corporate documents.

In a true condominium, the ownership is vested in the unit owner who owns:

(1) the air space in the individual unit;

(2) an undivided interest with all other unit owners in such common elements as the building structure, land, recreational facilities, and the like; and,

(3) certain property attached to the building within the unfinished perimeter walls, floors and ceilings.

In a homeowners' association, individuals own their property on a "fee-simple" basis, meaning that only they own their house or townhouse and the ground below. There is no common ownership of any part of their dwelling or townhouse.

I copied and pasted this. I am not defending it.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By DonW3 on 06/20/2012 5:07 PM
The subject of the complete destruction of a unit or series of units within our Maryland townhome association came up in conversation recently, specifically relating to the HOA's possible liability for the replacement (reconstruction) of such loses in the event the homeowner is not covered by insurance through lapse, cancellation, etc.

I find this interesting. It has been my experience that the lender (bank, mortgage company) requires that it be named as a loss payee on a homeowners policy (at least, for the amount of the outstanding loan balance) and that it be notified by the insurance company if the policy lapses or is cancelled. Usually, the lender will then obtain the appropriate insurance and charge the cost of the premium to the borrower and make the cost part of the outstanding loan.

GlenL (Ohio)
Posts: 5,491

Posted:

Don, your CC&R's should specify what the Association is responsible for and what the homeowner is responsible for and what insurance the HOA is required to have.

Studies show that 5 out of 4 people have problems with fractions

MattG2 (Kansas)
Posts: 16

Posted:

You need to be careful here.

You can require a homeowner to add you as a loss payee to their insurer, but neither you or the homeowner can actually compel the insurer to do so.

My HOA (non-condo) wants me to do exactly this and I cannot find an insurer to write the policy as the HOA doesn't own the structure they can't have a loss.

Whether other owners were able to do so in the past is irrevelevant. Getting a policy written in 1977 renewed is much different than getting a new policy written in 2012.

By-laws/CC&R etc are between the HOA and the owner. They don't affect the Insurer.

The insurance contract is between the owner and the insurer and insurer's aren't too fond of adding loss-payee's who don't actually have loss potential.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

MAtt
In 2011 when I closed on this HOA home, I simply called my insurance agent and had him add the HOA as a loss payee. Got confirmation from the insurance company a few weeks later.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By TimB4 on 06/20/2012 6:46 PM
The Association has no responsibility. The issue would be between the homeowners. If one rebuilds, per the language I previously posted, it's covered under section 3. Section 6, requires arbitration to settle disputes.

Mind you, for us, the Association has zero responsibility for anything on the individual lots. This is all done by the homeowner (including the roofs).

Tim

Tim

Allow me to add something here so apples are apples. Our HOA is responsible for all lot landscaping and house exterior shell (roof, siding, brick work, etc.)normal wear and tear (not damages, etc.) repairs/replacement.

Not sure what role it plays but that is the way it is.

Hope this helps.

TimB4 (Tennessee)
Posts: 21,062

Posted:

JohnC,

From reading your posts, I expected your Association is a condominium (responsible for exterior shell, etc.). This is likely why the Association can insist on members purchasing insurance.

As I posted, we are not a condominium and have zero responsibilities for any part of the town home (they are build in such a way, staggered setbacks and overall height, that each home only shares the common wall (even the roofs are separate).

Don posts that his development is similar to ours and even has the same language about the common walls. Since they are not a condominium, it's unlikely the laws will allow his Association to adopt the same insurance requirements common to condominiums.

It's possible that the individual from Don's Association that brought up the issue only has experience with town homes in a condominium development and this caused the question and confusion.

As you said, readers need to be sure to compare apples to apples or condos to condos and non-condos to non-condos.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Tim

We are an HOA consisting of single, standalone homes, each on a deed lot in South Carolina.

In SC, Condominium Associations are legally named Horizontal Property Regimes and are governed by The South Carolina Horizontal Property Act (SCHPA, originated 1962). It was specifically aimed at multi unit buildings sharing common space like halls, lobbies, elevators, etc. It came about due to the high rise condo buildings originally in Mrytle Beach.

Single home associations (HOA's) are not governed by the SCHPA but are governed by the SC Nonprofit Corporation Act thus they are pretty much governed only by the CC&R's, Bylaws, and Rules and Regulations they write for themselves.

Several years ago a bill was introduced at the state level to govern HOA's but (thankfully) it has been held up in committee and only a few politicians have any interest in it so most consider it to be dead.

As we all know rules, regulations, laws, terminology, etc. can vary widely.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

ADD ON

Man I hate the no edit feature.

I do not specifically know how SC handles side by side townhomes as I have only lived in private home HOA's here.

Maybe someone in SC that lives is a side by side townhome can answer.

Hope this all helps.

TimB4 (Tennessee)
Posts: 21,062

Posted:

John,

Thanks for the clarification.

Tim

DonW3 (Maryland)
Posts: 9

Posted:

Quote:

Posted By JeanneK3 on 06/21/2012 7:31 AM
Don W:
If your bylaws state that the HOA may not "subjugate", the association's master policy must pay for the whole thing minus the deductible. Should there be some reason why the insurance company is not required to pay, the association is faced with paying for the whole thing. Bummer.

Sorry I can't give you better news.
Jeanne

Jeanne:

There is no such language in our documents.

DonW3 (Maryland)
Posts: 9

Posted:

Quote:

Posted By GlenL on 06/21/2012 8:37 AM
Don, your CC&R's should specify what the Association is responsible for and what the homeowner is responsible for and what insurance the HOA is required to have.

Yes, those requirements are outlined in our CC&R's. However, the board member who brought up this issue was not worried about what IS there, but what ISN'T. He is concerned that the Association would be saddled with ultimate responsibility for the reconstruction of a property which suffered castrophic damage if the property was not covered by insurance at the time of such loss because the policy was allowed to lapse, due to cancellation or any other condition of non-coverage.

As I stated earlier, I have gone through numerous by-laws and CC&Rs of similar associations throughout the State of Maryland, none of which address such circumstances or even raise the issue as a point of possible risk that should be considered as part of a typical HOA liability/hazard insurance policy.

Therefore, as nobody else in Maryland seems to be concerned about such a "what if," should we be the apparent trend setter in the State and cover our butts with a revision to our CC&Rs and insurance policy to address such a risk?

MattG2 (Kansas)
Posts: 16

Posted:

Quote:

Posted By TimB4 on 06/21/2012 3:09 PM
JohnC,

From reading your posts, I expected your Association is a condominium (responsible for exterior shell, etc.). This is likely why the Association can insist on members purchasing insurance.

As I posted, we are not a condominium and have zero responsibilities for any part of the town home (they are build in such a way, staggered setbacks and overall height, that each home only shares the common wall (even the roofs are separate).

Don posts that his development is similar to ours and even has the same language about the common walls. Since they are not a condominium, it's unlikely the laws will allow his Association to adopt the same insurance requirements common to condominiums.

It's possible that the individual from Don's Association that brought up the issue only has experience with town homes in a condominium development and this caused the question and confusion.

As you said, readers need to be sure to compare apples to apples or condos to condos and non-condos to non-condos.

John might I add that because your HOA takes care of the exterior of the units, that's why they can be added to your insurance. My HOA does none of these things. This has been asked by every single insurer I've talked to.

Absent owning the property, if the HOA is responsible for maintining/repairing, they can be added. If they don't do that they can't be.

Regardless of whther they are or not I'd be interested in hearing if any HOA has ever had any luck getting a payout from one of these policies. It seems claims adjusters are much more knowelddgeable about what a policy actually means as opposed to the agents.

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