Problem In Your Condo Unit? You May Have To Pay The Deductible

Written by Posted On Tuesday, 24 April 2018 12:10

Many condominium projects in the Washington metropolitan are old, having been converted from previous rental apartment buildings. Pipes periodically break or leak, often causing thousands of dollars of damage. Who pays? The unit owner or the association?

Every condominium association has insurance coverage, typically called the "master policy". This is contrasted to the policy every owner in this area must carry for their own unit, called an HO-6 policy.

When damage occurs, the Master is usually obligated to cover certain repair costs. But every insurance policy has a deductible -- an amount that must be paid up front or deducted from the insurance proceeds. This can range from as low as $5000 to a high of $25,000 or more. And until recently, the bylaws of many associations stated that the deductible is a "common expense": in other words it has to be paid by the association.

Association Boards of Directors do not like to pay the deductible every time there is a problem; such expenditures are typically not plugged into the annual budget and often at the end of the year, an association may have to significantly increase the monthly assessments to make up for any shortfall.

A few years ago, the Maryland legislature gave every association a significant break. It enacted what is called "strict liability". If the cause of any damage to the condominium started from within a unit, regardless of whether there was negligence, that owner must pay the deductible up to $5000. And the law is not limited to plumbing problems; any incident that occurs in the unit that triggers payment by the Master policy is covered under that law.

The Maryland law makers then did something highly unusual. Almost all bylaws then in existence merely stated "owners may want to get their own insurance coverage." Typically, in order to amend association Bylaws, a super-majority vote (either two thirds or even three quarters) of all owners is required. However, since the then new strict liability provision would financially impact Maryland residents, a law was passed allowing associations, with only a simple majority, to amend their bylaws to require every owner obtain the H0-6 policy. Why? Because that insurance would pay up to $4500 of the $5000 deductible.

Condominiums in the District of Columbia were facing the same problem: pipes were breaking and leaking all over, especially when temperatures dropped below the freezing mark. The District 0 condominiums -- acting through the Community Association Institute -- supported an amendment to the DC condo act that basically is identical to that in Maryland. It reads: "if the Bylaws do not indicate the entity responsible for payment of a deductible amount if the cause of damage to or destruction of a portion of a condominium originates from a unit, the owner of the unit where the damage... originated shall be responsible for the association's property insurance deductible in an amount not to exceed $5,000."

In Maryland, in order for the association to legally collect the $5,000, the board must -- on an annual basis -- inform all owners of the amount of the deductible and their obligation under the law should a problem occur within their unit.

In Washington, in order to be obligated to pay the deductible, unit owners must be advised before any damage occurs. Best practice: the Board, through its management company, should advise all owners of this law annually.

Accordingly, deductibles remain a common expense except when there is a problem in a specific unit.

However, nothing in law is simple. Most Bylaws were written before 2010, state that all deductibles are common expenses, and thus must be paid by the association. In order to collect the up-to $5,000 from the unit owner where the damage occurred, the Bylaws should be amended to reflect the new law. And in the District, this will take a super-majority vote from all owners. Interestingly, although the law limits the payment to $5,000, if the amended Bylaws do not limit this amount, a District association may actually recover the entire deductible it has to pay when the insurance claim is filed. Careful drafting of the Bylaws will allow a condo with a larger deductible to collect the full amount from the owner in the unit where the problem occurred.

Amending Bylaws is not an easy task. In many associations, it's hard enough to get a quorum for the annual meeting, let alone get a super-majority vote to make changes to their legal documents. But all is not lost. When unit owners recognize that such a proposed amendment may significantly curb operating expenses -- and thus either lower condo assessments or at least keep them stable -- most financially thinking owners will support such an amendment.

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Benny L Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of KASS LEGAL GROUP, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

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