|
Memorandum To Clients Memorandum to Clients December 2005 Vol. XV No. 12 INSURANCE: CONDOMINIUM REBUILDING AFTER ANOTHER HURRICANE What happens when reconstruction and repairs are necessitated by a casualty, such as Hurricane Wilma? In a Florida condominium community, the issues of repair and funding normally must be separated. Generally, a declaration of condominium contains at least two provisions requiring review: 1) general maintenance; and 2) reconstruction and repair after casualty. When there are two provisions addressing similar issues in a declaration, courts seek to determine the intent of the declaration =s drafter by applying general rules of interpretation. The purpose of the rules is to provide the public with guidance when documents are not clear. Without more information about the drafter=s intent, courts will generally assume that the more specific provision governs a situation. This allows both provisions to have meaning. Thus, the general maintenance provision usually governs day to day maintenance responsibilities and the reconstruction and repair provision governs maintenance resulting from casualty.Maintenance Provisions Generally, the maintenance provision of a declaration of condominium provides that a condominium association is responsible for the Acommon elements@ and the unit owner is responsible for the Aunit.@ Thus, the obligation to perform maintenance may be determined by the definition of the Aunit@ and Acommon elements.@ While it may appear obvious, many declarations have different boundaries for what is a Aunit.@ It is therefore crucial that each declaration=s unit description be reviewed carefully.When a casualty occurs, however, the declaration may provide special rules for maintenance. These rules may be found in a separate provision addressing reconstruction after loss or casualty or may be part of an insurance provision. In many cases, the provision shifts responsibility for repair of the unit to the association when damage occurs to both the common elements and units. The shift of responsibility allows the association to ensure that the structural integrity and appearance of the buildings are maintained. Funding Generally, a declaration of condominium provides two options for funding the cost of reconstruction and repairs: insurance proceeds and levying assessments. Insurance: It was assumed by many declarations that an association =s insurance policy will cover the cost of reconstruction and repair. Obviously, that assumption has created numerous problems. In 2003, the legislature amended the Florida Condominium Act, '718.111(11)(b) to provide that every hazard insurance policy issued or renewed on or about January 1, 2004, shall provide primary coverage for: all portions of the condominium property located outside the unit; the condominium property located inside the units as such property was initially installed, or replacements thereof of like kind and quality; and all portions of the condominium property for which the declaration of condominium requires coverage by the association.The 2003 law excludes from association casualty insurance coverage certain items, including but not limited to, coverings of floors, walls, and ceilings, electrical fixtures, appliances, air conditioner or heating equipment, water heaters, water filters, built-in cabinets and counter tops and window treatments which are located within the boundaries of a unit and serve only one unit. Associations should contact their insurance agents to determine the scope of the policy and any coverage limitations. Assessments: Even with insurance coverage, the proceeds may be insufficient or there may be a deductible which needs to be funded. Many declarations allow the association to assess to cover the cost of reconstruction and repair. Generally, the cost of common element damage is assessed equally among all unit owners and the cost of unit damage is assessed to the owners of the unit damaged. As each declaration is unique, the reconstruction and repair provision must be carefully reviewed to determine how the cost is to be allocated. Additionally, the declaration may contain certain notice requirements or may require a membership vote before an assessment can be levied. As a practical matter, the association should document the repairs and expenditures. The association will need to document whether the repair is to the common elements or to the unit as this information will be necessary in calculating the assessment amounts for each unit. Loans: An alternative method of funding may be borrowing. Some declarations, however, prohibit borrowing or contain special notice and/or membership voting requirements. Even if permitted under the declaration, an association should exercise caution in deciding whether to borrow as some associations have experienced financial difficulties because of past loans which have exhausted borrowing power. Recent Developments The Division of Land Sales, Condominiums, and Mobile Homes recently announced an unofficial policy. The Division asserts that the legislative intent in defining insurance coverage was to have the duty to maintain mirror the duty to insure. Thus, to the extent that a condominium association is required to insure an item, the Division states that the association is required to pay for the reconstruction for that item regardless of how the responsibility is allocated under the declaration. Many practitioners disagree with this policy because the policy was not properly adopted as an administrative rule and the policy is not supported by the language adopted by the legislature in the 2003 amendment to the statute.Communication to Unit Owners Associations can help unit owners plan for the costs resulting from casualty damage by informing the owners through a newsletter of their obligation to maintain insurance. It is suggested that unit owners consider using the same insurance agent and carrier as the association to facilitate the processing of claims. Lastly, unit owners should be educated about the benefits of maintaining loss assessment coverage. Homeowners' Associations This article is primarily directed to condominium associations since most homeowners' associations' "governing documents" require the lot owner to insure and repair his/her lot. Where a homeowner association is responsible for repair of a part of a lot, for example the roof, then the declaration must be examined carefully to determine responsibility for reconstruction as there are no general rules for homeowners' associations. FIRM NEWS The firm =s offices will be closed Monday, December 26, 2005 and Monday, January 2, 2006 in observance of national holidays. The firm=s offices will also be closed at 3:00 p.m. on Friday, December 16, 2005 for its annual holiday party. May the new year bring joy and peace to all.This information is provided for general information purposes only, may no be relied upon and is provided without obligation or fee. It is distributed to the firm's association clients to provide a general comment of recent legal changes. This information is not legal advice, representation counsel or opinion. The changes in the law may not have been reviewed by Florida courts and may be subject to further challenge. Before taking any action you are urged to consult with counsel to ensure that your legal rights are protected. 8 2005 by Gelfand & Arpe, P.A. |