Owners vs. Associations vs. Insurers: Unraveling the Knots in Insurance Claims

Published on: January 15, 2018


Condominium insurance is complicated. This is hardly a stop-the-presses revelation. Board members and association managers who have shopped for insurance policies or dealt with insurance claims know how complex, frustrating, and headache-inducing these tasks can be.

Insurance-related questions could easily fill several large books, but I’m going to focus on two that seem to arise with considerable frequency:

  • What rights do condominium owners have when damage to a unit is covered by the association’s master policy?
  • And what rights does a condominium association have to control the defense of a liability claim?

I’ll start with the second question, which involves what is known as an insurance company’s “reservation of rights.” Liability policies typically require insurers both to defend a claim and to pay any damages resulting from it. But insurers have the option of separating the two – that is, they can undertake the association’s defense, paying the litigation costs, without also committing to pay the damages if the association is found to be liable for them.

Insurers sometimes want to hedge their bets in this way if they think their coverage obligations are uncertain. But if insurers reserve the right not to pay the claim, they lose the right to select the attorneys and manage the litigation. The insurer must pay the defense costs, but the association rather than the insurer has the right to select the attorney and control the litigation.

The critical point – and it is critical – is to have insurers state their intention, to reserve or not, up front and in writing. If the insurer reserves its rights, the association should immediately assert its right to choose its own attorney. Moreover, you don’t want any question about the insurer’s obligation to pay a covered claim. Knowing the insurer will pay the legal bills will be reassuring but discovering too late that the association will have no coverage for a $2 million damage award will be painful.

An insurer’s interest in controlling defense costs may sometimes conflict with an association’s interest in – or strong preference for – fighting a liability claim. When that occurs, some insureds argue they should be allowed to manage their own defense, using the attorney(s) of their choice, even if the insurer has agreed to pay any damages. The Massachusetts Appeals Court addressed that argument recently in OneBeacon America Insurance Company v. Celanese Corporation. Although the litigation didn’t involve a condominium association, the decision is equally applicable to them.

An “Adequate” Defense

The insured in this case, Celanese, had been fighting asbestos and chemical pollution claims for years. OneBeacon agreed to end a long-standing legal cost-sharing arrangement and offer a defense without reservation. But the insurer insisted on using its own attorney rather than the attorney who had been representing Celanese under the old arrangement. The company balked, arguing that OneBeacon’s priority on controlling costs made its defense of Celanese inadequate. Among other deficiencies Celanese cited: OneBeacon would not mount the robust defense required to defend the company’s reputation. For that reason, Celanese argued that it was justified in selecting an attorney that would provide an effective defense, and that OneBeacon should be required to pay for it.

The court was not sympathetic. OneBeacon’s insistence on selecting the attorney was reasonable and consistent with “the authority that is inherent in the insurer’s control of the defense, as part of its duty to defend,” the court said. The court also pointed out that Celanese’s insurance policy required Beacon to defend claims “of bodily injury or property damage…Protecting Celanese’s reputation was not something that OneBeacon was required to insure or defend.” While the company had the right to manage its own defense, the court agreed, OneBeacon was not required to pay for it. Instead, because OneBeacon agreed to defend the case without reservation, it was only obligated to cover the defense costs incurred under its management of the defense.

Policy details are also key, as are the association’s governing documents, when sorting out the relative interests, rights and obligations of associations and unit owners in insurance-related disputes. These disputes often arise when an owner objects to the insurance payment offered for damage to the owner’s unit.

Owners v. Associations

In a typical example, a leak in a common area water pipe damages the interior of an owner’s unit. Because the association is responsible for the pipe, the master policy coverage is triggered. The insurer sends an adjuster, who assesses the damage, and the insurer issues a check to the association – not to the owner – to cover the repair costs.

What happens if the owner thinks the insurance settlement is too low? The short answer, in most cases, is – too bad. In the condominium structure, the association is the insurance trustee, with the responsibility for managing insurance claims filed under the association’s master policy and the authority to do so. Unless the policy or the condominium documents dictate otherwise (which would be unusual), the insurer is not required to deal directly with the owner, and the association has no obligation to make sure the owner is satisfied with the insurance resolution.

There are a few exceptions. If the owner is a named insured on the master policy, the insurer may have the option, and possibly the obligation, to negotiate directly with the owner. Also, If the board agrees that the settlement is unfair, it may contest the settlement on the owner’s behalf. If board members feel strongly enough about the issue, they could hire a public adjuster to press the argument with the insurer. But an owner could not typically hire an adjuster to negotiate with the insurer unless the board approves. The owner could sue the association and/or the insurance company, of course, but their arguments are unlikely to get past the fundamental principle I noted earlier: As the designated insurance trustee, the association has the sole authority to deal with the insurer.

That’s what a Massachusetts Appeals Court concluded in a 2003 case (Calloway v. St. Paul Fire and Marine Insurance Company), where the owner of a fire-damaged unit argued that the association should have consulted him and other owners before accepting the insurance settlement.

The master policy specified said that in claims involving owners’ units, the insurer “will adjust the loss with [the condominium trustees], or we can choose to settle directly with the owner.” The court noted that this language allows the insurer to negotiate directly with owners, but doesn’t require it to do so. The court went on to explain that condominium owners are beneficiaries of the trust; they “are not partners or associates…and hold no relation to the trustees other than that of [beneficiaries].” The master policy represents an agreement between the insurer and the association, to which owners are third parties, the court noted, adding: “[T]he ordinary rule is that in relations between a trust and the outside world, where internal administration of the trust is not involved, the trustee represents the [beneficiaries].”

Best Practices

This highlights my earlier point: Owners have no right to negotiate directly with the insurer or to be involved in those discussions, and, in my view, it is usually best if they are not. The best practices we recommend to association boards when dealing with master policy coverage for an owner’s unit:

  1. Notify owners of the insurance settlement.
  2. Instruct them to arrange for the necessary repairs. Boards shouldn’t be involved in the selection of a contractor, but they should require owners to verify that the contractors they select have the appropriate licenses and insurance.
  3. Release payments (in installments, if it’s a large project) to the owner’s contractor – not to the owner. This eliminates the risk that the owner will use the insurance proceeds to pay for a trip to Tahiti rather than to finance the unit repairs.
  4. Require owners to sign a release acknowledging that the insurance proceeds have been distributed. While some owners may object, the courts haven’t left any doubt about the association’s right to impose this requirement. In a 2010 case addressing the question (Davagian v. Cape Codder Condominium Trust) the Massachusetts Appeals Court concluded: “…the release was a reasonable means used by the trust in furtherance of its duty to shield itself, and by extension, all of the unit owners, from liability.  If the repairs to an owner’s unit cost less than the insurance settlement, the owners aren’t necessarily entitled to the difference. In fact, some condo documents specify that the association keeps any surplus. If the documents are silent, then the board can decide where the money goes.  If the repair costs exceed the insurance allotment, owners can’t use their individual unit owners’ (HO6) policies to fill the gap. The HO6 covers an owner’s personal property, their share of the master policy deductible, and their share of any “loss assessment” required to pay for common area repairs for which the association is under-insured. But the HO6 won’t fill the gap between what the master policy pays for damage to an owner’s unit and the higher amount owners may think they should receive.
  5. Read the condominium’s governing documents and its insurance policies. (This should be item one on the list of suggestions for boards). Consult the association’s attorney and/or its insurance agent to make sure you understand the association’s insurance coverage and its obligations. Insurance questions are knotty; the answers almost always depend on words and commas and endless technical details buried in hundreds of pages of insurance jargon and legalese. You will find the devil – and often several devils – in these details. And when it comes to insurance, it is far better to deal with the devils you know rather than those you don’t.

Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.

Thomas Aylesworth