Settling Insurance Losses

Published on: July 15, 2001

On many occasions in the past I have discussed various issues surrounding condominium insurance matters. The recent report in the CAI Law Reporter of a case arising in Florida in the aftermath of Hurricane Andrew pointed to an issue oftentimes overlooked when a casualty loss occurs. All too often the association will file and negotiate a claim and then dole out the proceeds to the various unit owners who have suffered a loss. Doing so ignores, however, the association’s obligation to the mortgagees.

In the Florida case in the aftermath of Hurricane Andrew the association negotiated a $3.4 million settlement with its property insurer. It then undertook to effect repairs. However, by the time only 50% of the repairs were completed, the settlement funds had been used up.

A lender which held mortgages on two units sued, claiming the association was negligent (1) in its settlement of the claim for too low a sum and (2) in its administration of the repairs. The trial court dismissed the case, holding that the association owed no duty to the lender. The appellate court reversed, holding that there was a common law duty for the association to exercise due care to ensure that those whose interests were at risk were properly protected.

Whether, ultimately, it will be found that the association breached this duty is yet to be decided. What is important, however, is that the appellate court found a legal duty existing to the mortgagee and, further, that this duty arose at common law, as opposed to being created by the condominium’s documents.

Thus, since the mortgagee has an insurable interest, a board cannot merely pay over the funds applicable to a unit’s damage to the owner without concern as to what happens with the funds. Rather, the board has a duty to ensure that those funds are used to repair the unit so that the mortgagee’s security is protected. Thus, requiring owners to provide proof of repairs is warranted. 

But, you say, the damage was small and requiring proof of repairs will be too burdensome. In such case, the board should insist on obtaining an appropriate indemnity agreement from the unit owner. There is no guarantee against a claim, nor does it ensure that the unit owner will meet their obligation under the agreement. It is, however, in the appropriate situation a reasonable method of handling the issue.

Remember, the “all in” form of coverage was mandated by the secondary mortgage market to protect the lender’s interests in the security. As this Florida case demonstrates, those interests are recognized by the courts. Thus, before insurance proceeds are distributed to owners, boards should either ensure that repairs have been effected, or obtain, a properly drafted release and indemnity agreement