Washington Court Rules that Condo Association's Insurance Covers Tenant

A Washington appellate court recently decided that a condominium association’s insurance policy covered a unit owner’s tenant as a coinsured party because the lease did not specifically state otherwise. This is significant because associations’ insurers may not attempt to shift the cost of repairing damage caused by a tenant’s negligence or misconduct to that tenant if he or she is covered by the association’s insurance policy. Washington community associations should consider requiring leases to state that the tenant is not covered by the association’s insurance policy. This could help those associations avoid higher insurance premiums in the future.

Community association insurance can be a difficult subject to grasp, but boards must confront it in order to fulfill their legal duties. Identifying and understanding the portions of the governing documents and state law that govern insurance is the first and most important step. An attorney who focuses on representing Washington condominium and homeowners associations can make this complex area more accessible.

Seattle Condominium Flood Demonstrates Importance of Insurance

An overflowing bathtub caused by a sleepy owner recently plunged the Seattle condominium known as Mosler Lofts into a nightmare. Property damage was extensive, and many of the units had to be vacated for repairs. An unfortunate incident like this should remind condominium associations and their owners that purchasing adequate insurance coverage is advisable even when it is not legally required. It should also cause condominium boards to evaluate their governing documents to determine who pays their association’s insurance deductible in these types of situations. Ben Kakimoto’s discussion of condominium insurance on the Seattle Condo Blog earlier this month is well worth reading. For an overview of Washington condominium associations’ legal duty to purchase insurance, please review my previous post on that subject.

Court Upholds Seattle Condominium Association's Default Judgment Against Insurance Company

In 2005, the Lakewest Condominium Owners Association in Seattle discovered that several of its buildings required major repairs due to rain damage. The Association filed and pursued claims against numerous insurers to pay for the damage, which culminated in lawsuits against some of them. The Association was granted a default judgment in the amount of 7.5 million dollars against Tokio Marine & Fire Insurance Company, Ltd. in October of 2007. A default judgment is entered when a person is served with a lawsuit and does not respond within the time allowed by law. Tokio argued to the court more than one year after the judgment (the applicable deadline) that the judgment should be vacated. The court agreed with Tokio, but this ruling was reversed on appeal in an unpublished decision issued earlier this month. The association's default judgment is thus valid and enforceable against the insurance company.

Washington condominium and homeowners association boards should not be hesitant to file claims with their insurance companies when serious property damage occurs, and they should encourage owners to proactively contact their insurers as well. This is sometimes the only way to avoid major special assessments. It is sometimes necessary to sue insurance companies if they will not respond or if they deny claims that appear to be covered by the policy. Such litigation can obviously turn out very well indeed for the association if the insurer drops the ball and is found in default. The Lakewest case demonstrates that default judgments have value and will be upheld by the courts in some circumstances.

New Requirements for FHA Condominium Loans Delayed and Revised

The U.S. Department of Housing and Urban Development has announced that most of the new guidelines for Federal Housing Administration (FHA) loans related to condominiums will not be implemented until December 7. The "spot loan" approval process is now scheduled to be eliminated on February 1, 2010. All currently approved condominium projects will be transferred to the new FHA approved list. Projects that were approved before October 1, 2008 will require re-certification by December 7, 2010. Projects that were approved between October 1, 2008 and December 7, 2009 will require re-certification within two years of their approval date.

The new standards governing FHA condominium loans that were first announced in June have also been revised. One significant change is that condominiums are not required to maintain a current reserve study. A "budget review" process has been inserted instead. This review must determine that the budget is adequate and meets the following standards: 1) Includes allocations to ensure sufficient funds are available to maintain amenities and unique features; 2) Provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and 3) Provides adequate funding for insurance coverage and deductibles. If a condominium's budget does not meet these standards, a lender may request to review a reserve study that is less than a year old to assess the project's financial stability.

Another important revision to the new FHA standards concerns the kinds of insurance coverage that must be in place to obtain approval. Condominium associations are required to maintain property insurance in an amount equal to 100% of current replacement cost of the condominium and comprehensive general liability insurance covering common elements, commercial space, and public ways. Associations with 20 or more units must also maintain fidelity insurance with coverage in an amount no less than the sum of three months assessments on all units plus reserve funds. If the project is located on a 100-year flood plain, a certain type of flood insurance is required as well.

If the board of your condominium association is concerned about obtaining or maintaining FHA approval, then it should consider seeking guidance from an attorney or other real estate professional that is familiar with this complex area.

Property and Liability Insurance – Is Your Association Paying Too Much?

In times like these, every part of a community association’s budget should be scrutinized. Insurance is a tempting target when boards are looking to reduce spending, and some associations can obtain substantial savings while maintaining quality coverage. However, condominium and homeowners association boards should be aware of what state law and their governing documents say about insurance before they decide to make a major change in this area.

Condominiums created on or before July 1, 1990 and homeowners associations should focus on their governing documents when evaluating their current insurance. The Horizontal Property Regimes Act and the Homeowners’ Associations Act do not impose any insurance-related requirements other than those in the association’s governing documents. Condominiums created after July 1, 1990 are required to maintain the insurance that is required by the Washington Condominium Act, which includes property insurance on the condominium in the amount of at least 80% of the actual cash value of the insured property at the times that the policy is purchased and renewed and liability insurance for death, injury, and property damage relating to the use, ownership, or maintenance of the condominium’s common elements.

Once community association boards are aware of the minimum insurance requirements established by applicable statutes and their governing documents, they should examine their associations’ present insurance policies. Automatically renewing those policies without considering other available options could result in some associations missing a better deal. Mary Register, an insurance agent at Lovsted Worthington, recently pointed out to me that many condominium and homeowners associations can obtain as much or more insurance coverage for less money by switching to direct writers like Philadelphia Insurance or Fireman’s Fund. She also indicated that some associations would benefit from a re-assessment of the value of the insured property and the cost to rebuild it given the current market conditions. Even if an association decides to stay with its present insurer, Ms. Register noted that it can lower its insurance premiums over time by installing safety features like fire alarms and security systems.

It only takes one serious incident to realize the value of an association’s property or liability insurance policy. Boards should ensure that their associations have adequate insurance coverage, but they should also take advantage of the increased competition for their business to lower their associations’ premiums if possible. The owners will (or should) thank them later.