Insurance Weighs Heavy on Everyone’s Mind

By Michael J. Gelfand, Esq. / Published February 2023

I

nsurance: Vanishing Coverage Risks of Underinsuring Association Property

     Disasters befalling property owners in Florida, from the most recent hurricanes to the new phenomenon of building collapse, contribute to skyrocketing insurance premiums.

     Many Florida community association boards of directors seeking to limit assessment increases may be asking themselves whether they need to fully insure their buildings, seeking a lower premium to avoid increasing assessments.

     Is “underinsuring,” insuring below replacement cost, a good idea? ABSOLUTELY NOT! Covenants and statutes frequently provide specific requirements for Florida community associations and directors. Highlighting the dangers of underinsuring a condominium building, a recent out-of-state decision in Grooms Property Management, Inc. v. Muirfield Condominium Association, 876 S.E. 2d 774 (N.C. App. July 19, 2022), described a fire destroying a condominium unit in a building. Although the declaration of condominium required the association to carry at least 80 percent of the replacement value, the association purchased less coverage.

     The estimated cost to repair the building was between $1.36 and $1.46 million. The association received only $933,421 in insurance proceeds. The shortfall apparently prompted one of the unit owners to sue the condominium association and its directors for failing to maintain the requisite insurance coverage on the building.

     Rejecting the association’s argument the declaration required association insurance only for the building’s exterior, the trial court granted a partial summary judgment for the owner, holding that the association’s failure to purchase sufficient insurance to cover at least 80 percent of the replacement value of the building violated the declaration.

     The North Carolina appellate court agreed with the decision of the trial court. The appellate court rejected the association’s argument that the declaration provisions were ambiguous, maintaining that the word “building” only referred to the outside structure and not the interior units. Rejecting this argument, the court held that the association was required to obtain insurance sufficient to cover 80 percent of the “building,” which included both the exterior of the units and certain interior components.

     There are many lessons that follow from this decision. First is the necessity to follow the insurance requirements of the community’s governing documents. Nearly all Florida condominium associations, and most homeowners associations that have structures, are required to have full replacement cost insurance coverage. In addition, the Florida Condominium Act generally requires Florida condominium associations to have “full insurable value, replacement cost, or similar coverage…” with certain exclusions (Section 718.111(11)(a) Fla. Stat. (2022)).

     Second, most Florida casualty insurance policies contain a “coinsurance” provision. Coinsurance is not the same for property insurance as it is with medical coverage. In property coinsurance, the policy requires minimum coverage, frequently at 80 percent of the estimated replacement cost. Even if the loss is less than the stated dollar coverage amount, the loss payment is reduced by the ratio of actual coverage to required coverage.

     Thus, underinsurance usually is a breach of “document” duties as well as statutory duties, particularly for condominium associations.     

     Underinsurance brings a penalty for breaching the insurance policy minimum. Note also that usually the association has a duty to update the replacement cost estimate, which for condominiums is no less often than every three years.

     Although this case was from an out-of-state court, the dangers of underinsuring buildings is just as real to Florida community associations, especially as insurance rates are increasing so rapidly.

Insurance Part II: Corrosion Water Damage an “Act of Nature” Precluding Coverage

     Drip. Drip. Drop. Sounds of torture to a property owner or manager. Rusty pipes. Slow leak. Sooner or later the damage cannot be ignored.

     When there is property damage, frequently the knee-jerk reaction is to file a claim with the property casualty insurer. Will the insurer cover the costs to repair the water damage?

     A Florida homeowner was likely surprised to learn that her policy did not cover water damage caused by an “act of nature.” A Florida appellate court recently ruled that corrosion in a homeowner’s pipes was a naturally occurring force and therefore an “act of nature” excluded from coverage by her insurance policy.The facts in Rosa v. Safepoint Insurance Company, 47 Fla. L. Weekly D 2320 (Fla. 5th DCA, November 14, 2022), indicate that the owner’s home was damaged by the overflow of water from the water pipes. The cause of the damage resulted from the deterioration of cast iron pipes caused by corrosion.

     The insurance company denied coverage because the insurance policy excluded water damage “caused by or resulting from human or animal forces or any act of nature.” The owner sued the insurer seeking to recover her costs in repairing the damage to her home. The trial court granted final summary judgment for the insurer based on the policy’s water damage exclusion.

     The Florida appellate court agreed with the trial court’s decision in favor of the insurer.

     The appellate court held that corrosion that occurred in the pipes was a naturally occurring force whether it was preventable or controllable. The court stated

     The phrase “act of nature” does not require an uncontrollable or unpreventable event…. Here, the loss was caused by rust or corrosion. Corrosion, the chemical reaction between iron and moist air, is an act of nature or a naturally occurring force. Thus, the rust or corrosion occurred because of a natural act. As a result, the Water Damage Exclusion endorsement applied to this loss.”

     In other words, as an act of nature, the loss came within the insurance policy’s exclusion for “any act of nature.”

     A condominium owner or townhome owner may find that damage to their property may not be covered for leaks. Many may assume that flood insurance may cover the damage, but flood insurance has many exclusions. Thus, this decision highlights the importance of knowing what your insurance policy covers and does not cover. If there is an act of nature exclusion, are all acts of nature excluded?

     If you have any questions regarding your coverage, contact either your insurance agent or association counsel.

Michael J. Gelfand, Esq.

Senior Partner, Gelfand & Arpe, P.A.

     Michael J. Gelfand, Esq., the senior partner of Gelfand & Arpe, P.A., emphasizes a community association law practice, counseling associations and owners how to set legitimate goals and effectively achieve those goals. Gelfand is a dual Florida Bar board certified lawyer in condominium and planned development law and in real estate law, a certified circuit and county civil court mediator, a homeowners association mediator, an arbitrator, and parliamentarian. He is a past chair of the Real Property Division of the Florida Bar’s Real Property, Probate & Trust Law Section, and a Fellow of the American College of Real Estate Lawyers. Contact him at ga@gelfandarpe.com or (561) 655-6224.