Condominiums: New Law
In an effort to clear up rampant confusion about insurance deductibles, the Maryland General Assembly has amended the Condominium Act, effective October 1, 2001. The new law (Senate Bill 639) adds a measure of clarity, but may have some unexpected consequences. Also, depending on a condominium’s documents, the new law may not even apply
Condominium bylaws usually do not give much explicit guidance as to who is responsible for paying insurance deductibles. As insurance costs and claims have risen, so have the deductible amounts under condominium property damage policies. With $1000 and $2500 deductibles now common, the stakes are higher than they used to be.
Often, bylaws address deductibles implicitly by talking about what happens if the cost of repairing damage is “in excess of insurance proceeds.” Condominium lawyers have had to interpret those bylaws sections to figure out whether the association or an individual owner pays the deductible in a given case. The new law puts a stop to that approach. It says simply that a deductible is not a cost “in excess of insurance proceeds.”
The law then says that the insurance deductible is a common expense: (i) if the cause of damage originated in the common elements, and (ii) (unless otherwise provided in the bylaws) if the cause of damage originated in a unit.
So, beginning October 1, 2001, unless the bylaws provide otherwise, all insurance deductibles will be common expenses.
This is not the end of the story. Under the new law, if the bylaws say that the deductible must be paid by the owner of the unit in which the cause of the damage originated, the owner can be required to pay up to $1000, and that any excess deductible amount will be a common expense. This means that the owner may be required to pay $1000, even if the owner was not negligent or otherwise at fault.
What does all this mean for a Maryland condominium association? Among other thins, it means that:
1. The Condominium Act officially recognizes the principle that an owner may be required to pay the deductible, even if the owner’s own unit was not damaged, and even if the owner was not at fault in causing the damage, but was unlucky enough to have, say, a pipe break or an air conditioner condensate line clog in his/her unit.
2. Since the Condominium Act clearly states that the insurance deductible is a common expense (possibly subject to the above exception), associations can be expected to take the position that, unless an insurance claim actually is filed, there is no “deductible” to be paid by the association. Since the deductible really exists only as a deduction from the amount paid by the insurance company, there really is no deductible if an insurance claim is not filed. If the cost of repairing damage is less than the deductible amount specified in the insurance policy, associations will not file claims, and unit owners will be told that they must pay for fixing their own units, as part of their regular maintenance and repair responsibility.
3. The new law does not prevent an association (or an individual) from pursuing reimbursement of any paid deductible amount from the party whose negligence actually caused the damage. While the Act may say who pays the deductible in the first instance, it does not say that that party has no recourse against someone who really was at fault.
4. All of this still is subject to any different provisions in a condominium’s bylaws. The new law specifically says that the deductible for damage originating in a unit is a common expense, “except as otherwise provided” in the bylaws. Also, Section 11-142(b) of the Condominium Act says that the entire Section of the Act on insurance (which includes this new law) applies to a condominium only if the condominium’s own declaration, bylaws or plat do not “provide otherwise.” This means that a condominium’s own documents may be written (or amended) to take a completely different approach from that specified in the Act.
As with any new legislation, it will take some time (and maybe some court decisions) to sort out the effect of this change to the Condominium Act. While it is an attempt to clarify the exquisitely confusing area of condominium insurance, it does not solve the deductible issue once and for all, and the real impact on condominiums, condominium fees and owner obligations remains to be seen.