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Condo | HOA Lawyers

Why You NEED to Amend Your Association Declaration Insurance Provision Before You Have a Loss

Issue:  If your association was destroyed by fire or some other hazard, and it did not make sense to rebuild, how would the funds be divided?

Problem.  Odds are that you don’t know the answer.  The fact that you don’t know should scare you.  Is every unit in your association worth the same amount?   I doubt it.  Do you each pay the same amount in assessments?  Does that control?  What does your declaration say about the distribution of insurance proceeds if the unit owners elect not to rebuild?  Do you understand what it says? Does it even make sense?

Recent Case.  An 18 unit condominium in Tennessee consisting of four buildings of different sizes was destroyed by fire and the unit owners unanimously elected not to rebuild. They had all paid equal assessments for years.  However, the trial court and appellate court determined that the insurance proceeds should be divided proportionately, not equally.  Village East Association, Inc. v. Lamb, No. E2017-02275-COA-R3-CV (Tenn. Ct. App. Sept. 19, 2018) Those unit owners who had been paying equal assessments, but now got less than an equal distribution, I am sure were not happy.  To add insult to the loss, they presumably also spent a fair amount of money on the lawsuit.

Lesson.  Had the association and unit owners spent a relatively small amount – less than $2,500 likely, they could have amended their documents and clarified their various ambiguous insurance provisions.  Every set of declarations are originally written by the Declarant who is concerned with selling the units and does not give a lot of time or effort to making the insurance clauses clear.  If you don’t believe me pull out your declaration and read yours.  This is especially true since the Declarant is likely controlling the association during the relevant time from the Declarant’s standpoint (while he or she is selling units).  Once the Declarant is gone, no one looks at the provisions until a serious loss takes place.  By then it is too late.  Don’t let that happen to your association.  Have your insurance committee or board at least consider amending these two provisions:

  1. What exactly the documents require to be covered, so that you actually get paid on a loss the full amount the law allows (this is usually NOT the case); and
  2. Making sure your documents clearly provide how funds will be distributed if the insurance proceeds are not sufficient to rebuild (or the owners vote not to rebuild) the association.


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