Super Storm Sandy
The following article by Eric F. Frizzell was originally published in the January 2013 issue of Community Trends, the monthly magazine of the New Jersey chapter of the Community Associations Institute.
Super Storm Sandy: Review the Insurance Provisions in your Association’s Governing Documents Regarding Allocation of Insurance Proceeds and Required Means of Repair
By Eric F. Frizzell, Esq., Buckalew Frizzell & Crevina LLP, Glen Rock, NJ
In the aftermath of Hurricane Sandy, management companies throughout New Jersey have been working tirelessly to repair the terrible damage suffered by their associations and in dealing with insurance adjustors. It is important to remember that many associations’ governing documents contain casualty loss provisions that mandate the manner in which insurance proceeds received by the association must be handled and how repairs must be performed. The purpose of these provisions is to protect the interests of mortgage holders as well as unit owners, and the failure to comply with them can expose the association and management company to a lawsuit by a unit owner or mortgagee claiming that the insurance proceeds were allocated and repairs were performed in violation of these provisions.
Accordingly, while the insurance provisions can vary from one association to another, it is worthwhile to review some of the provisions that are commonly found in associations’ governing documents:
– A requirement that where the association receives insurance proceeds from its own policy, for damage to the common elements AND to individual units, that the association perform all the repairs to not only the common elements and but also those portions of a unit for which the association is receiving insurance proceeds under its own policy. This provision requires the association to actually perform the repair itself, and not just “cut a check” to a unit owner for the portion of the association’s insurance proceeds allocable to the unit. While requiring the association to perform the repair can pose some logistical challenges (such as where a unit requires other repairs not covered by the association’s insurance and hence remains the unit owner’s obligation), doing so assures that the overall community is properly restored, that some unit owners do not pocket the insurance proceeds and fail to do the repairs, and that the interest of mortgagees in their collateral (the unit) is protected. While an association may wish to consult with its attorney regarding whether obtaining an appropriate release and indemnification agreement from a unit owner would sufficiently protect the association to enable it to simply “cut that check,” there are legal arguments against following such a
– A provision that if the only damage that occurred was to individual units, and not to any common elements, the association may be allowed to simply pay to the unit owner his/her share of the insurance proceeds.
– A requirement that the association contract with licensed contractors to restore the damaged portions of the insured improvements in conformance with the original plans and specifications, or if adherence to such plans and specs is impracticable then in conformance with revised plans and specs that provide that the repairs/rebuilding are of a quality and kind substantially equivalent to the original construction.
– A requirement that if the insurance proceeds to be paid to the association exceed a specified amount that the proceeds be paid directly to an “Insurance Trustee”, to protect the interests of holders of mortgages on individual units and of unit owners; some associations’ governing documents expressly prohibit the Insurance Trustee from being a member of the Board or the manager.
– A requirement that disbursement of funds by the Insurance Trustee be made only upon the signatures of a majority of the members of the Board of Directors.
– A requirement that the contract between the association and contractor provide for progress payments that can be made only upon the association’s prior receipt of an architect’s certificate (i.e., from the association’s architect) and a contractor’s requisition.
– A requirement that the association employ a “properly qualified party” to supervise the repair/rebuilding to assure that the work is of proper quality and completed in a workmanlike manner.
It is important that managers, boards, and attorneys’ review their association’s governing documents to assure proper compliance with the casualty loss insurance provisions.