The Right of Individual Condominium Unit Owners to Sue the Association's Property Insurer

In this Analysis, Douglas Scott MacGregor reviews the basic principles of condominium ownership and the requirements for insuring condominium real property before turning to a survey of the cases on unit owner standing in litigation against association insurers. It concludes by suggesting a need for comprehensive legislation to address the standing question and permit limited standing for individual owners. Mr. MacGregor writes:

II. THE NATURE OF CONDOMINIUM OWNERSHIP

A. A Hybrid Form of Real Property Ownership

     The condominium form of ownership is ancient but was rarely found in the United States before the Federal Housing Administration (FHA) adopted a Model Act in the 1960s. That Act became the basis of state enabling legislation across the country. These rudimentary early laws are referred to as "first generation" Acts. Some states - notably Florida and California - have now evolved complex legislation governing condominiums and others - for example Alaska, Colorado, Connecticut, Minnesota, Nevada, Vermont, and West Virginia - have adopted a version of the Uniform Common Interest Ownership Act (UCIOA) drafted by the National Conference of Commissioners on Uniform State Laws. These state laws, whether the detailed newer legislation or the embryonic first generation statutes, serve as enabling legislation for the creation of condominium regimes. Therefore, the condominium form of ownership is a "creature of statute." Most statutes require a "declaration of condominium" to be recorded to create a condominium regime.

     Condominium ownership is generally described as a "merger" of estates: fee simple ownership in the individual unit and tenancy in common in the common elements. This hybrid form of ownership is the statutory definition of "condominium." For example, the Florida Condominium Act defines the term "condominium" as: "...that form of ownership of real property ... which is comprised entirely of units that may be owned by one or more persons, and in which there is, appurtenant to each unit, an undivided share in the common elements." California law says a "condominium project" is "... a development consisting of condominiums [and a] condominium consists of an undivided interest in common in a portion of real property coupled with a separate interest in space called a unit ..." Similarly, in North Carolina, a Uniform Act state, the definition reads: "... real estate, portions of which are designated for separate ownership and the remainder of which is designated for common ownership solely by the owners of those portions. Real estate is not a condominium unless the undivided interests in the common elements are vested in the unit owners." Courts agree with these definitions. For example, the Colorado Supreme Court said that the very definition of a condominium requires existence of an undivided interest in common elements. The Texas Supreme Court opined that:

     "A condominium is an estate in real property consisting of an undivided interest in a portion of a parcel of real property together with a separate fee simple interest in another portion of the same parcel. In essence, condominium ownership is the merger of two estates in land into one: the fee simple ownership of an apartment or unit in a condominium project and a tenancy in common with other co-owners in the common elements."

     However, as one commentary notes, condominium ownership is more than merely a hybrid, a blending of two traditional forms of real property ownership. The common elements have unusual aspects distinguishing them from tenancy-in-common or joint tenancy. For example, owners are prohibited from separating the interest in the common elements, the interest does not have to be created in a single instrument, and, owners have no right of survivorship. The commentary concludes, these are attributes of concurrent ownership distinctive to condominiums.

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VI. INDIVIDUAL UNIT OWNERS AND THE ASSOCIATION'S INSURER

A. Suits By Unit Owners Against the Association's Insurer

     A handful of cases discuss the right of individual owners in common interest communities to sue insurers whose policies were issued in the name of the association. One of them is not a condominium case, but provides some context for the discussion. Of the remaining cases, only two allowed an action against an insurer to go forward.

     Gantman v. United Pacific Ins. Co. [enhanced version available to lexis.com subscribers], appears to be the earliest case discussing the right of residents of a common interest community to sue the insurer of common property. It is of little or no precedential value in the condominium context because Gantman involved a homeowners association that owned the "common area parcel." Additionally, the declaration explicitly prohibited any individual unit owner from separately insuring his or her residence, and provided that each owner was deemed to have appointed the association as his or her attorney-in-fact to act in connection with all matters concerning maintenance of a master insurance policy. The association had, under the declaration, full power and authority to purchase and maintain that insurance and any insurer could deal exclusively with the association. Finally, the declaration stated that the governing board of the association had the exclusive right to contract for insurance.

     Almost as soon as the plaintiff home owners moved into their units, the roofs began to leak. Some of the leaks were in flat portions of roof and others in tile portions. The association made a claim regarding the flat portions. That claim was paid, however, no insurer paid any claim for the tile portions of the roofs, and the association declined to pursue that issue. The plaintiff unit owners sued to recover for defects in the tile portions. It was established that plaintiff Gantman had no ownership interest in the roof over his home, was treasurer for the association, was its liaison with the insurance broker who procured the policy, that the policy was issued to the association, and that Gantman was not an additional insured. Thus, said the court, the association, a nonprofit corporation, was the named insured and the plaintiffs were suing in their capacity as members of that association, not additional insureds or express beneficiaries. A member of a nonprofit corporation, said the court, is prohibited from instituting an action in the right of the corporation unless that action is a derivative suit. However, the plaintiffs argued they were entitled to sue as third-party beneficiaries of the policies. They acknowledged they would only have standing if they were claimants whose benefits were wrongfully withheld. However, concluded the court, the benefits the plaintiffs sought belonged to the association under the policies and the benefits also belonged to the association as the entity under the declaration responsible to repair and maintain the roof. Thus, the plaintiffs were simply not claimants whose benefits were wrongfully withheld. The court, therefore, held the individual members of the homeowners association had no standing to maintain an action against insurers on policies purchased by and issued to the association that managed the development and under which plaintiffs were not insureds.

(footnotes omitted)

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