The Plaza East trilogy: not a nursery rhyme, but scary warfare.

• Author: Gelfand, Michael J.
• Position: Florida condominium insurance coverage

"If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?"

"It would be so nice if something made sense for a change." (1)

Hurricanes as just nursery rhymes? After hurricane winds calm, the battle is over who pays what to whom, and who must repair the physical damage. The battle becomes more intense and the outcome less certain when the payer is an insurer and the damage is to a condominium.

The efficient reconstruction of casualty damaged condominiums is a matter of great public interest. Of course, if you prefer to emulate the Mad Hatter, then you can pretend as we did during the 1970s and 1980s that Florida is immune from casualties, and flip to the next article.

The Battlefield

The condominium context, the broadest conflict in Florida, involves over 22,000 associations, nearly 1,400,000 individual units, (2) and countless owners, tenants, and lenders. In many condominiums a three-way battle pits insurers against condominium associations against condominium unit owners.

The battle is fought over two competing duties: the duty to insure property and the duty to repair property. Usually, identifying who has the duty to repair is easy. Similarly, usually the person who must repair has the duty to insure. Just as Alice discovered in Wonderland, what is usual in condominium law is frequently the unusual.

Between competing duties of insuring and repairing, the "no man's land" of the battlefield, is the real issue: Who is responsible to fund casualty loss repair expenses not funded by insurance? (3) Usually the amount not funded is the result of the insurance policy deductible. If the issue is ignored, then condominium unit owners and their condominium associations will not have sufficient funds to repair casualty losses, endangering the owners' quality of life and investments, and undermining lenders' security.

This article analyzes the disconnect between the two duties, including the statutory foundation for condominium insurance coverage, contractual duties of condominium unit owners and condominium associations stated in "condominium documents," (4) and the Plaza East trilogy interpretation of the statutory duties which disregarded contractual duties. Last but not least, unlike the Mad Hatter, this article will suggest a path out of "Wonderland" to a logical reality.

Staggering dollar amounts compel this analysis. Nearly every casualty insurance policy has a deductible. As deductibles increase from small fixed dollar amounts to deceptively small percentages of policy value, the impact upon condominiums is astronomical. A deductible calculated by a percentage of the policy value, especially when units' insured values have increased, creates unfathomable insurance proceeds shortfalls when repairs must commence.

Though Florida homeowners' association communities are not governed by the Florida Condominium Act (5) and are not addressed in this article, many are becoming more akin to condominiums. Therefore, Florida practitioners must anticipate that insurance issues addressed here will be raised in the homeowners' association context.

Risk Allocation Factors

History magnifies the condominium insurance battle through four distinct lenses, or factors. The first factor is that unit owners, usually neighbors, are the decisionmakers for their condominium association after the developer departs the community. Unfortunately, few owners are aware of how their association is governed, and fewer volunteer to serve their association. Nearly all association directors serve without compensation, each paying the same assessments as other owners.

The second factor is the legislature's numerous amendments to the Florida Condominium Act changing what portions of a condominium are insured and by whom. Usually insurance law changes are driven by insurers seeking to reallocate risks.

The third factor is the contractual relationship (6) between condominium unit owners and their condominium association created by developer-crafted condominium documents (7) (hopefully, but not always, drafted by knowledgeable Florida counsel). In theory, the marketplace drives developers to allocate risk and expenses between unit owners and condominium associations. While unit purchasers constitute the market when a condominium is created, and purchasers must receive condominium documents to review and understand within a 15-day right of recession period, (8) few purchasers read beyond the title page and fewer understand the documents. Therefore, in reality, the project lender mandates how casualty risks and insurance costs are allocated.

Add to the usual brew a curiously acidic fourth factor: small groups of extremely vocal unit owners, highly dissatisfied with, and suspicious of, association governance, who frequently vilify volunteer directors and constantly barrage legislators. Directors, after volunteering their time and energy to the community, have little extra time to advocate the "other side"; thus, legislators rarely hear from the directors charged with making on-the-spot decisions.

The Condominium Act Shifting with Time

The Florida Legislature sought the impossible: to accommodate all competing interests, including reducing premiums, reducing risks, and protecting owners as well as lenders. In this quixotic quest, extensive duties were placed upon associations to obtain, and upon insurers to provide, broad insurance coverage. (9) Interestingly, the condominium act originally did not expressly regulate insurance. (10) Not until 1979, when the condominium act was restructured, were associations charged with insuring not only a condominium's common elements, but also insuring units. (11)

Insurer complaints resulted in exceptions to condominium casualty insurance coverage to reduce association premium expenses. In 1986, wall and floor coverings located in a unit were excepted from association coverage. (12) In 1992, most nonstructural items in a unit, including appliances, were excepted. (13) However, these risks did not just go away; the risks were shifted to unit owners, increasing unit owner premiums.

Then Hurricane Andrew blew through south Florida and through casualty insurance. The legislature's effort to further reduce premiums led to further risk reallocation and recognition that casualty risks in condominiums were unlike casualty risks in single family dwellings. A single family dwelling owner could be treated like an island, entirely of itself; however, unit owners in a condominium could not be an island because unit owners must rely upon each other to have funds to rebuild. (14) Nevertheless, many owners still did not obtain insurance, which in turn, endangered the viability of their condominiums.

A condominium association's minimum duty to insure was changed. Eventually, the act read:

Every hazard insurance policy issued or renewed on or after January 1, 2004, to protect the condominium shall provide primary coverage for:

1. All portions of the condominium property located outside the units;

2. The condominium property located inside the units as such property was initially installed, or replacements thereof of like kind and quality and in accordance with the original plans and specifications or, if the original plans and specifications...