What insurance must be purchased by an association can usually be determined by reading the governing documents and relevant NC statutes (and consulting an experienced community association insurance professional!). The NC Condominium Act details what insurance must be purchased by a condominium association created on or after October 1, 1986 (other statutes provide for insurance requirements on older condos or planned communities). NCGS § 47C-3-113 states, among other things:
Commencing not later than the time of the first conveyance of a unit to a person other than a declarant, the association shall maintain, to the extent available: (1) Property insurance on the common elements insuring against all risks of direct physical loss commonly insured against including fire and extended coverage perils.
An association declaration will then generally define what other insurance must be purchased and in what amounts.
An appellate decision this week from the NC Court of Appeals, Porter v. Beaverdam Run Condominium Association, examined whether the above language and circumstances required the association to purchase flood insurance. For Beaverdam Run, the answer was “yes.”
In Beaverdam Run, 5 of 66 condominium buildings are located in a flood zone. The Association made a conscious decision not to renew flood insurance due to “cost and the allocation of the expense among the other members of the Association.” Some owners then filed a declaratory judgment action, asking the judge to determine whether the Association was required to maintain flood insurance on those buildings. The trial court granted summary judgment for the Association, but the appellate court reversed that decision and returned the matter to the trial court for further proceedings.
In brief, the Court of Appeals made the following determinations:
- The Condo Act requires that if available, associations must maintain insurance “against all risks of direct physical loss commonly insured against.”
- The Court found that flood “is a risk of direct physical loss which is commonly insured against for residential buildings located in a FEMA-designated flood zone.” (The Court also noted that only a condominium association can purchase flood insurance on a residential building, as unit owners are not eligible to purchase flood insurance through the National Flood Insurance Program.)
- If flood insurance is reasonably available, the Association had an obligation to purchase flood insurance for buildings in a flood zone.
The Court seems to acknowledge that its decision does not apply to every association, and even as to Beaverdam Run that “the Association’s obligation to maintain flood insurance coverage on the Community’s buildings located in a FEMA flood zone is not absolute for all time.” Instead:
Flood is a hazard which is commonly insurance against for residential properties located in a FEMA flood zone. Whether flood continues to be a hazard ‘commonly insured against’ and whether such insurance is ‘reasonably available’ are to be determined by the Association in the course of its diligent and good-faith execution of its duties. . . . We note that in the event the Association, in any given year, determines in the affirmative to both questions, the Declaration requires that such insurance be maintained as a common expense.
To me, the takeaways of Beaverdam Run are that
- there is no one-size-fits-all insurance answer for every association (but if you have condo buildings in a flood zone, you better consider flood insurance);
- association boards must examine insurance, like other issues, in a serious and business-like manner with due consideration to pertinent statutes, the governing documents, and specific facts; and
- consult and rely upon your association professionals, whether attorneys or insurance advisors.
Beaverdam Run is worth a read, as it has a good discussion of insurance and association obligations, whether or not your association is in a similar circumstance. Also, because association insurance issues are complicated, feel free to contact one of our attorneys with questions or for a referral to a qualified community association insurance professional.