Minnesota condominium and townhome unit owners have insurance claims. Those can be covered by two polices: one obtained by the association, the other by the unit owner. clearly the unit owner is responsible to pursue a claim under his or her policy. Who pursues the association’s claim under the association’s policy? If the association has insurance to cover property within the unit, state law requires the association and unit owner to work together to pursue a claim.
The statute mandating cooperation between the association and unit owner is Minn. Stat. § 515B.3-113. The statute requires the association’s insurance to cover units within shared walls, siding and roofs, but the statute specifically lists several items where coverage is optional. This optional coverage includes things like ceilings and walls, cabinetry, electrical, heating and HVAC.
The association’s governing documents usually state whether these optional items are included in insurance coverage. In my experience, insurance policies are usually written to follow whatever coverage is required in the governing documents. The most important of the governing documents are the declarations. Therefore, the two sources of information to determine coverage are the actual association insurance policy and the declarations.
If there is coverage of some or all these optional items, the association must work with the unit owner to pursue the claim for damage arising within the unit. The statutory mandate is as follows: “any loss covered by the property policy under subsection (a)(1) shall be adjusted by and with the association.” The statute further requires the eventual insurance payouts to be held in trust by the association “for unit owners and secured parties” such as a mortgage company. The proceeds must be directed to the common elements and units. The surplus may be retained for use by the association and distributed amongst unit owners.
In my view, the mandate for associations to hold insurance proceeds in trust demonstrates the association, when pursuing an insurance claim, holds a fiduciary duty to unit owners. That is an important duty that must be carefully discharged. The association is going to hold all insurance proceeds in trust for others, so in turn, the work required to obtain the funds carries a fiduciary duty.
The Legislature did not specify the details of how this fiduciary duty operates. Yet it seems clear there is no basis for an association to freeze-out a unit owner from the insurance claim process. The phrase “adjusted by and with” must mean there is some kind of cooperation to advance the insurance claim for the benefit of the unit owner.
I argue an association must not advance the insurance claim to the detriment of a unit owner. An association should not accept unreasonable, low-ball adjustments from insurers that result in unit owners having to fund repairs. Associations that fail to do so expose themselves to liability under the statute and, more broadly, a claim for breach of fiduciary duty.
Please e-mail me if you have any questions about this statute at ed@beckmannlawfirm.com.