By Matthew Pearson, Wes Wollenweber, Lisa Greenberg, Gravely Pearson Wollenweber Freedman, LLC
As many managers and certain board members know, condo and townhome associations are often involved in difficult disputes with their insurance carriers over significant property damage resulting from catastrophic weather events. These disputes unfortunately can result in lengthy court battles, many of which are in federal court. Catastrophic weather is truly on the rise in Colorado. Consequently, these disputes are not going away. The disputes are often incredibly similar: a condo community suffers damage from a major storm, such as hail and/or high winds, and contractors or public adjustors provide estimates of the damage to property owners in response to the low estimates prepared by the insurance companies or their representatives. To combat this problem, managers should know that Colorado has a relatively new but powerful statute that punishes insurers for unreasonably denying and/or delaying payment on valid claims (Insurance Bad Faith). Because this statute exposes an insurer who violates it to significant financial exposure, insurance companies are fighting these lawsuits vigorously.
Certain trends are resulting from these legal battles. Among these emerging trends are insurance companies’ reliance on two policy provisions. These provisions are in nearly every commercial policy that covers a multifamily community, and insurance companies are claiming in litigation that homeowner associations are violating these provisions. The first provision requires policyholders to “promptly” notify their insurance company in the event of a loss. The second provision, commonly referred to as a fraud clause, arguably prohibits misrepresentations during the claims process.
Under the prompt notice provision, insurance companies try to defeat a breach of contract claim (based on denial or underpayment of a claim) by arguing that the policyholder failed to promptly notify them of the loss and therefore somehow caused the insurer some type of harm. Insurance companies are making the argument that multifamily community policyholders are obligated to take steps to inspect for weather damage as part of ordinary maintenance and that the failure to do so violates this provision. While it is not known yet how our courts will ultimately view this argument, it is important to be aware of this litigation trend.
While most, if not all, insurance policies do not require routine inspection for weather related damage, periodic photographs or video inspections, especially if used to compare to previous photo and video inspections, can help identify exactly when the damage occurred, preventing any prompt notice arguments. The lack of routine inspections can sometimes result in a community discovering weather related property damage months after the actual weather event occurred because the damage is not obvious and did not cause any leaks. Insurance companies are arguing that the lack of such routine inspections is somehow a breach by policyholders even though the insurance policies require no such routine inspection. It remains to be seen how federal and state judges will view this argument.
Under the fraud provision, insurance companies are working hard to establish what they call “reverse bad faith” by arguing that associations and their vendors are misrepresenting key facts or intentionally inflating estimates during the claims process. Insurance companies are developing these arguments to potentially recover insurance proceeds they have already paid under the pertinent policy. One of the reoccurring legal theories insurance companies have put forth involve allegations that the association’s roofing contractor has padded its estimate and, thus, padded the association’s claim.
In addition, as many community managers and board members know, because of the nature of these claim disputes, more and more communities are turning to Public Adjustors to serve as their advocates in the claims process. Certain insurance companies are fighting hard to paint a picture that Public Adjustors are conspiring with roofing contractors, and even the association’s community managers to inflate the value of the insurance claim. The insurance companies even cite to community management contracts that allow managers to earn a fee for assisting with the association’s claim as evidence of fraud or at least an incentive to inflate damage estimates.
Based on these trends, Associations, as policyholders, should be diligent to periodically document the condition of their community by photos or video. In the event of a loss, notify the insurance company as soon as possible and make sure that one person is designated to communicate with the insurance company or their adjuster. If the community needs to hire a contractor or public adjuster to assist them with the claim, make sure they are qualified and have experience evaluating and repairing damage. Insurance claims are often frustrating and time consuming. However, the Colorado law is in place to help policyholders obtain what they bargain for in paying premiums: fixing their property damage.