By Lisa Greenberg, Gravely Pearson
Catastrophic hail storms are an unfortunate and increasingly common reality throughout Colorado’s Front Range, causing hundreds of millions of dollars of damage every year. In 2017, a hail storm severely damaged the Colorado Mills mall in Lakewood, breaking open skylights and severely damaging the mall’s roof, allowing rainwater to flood the mall’s stores. It took more than six months for repairs to be completed before the mall could re-open. However, these hailstorms are indiscriminate, damaging condo and townhome communities as well. The increase in destructive storms has caused a simultaneous increase in large insurance claims. This has prompted insurance companies to push back on policyholders attempting to recover property loss benefits. That pushback has led to litigation, where homeowner associations have been forced to sue their insurance carriers. This insurance litigation has resulted in some interesting trends that multi-family communities and managers should be aware of as they work together during the insurance claims process:
- Timely Reporting: Most insurance policies require HOA policyholders to report damage to the insurance company “promptly.” Unfortunately, these policies do not define what “prompt” means, leaving the interpretation of this vague term up to a court. Many of these cases end up in federal court. Our federal courts have identified two separate issues related to the question of prompt notice. Some courts have focused on the deadline for when the prompt notice timeline begins to run, finding that whether notice is “prompt” relates solely to the date the damage occurs, rather than from when the HOA knows about the damage. Other courts have focused more on the length of time between the occurrence and/or knowledge of the damage and when the notice is given to the insurance company. In those cases, courts have sometimes indicated that HOAs failed to provide prompt notice when they failed to report damage within a few months after the damage occurred. In all cases, however, the courts have found that if damage is not reported “promptly,” the insurance company may be able to deny the claim in its entirety. This has given insurance companies a lethal advantage.
These court rulings are of specific concern to multi-family communities because many hailstorms are not as obviously destructive as the one that hit the Colorado Mills. Instead, storms often damage roofing systems multiple stories off the ground and leave little evidence of damage to those observing from ground level. Because hailstorm damage is not always obvious, and the consequences of failing to report damage promptly can be significant, HOA owners, members of the Board of Directors, and management would be wise to implement measures that allow for the prompt discovery and reporting of hailstorm damage. In addition to being exceptionally vigilant and diligent in discovering and reporting damage, owners, Board members, and management should also be educated on when to investigate possible storm damage, even when such damage is not immediately visually apparent, so that insurance claims can be discovered and “promptly” made.
- Contingent Management Fees: While HOAs must focus on prompt reporting of a loss to the insurance company, other trends in insurance law have put a spotlight on how HOAs handle insurance claims once they are reported. Many HOAs handle insurance claims through assistance from their management companies. Some management companies help manage the claim and are compensated with a percentage of the total amount of the claim ultimately paid by the insurance company because the work performed is outside of their regular duties as property managers. While this takes the grunt-work off the back of the Board of Directors and means that HOAs do not have to pay out-of-pocket for the (sometimes voluminous) work that goes into making an insurance claim, these contingency-based agreements have also created an opening for insurance companies to attack the legitimacy or amount of the insurance claims. From the perspective of the insurer, when a management company has a contingent interest in the outcome of an insurance claim, the insurance company may attack the validity of the claim by arguing that the management company has an interest to inflate the claim. While these agreements are not improper, rest assured, insurance companies are learning about our industry and are using certain trends against HOAs in litigation.
Notably, this contingent-fee “issue” shows up in other ways in some insurance-related disputes. For example, Public Adjusters, like management companies, also often forego immediate payment in lieu of a percentage of the amount of the claim ultimately paid by the insurance company. Similarly, some contractors may agree to repair the damage for whatever amount the insurance company ultimately decides to pay, regardless of the true value of the work. Some insurance companies argue that these contingent-type fee agreements also create the appearance of improper claim inflation. Regardless of its truth, this appearance can be damaging to the claims process and can create a significant roadblock to the policyholder collecting the full value of their claim.
- Counterclaims: With insurance losses on the rise and insurance companies learning more about the business relationships between HOAs, management companies, and other entities assisting with the insurance claim process, some insurance companies are turning more and more to scorched-earth tactics to intimidate policyholders and avoid paying out on valid insurance claims. In perhaps the most significant modern trend in Colorado insurance law, insurance companies have been attempting (sometimes successfully) to turn an HOA’s failure to report a claim within a “reasonable time” (regardless of the HOA’s knowledge of the damage) and the HOA’s payment of contingent fees to entities helping with such claims, into counterclaims based on allegations of fraud or misrepresentation. Most insurance policies have clauses that allow insurance companies to terminate their policy, and even recoup insurance benefits that were previously paid out should such conduct be proved to occur. The typical allegations are that the HOA policyholder and its agents are inflating the claim or withholding relevant information from the insurance company.
Not surprisingly, allegations of fraud against an HOA are highly damaging both to a community’s ability to recover on a claim, and to the HOA industry in general. These counterclaims are changing the perception courts and laypeople have about insurer-insured disputes, suggesting the insurance company is the “victim” and the HOA is the perpetrator. Most importantly, insurance companies’ newfound boldness in bringing these fraud counterclaims, and their current success in doing so, has, from all appearances, inspired insurers to continue their practice of disputing and/or refusing to pay on legitimate insurance claims.
In order to more easily navigate the insurance claim system in light of the modern trends in Colorado’s insurance law, homeowners, Board members, and managers must strive to educate themselves on best practices in handling their insurance claims to prevent insurance companies from gaining additional leverage in court. With the concerns noted above in mind, multi-family communities are poised to turn the tide on insurance-related claims throughout the Front Range and Colorado in general.