Earlier this week, the North Carolina Court of Appeals issued a decision in Grooms Property Management v. Muirfield Condominium Association. The case dealt with interpreting and applying insurance provisions in the declaration of an older condominium governed by the NC Unit Ownership Act, and determining the association’s obligation to purchase insurance and the application of proceeds in the event of a total destruction. The condominium building in question had been entirely destroyed by fire, and the cost of complete exterior and building repairs was estimated to be between $1.36 and $1.46 million.
The Declaration in this case required the association to maintain insurance “covering the building and all improvements upon the land.” However, because the declaration only required the association to cover 80% of the replacement value, the insurance proceeds were inadequate. To address the shortfall, the association held a special meeting where it voted not to obtain a loan, not to apply proceeds to unit repairs, and to assess owners for all of the interior unit repair work. The association decided to apply the insurance proceeds solely to repair the building’s exterior, and refused to apply proceeds to the remaining building repairs. The association’s reasoning was that since the association in ordinary circumstances only had a duty to maintain portions of the condominium that were not “units,” it only had a duty to insure 80% of those specific portions, and it only had a duty to apply insurance proceeds to those specific portions in the event of a total destruction of the building.
A unit owner then filed suit in the trial court, seeking an order declaring that in the event of a total destruction of the building, the Association had the obligation under the declaration to apply remaining proceeds to repairs of the interior of the owner’s condo unit, and to the remainder of the building. The trial court agreed with the owner and held that: (1) the association’s failure to purchase insurance sufficient to cover 80% of the replacement value of the “building” violated the Declaration; and (2) that under N.C. Gen. Stat. § 47A-25, the association needed to repair the building using the proceeds of the insurance, and only then, the owners could be held liable for any remaining deficiency.
The Association appealed, but was unsuccessful. In Grooms, the court interpreted the Declaration as requiring the association to cover “the building.” The court found that this was not ambiguous—“the building” meant the entire building—the exterior, interior, units, and all portions in between. It also addressed provisions of the Declaration discussing maintenance and repair, which provided that unit owners had obligations to repair remaining damage to “units” after the proceeds of the association’s insurance were applied. The court also held that the Declaration required that Association insurance proceeds be applied to the common areas first, and then to the units. The Court of Appeals rejected the Association’s arguments that were essentially identical to those it presented in the trial court, that the Association only had insurance and replacement obligations that mirrored the maintenance obligations in the Declaration, and that since owners could insure their units, the Association was not required to.
The takeaways from this case are that for condominiums that are governed under the older Chapter 47A Unit Ownership Act, the association should carefully consult with an attorney and with insurance professionals to insure that proper insurance coverage is acquired. In the event of total destruction of a building, such communities should consult an attorney to ensure that proceeds of insurance are applied as outlined in the Declaration. There should never be an assumption that provisions relating to ordinary maintenance obligations address or dictate insurance obligations, or dictate the order in which insurance proceeds should be applied to differing portions of the condominium.
As with any appellate decision, it is always best to read the actual case if you want to know how it might impact a specific association, then talk to an attorney about your specific facts. The Grooms decision can be found here at https://appellate.nccourts.org/opinions/?c=2&pdf=41477.
If you have questions about this or any other community association related matter, please contact one of our North Carolina attorneys in Charlotte, Greensboro, Wilmington or the Triangle, or our South Carolina attorneys in Greenville and Columbia.