As many homeowners, condominium owners, directors, property managers, and public adjusters are aware, the Florida statutes of limitation are approaching for Hurricanes Katrina and Wilma. There has been much litigation in Florida related to these catastrophic events, however, we are not out of the woods yet…and we may not be even once the limitation periods pass. The scope of this post relates to the fiduciary duties that condominium and homeowner associations and their boards of director have to maintain and repair damages to the common areas of these communities.
It is within the board of directors’ power to determine whether to proceed with a claim for insurance proceeds, and the board members should collectively ensure that they avoid any potential allegations that they failed to act once the statute passes. Homeowners’ and condominium associations exist primarily to protect the owners’ fiduciary interests in the common areas of the community. Simply put, the association bears the duty to protect, maintain and repair the property commonly shared by the owners. Generally speaking, the condominium/homeowners association’s declaration documents speak to these duties. A breach of this fiduciary duty could likely result in property damage to the common areas or even the unit owners’ specific property. Particularly once the limitations period passes, associations could potentially face actions brought against them by unit owners for failure to effectuate repairs or failure to appropriately investigate and pursue avenues of recovery with the associations’ property insurance carriers. The unit owners could potentially do so under a breach of fiduciary duty theory of recovery.
So, the simple question from the board members’ perspective becomes, “what can I do to ensure that I can demonstrate that I have done a reasonable investigation of the association’s insurance claim (or potential insurance claim) before the statutes of limitation pass?” The short answer to that question is to make sure the boards have conducted a reasonable investigation into their insurance claim (or potential insurance claim) and have some reliable opinion from an experienced professional on the matter. This can involve counsel and experienced public adjusting professionals with requisite experience in evaluating insurance claim damage, particularly as that damage concerns condominium and homeowners’ associations.
The situation may present itself with an all too familiar initial scenario: A unit owner writes the board on numerous occasions to express his or her concern for a leaky roof or other problem with a common element. That unit owner feels like his or her concerns are ignored. Then the situation takes a turn toward an unfamiliar problem as it relates to condominium/homeowner association and first-party property insurance law when the statute of limitations to file or proceed with a claim passes. That unit owner may then file a lawsuit against the association and its board of directors for breach of fiduciary duty. See Allstate Insurance Co. v. Cambron, 936 So.2d 1210 (Fla. 5th DCA 2006).
This is why it behooves the condominium and homeowner associations’ boards of directors to ensure that they have taken adequate steps to investigate their claim (or potential claim) with the right team of experienced professionals with sufficient time before the limitations period approaches. The board of directors should have a good faith, independent and reasonable basis for a business judgment of whether to proceed with potential recovery under the association’s insurance policy well before the statutes of limitation pass.
Once the statute of limitations passes, any cause of action by unit owners for breach of fiduciary duty may be defended under an errors and omissions policy for at least some portion of the recovery that would have been available under the association’s property insurance policy. Owners’ associations often times maintain insurance against such breaches of fiduciary duty so the property value will not diminish because of the association’s or board’s wrongdoings. This is referred to as errors and omissions coverage.
In Lumbermens Mutual Casualty Co. v. Dadeland Cove Section One Homeowners’ Association, Inc., 2007 WL 2979828 (S.D. Fla. 2007), the homeowners sued the association for breach of fiduciary duty. . To defend, the association looked to Lumbermens Mutual Casualty Company, the insurer for the association’s directors and officers policy, which provided errors and omissions coverage. Lumbermens provided a defense to the association for several years, but then refused coverage and asked for its money back based on an exclusion for “loss arising from any claim for … loss of use, destruction of or damage to any tangible property, except for claims which involve construction defects…” Id. The association was forced to litigate the issue and argue that the errors and omissions policy covers the breach of fiduciary duty lawsuit at hand.
The Southern District Court held that:
Lumbermens misses the mark in relying upon exclusion N [listed above] because it is irrelevant to the situation at hand. The provision only excludes coverage for ‘loss arising from any claim which is for loss of use, destruction of or damage to any tangible property’—in other words, for the damage that should be covered by general liability insurance, such as damage by a fire. Lumbermens’ interpretation puts the cart before the horse because the origin of the claim here is the breach of fiduciary duty, not the property damage. This is not a case where the ‘loss arises from a claim for tangible property damage.’ Rather, the loss here is the property damage that arises from a claim for breach of fiduciary duty—the exact scenario the Policy covers… Any other result would render coverage so limited that it could not reasonably have been intended by the parties. Id.
The Southern District Court of Florida granted the association’s summary judgment motion as to coverage under the errors and omissions policy. Lumbermens appealed that decision to the United States Court of Appeals for the Eleventh Circuit, which ultimately affirmed the District Court’s finding of coverage. Lumbermens Mutual Casualty Co. v. Dadeland Cove Section One Homeowners’ Association, Inc., 2008 WL 4483419 (11th Cir. 2008).
There are two points of concern then for those involved in advising, working with, or serving on boards of directors of condominium and homeowners’ associations as the statutes of limitation for Hurricanes Katrina and Wilma approach. First, to meet the fiduciary duty to repair the property commonly shared by the owners, ensure that appropriate action is taken to reach a business judgment regarding whether to proceed with a claim (or potential claim) for damages to common property. This must be done with sufficient time before the limitations period pass. Hiring the right team of experienced professionals can establish the board’s good faith, independent and reasonable basis for a business judgment of whether to proceed with potential recovery under the association’s insurance policy. Second, while the association may have an errors and omissions policy that potentially provides coverage for any property damage resulting from any lack of action by the board of directors, as the Dadeland Cove case above reveals, such litigation involving the errors and omissions carrier may be a long and drawn out battle. This is often a concern for board members faced with a decision whether to proceed with a claim within the statute of limitations period. Better to face it head on initially, rather than under an errors and omissions theory later.