In my last condominium blog post, I discussed a recent case from Florida in which a condominium unit owner sued a condominium association for allegedly failing to maintain and repair the condominium roof, which resulted in damage to the unit owner’s property. The United States Court of Appeals for the Fifth Circuit recently published an opinion on a similar case out of Louisiana, in which a condominium unit owner sued a condominium association for failure to procure adequate flood insurance and failure to pursue an insurance claim on the unit owner’s behalf.

In King v. Casa Grande Condo. Ass’n, Ltd., No. 10-30237, 2011 WL 280844 (5th Cir. Jan. 28, 2011), the Casa Grande Condominiums in New Orleans suffered significant flood damage from Hurricane Katrina in 2005. The condominium association had a flood insurance policy, and the unit owner had a secondary flood insurance policy that only provided coverage once the association’s flood policy was exhausted. When the association made an insurance claim, the association found out that it only had $247,100 in flood insurance coverage, despite the building’s estimated value of $2,471,000. The missing “0” was allegedly due to the insurance agent’s clerical error (See Liability on the Insurance Agent for more on this subject). Because the association was underinsured, the insurer applied a coinsurance penalty, reducing the insurance benefit to only a fraction of what the association would have received had it been properly covered. The association’s flood policy also provided some coverage to the unit owner, but because of the coinsurance penalty, the unit owner only received a fraction of that benefit as well. Since the unit owner only received a fraction of the benefit under the association policy, the unit owner’s insurer refused to pay under that policy because the association’s policy had not been exhausted.

The condominium association sued the flood insurer to recover the rest of the benefit it was owed if the policy had been properly issued, but the association did not seek to recover the rest of the benefits for the unit owner. The unit owner sued the association for not procuring the correct insurance and for failing to include its damages in the association’s lawsuit against the association’s insurer. At the trial court level, the unit owner was awarded over $47,000 in damages, despite the fact that the unit owner would have only received a little over $2,000 from the insurance company if the policy had been properly written.

The insurance company appealed the damage award, and the Fifth Circuit reevaluated the claim. The court explained that even though the unit owner’s lawsuit against the association was for the tort of negligence, the unit owner’s recovery in an action for failure to procure appropriate insurance was limited by the amount that the insured would have received had the association acquired the appropriate insurance in the first place. The Fifth Circuit Court remanded the case back to the district court to determine the appropriate amount of damages in accordance with its findings.

This lawsuit could have been avoided if the association evaluated its insurance coverage before the loss and found the clerical error in the limit of coverage. If your association needs its coverage evaluated, please contact a qualified insurance professional before it is too late.