When a new condominium is constructed, the developer initially owns the property. Typically the developer will start selling individual condominium units, but maintain ownership and control over the common elements and unsold individual units. At some point, usually after a majority of the individual units have been sold, the developer will turn over ownership and control of the common elements to an association of individual condominium unit owners. These are usually times of transition, and different parties at different times carry different interests in the property. When an insured loss occurs during these transitory times, complicated issues can arise regarding who is entitled to insurance benefits.
In May of 2011, the North Dakota Supreme Court resolved a dispute like this over insurance benefits between a condominium developer, individual condominium unit owners, a condominium association, and the bank holding the developer’s mortgage. In First Intern. Bank & Trust v. Peterson, 797 N.W.2d 316 (N.D. 2011), the developer of a condominium had sold only ten of fifty condominium units when a hailstorm damaged the roof of the condominium building. The developer had insured the property in its name with the mortgagee bank as an additional loss payee, but the condominium association was not named in the policy. Shortly after the claim was submitted, the bank initiated foreclosure proceedings against the developer. The insurer issued a benefit payment in the names of both the developer and the bank, but due to the foreclosure, the bank sued the developer in an attempt to recover all benefits. The trial court initially sided with the developer, holding that the bank was not entitled to any of the insurance proceeds. The individual condominium unit owners and the condominium association were then permitted to intervene in the lawsuit. Once the condominium association and unit owners were in the lawsuit, the trial court held that the benefits should be paid to them. The North Dakota Supreme Court summed up the trial court’s holding like this:
The court ruled [the developer] was the de facto board of managers, was required to purchase insurance and had a fiduciary duty to act in good faith and in furtherance of the unit owners’ legitimate interests. The court further held the unit owners and the Association were the intended beneficiaries, the unit owners had an expectation under the condominium documents that the insurance proceeds would be applied to repair the roof and the unit owners had a right to rely on the condominium documents. The court ruled [the developer] would be unjustly enriched if it was allowed to keep any portion of the insurance proceeds.
The developer appealed this decision and alleged that the association did not have standing to be in the lawsuit from the beginning. The developer also alleged that the association and unit owners were not entitled to benefits under the policy or the mortgage.
The Supreme Court looked to the condominium documents and determined that the association and unit owners had standing to be in the lawsuit. The court then reviewed the record and affirmed the trial court’s ruling, stating:
If [the developer] had remained solvent, under the terms of the condominium documents, it would have had a duty to use the insurance proceeds to repair any damage to the roof. Although [the developer] no longer controls the condominium association, its successor is entitled to the insurance proceeds. The Association is the unincorporated condominium association’s successor and, therefore, is entitled to the insurance proceeds. We conclude the district court did not err in granting the Intervener Plaintiffs’ motion for summary judgment and deciding the Association is entitled to the insurance proceeds.
In the end, the resolution of this case was highly dependent on the declaration of condominium and other condominium documents. A different result could have been reached had the declaration of condominium not required the developer to be a fiduciary to the association. Having said that, this case provides a good argument that a developer’s insurance benefits should be applied to appropriately remedy an insured loss, regardless of who owns and controls the property.