Fees may not be recoverable under a condominium association policy to an insured condominium association or its property management company after a loss. The Board should carefully consider fee percentages agreed upon in a management agreement to assist the association through a property insurance claim.
In Capitol Property Management Corporation v. Nationwide Property and Casualty Insurance Company,1 a property management company sued a condominium association’s insurance carrier to recover a construction management fee and claim processing fee after a fire loss. In the management agreement, the Association agreed to pay its property manager 10% of any recovery under the policy for processing its property insurance claims and a 5% construction management fee for managing reconstruction. A federal appellate court recently held the Association’s policy did not provide coverage for either fee and same were not recoverable.
The court first addressed whether the construction management fee was recoverable under the policy. This issue was rather straight forward. The property management company was not an insured under the policy, and therefore failed to demonstrate the carrier owed it a legally enforceable duty. Thus, the property management company failed to establish a viable claim for breach of contract.
The property management company’s arguments addressing the claim processing fee were admittedly more colorful because the Association assigned its rights to obtain the claim processing fee to its property manager.
The management company argued two points for recovery. First, the Association’s “all risk policy” provided coverage for any loss incurred as a result of the fire unless the policy specifically excluded the loss. Alternatively, the policy provided coverage for the claim processing fee under the “extra expense” policy provision. The court disagreed.
The court first explained the claim processing fee did not fall within the “primary coverage” provision because it was not a direct physical loss. The court next turned to the “additional coverage” provision to analyze whether the fee was an “extra expense” as defined under the policy.
The “extra expense” policy provision stated:
We will pay necessary “extra expense” you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss of or damage to the property at the described location.
An “extra expense” is incurred to “avoid or minimize the suspension of business and to continue operations.”2 To qualify as an extra expense, the federal appellate court scrutinized whether the claim processing fee was (1) incurred because of the physical loss, and (2) a necessary expense to maintain the Association’s business operations.
The court determined prong one was satisfied while prong two was not. The Association would not have incurred the claim processing fee but for the fire loss; however, the fee was not necessary to avoid or minimize the suspension of business operations. Rather, the claim processing fee corresponded with the Association’s post-loss obligations, and the Association was not entitled to payment for compliance with the “duties after loss” policy provision.
Specifically, the property management company was tasked with the responsibility of providing the carrier with inventories of damaged and undamaged property, allowing the carrier to inspect the premises, and cooperating with the carrier in the loss investigation. These post-loss duties were not a necessary expense incurred in the Association’s business of maintaining the condominium buildings. The federal appellate court explained that the Association’s decision to delegate its post-loss obligations to a property management company did not convert the claim processing fee into an “extra expense” under the policy.
It is important for policyholders and property insurance professionals to understand the nuances of varying policy provisions to accurately assess a property insurance claim. The right to recovering certain fees and costs following a loss may be a difficult path to navigate. Although, most property insurance attorneys can appreciate a good argument on policy interpretation.
1 Capitol Prop. Mgmt. v. Nationwide Prop. and Cas. Ins. Co., No. 17-1789, 2018 WL 6600219 (4th Cir. Dec. 14, 2018).
2 Id. at *2.