Orten & Hindman recently represented a homeowners association in an arbitration that resulted in a victory for the association. The dispute arose out of the association’s decision not to submit a claim to the association’s insurer. The homeowner claimed that the association had acted negligently or recklessly in the handling of her claim and had breached its duty of good faith and fair dealing.  Additionally, the homeowner brought a claim of misrepresentation against the association as a result of representations of its insurance manager. The arbitrator found the homeowner’s claims were not supported by the evidence and held in favor of the association.

The Facts

After the homeowner discovered standing water in her basement, she reported the damage to her association. The insurance company’s adjuster inspected the damage and, observing mold on the carpet, advised the homeowner to contact her homeowners’ policy insurer as the association’s insurance policy excludes coverage for mold. The homeowner’s insurance company determined that the damage was covered under her policy and paid her the policy limit of $2,500. Estimates showed that clean up and repairs would cost $8,000 to $10,000, and the homeowner concluded that the association’s insurance company should provide the balance.

The association sent additional representatives to examine the homeowner’s basement. These representatives found that the damage had not resulted from a sudden occurrence, which would have been covered under the association’s insurance, but rather, had developed over a period of time, which was not covered under the association’s insurance. Based on this information, the association declined to submit a claim as the deductible was $5,000 and because of a concern that the insurance premium may increase as a result of filing the claim. At this point, it appeared that the association’s insurance adjuster represented to the homeowner that the insurance company had refused to pay the claim rather than telling her that the association had decided not to submit a claim on her behalf.

In an attempt to settle the association offered the homeowner $4,000 to pay half her damages, which the homeowner accepted. Under the impression that they had settled the dispute, the association was surprised when, still unsatisfied that the association had not submitted her claim, the homeowner brought an action for the remaining balance of the repair costs. Before turning to arbitration, the association first satisfying the specific procedural requirements set forth in its by-laws that homeowner disputes by first addressed at a board meeting, then a member meeting with arbitration being the last resort.

The Decision

In respect to the homeowner’s claim that the association had acted negligently or recklessly, the arbitrator found that there was no evidence of bad faith on the part of the association. The arbitrator stated that the association had investigated the situation thoroughly by sending out investigators who had experience with water damage problems to examine the damage and investigate possible causes. Furthermore, it was noted that the board did not have a duty to act as the homeowner’s trustee or fiduciary, which would have raised the standard of care the board owed to the homeowner.

It was concluded that the association’s insurance adjuster did have a conflict of interest in acting as a representative of the insurance company as well as advising the association on the matter. However, the arbitrator determined that this conflict did not cause “any compensable injury” to the homeowner as she had not relied on any of the insurance adjuster’s advice in determining the coverage of her homeowners’ policy. In the same vein, the arbitrator denied the homeowner’s claim of misrepresentation because her economic harm did not arise from the insurance adjuster’s misrepresentation that her claim had been submitted. Additionally, it was held that the homeowner failed to prove her claim of breach of duty of good faith and fair dealing as she could not show that the association had acted “arbitrarily or irrationally” in making its decision not to submit her claim.

The Lesson

For the most part, the association’s actions in this case provide a good example of what boards should do in similar situations. The board’s careful following of its own procedures protected it from accusations of impropriety, discrimination, or negligent governing. Additionally, by involving expert inspectors to examine the situation thoroughly, the board was able to show that it had fully considered the homeowner’s request. The board’s careful gathering of information illustrated that it met its obligation to make a decision in good faith with the entire community’s best interest in mind. However, the board may have avoided further litigation by tendering a check with restrictive endorsement language on its memorandum line like “Full and Final Release” or “Payment in Full.” The check should have been accompanied by a letter stating that cashing the check was an acknowledgement of settlement on the disputed amount. In this manner, once the homeowner had cashed the check she would have been precluded from claiming that a settlement had not been reached.
[PRINTER FRIENDLY VERSION]