Fifth Federal Circuit Court of Appeals affirms denial of Property Damage Coverage to Unit owner making a claim under the Condominium Groups Policy.

Fifth Federal Circuit Court of Appeals affirms denial of Property Damage Coverage to Unit owner making a claim under the Condominium Groups Policy.


How does one insure walls, roofs, and perhaps ceilings without also insuring anything attached to the outside of the structure? The answer is to purchase a condominium unit. Most association documents provide that the “outside” portion of the unit is owned by the association, and the “inside” portion of the unit is what the condo owner actually purchases. In this case, a condo owner, suffered just under $60,000.00 of damage to personal property and the interior of his condominium unit.  He made a claim under the “Property Damage” coverage provided in the Condominium associations policy.  

It is not clear whether he made a liability claim against either the owner of the upstairs unit or the association—either of whom could be liable for the leak in the first place. The only claim discussed is a claim made under Section I of the association’s policy related to property damage.  Section II deals with liability coverage (that coverage that defends you if you negligently cause damage and pays such claims up to policy limits applicable to the liability coverage).

 In this instance, the insurer concluded that there was no coverage under its Section I Property Damage coverage and denied the claim. The unit owner sued. 

His theory was twofold: 

1.  He was by definition a named insured under the policy and the unit was insured under the policy for property damage

2. Alternatively, he was a third-party beneficiary to the association’s policy.  (Apparently, he had no policy of his own and perhaps relied upon the fact that the association had property insurance. This is easy to do if you don’t know and are not told the meaning in an insurance context of owning the inside only.)

 Unfortunately for the unit owner, a federal district judge ruled that the insurer was entitled to a summary judgment. The district judge, applying Mississippi law, dismissed the unit owner’s case. He appealed, and the Court of Appeals for the Fifth Federal Circuit upheld the district court’s ruling that the insurer had no obligation to pay the unit owner's property damage claim. 

 First, the appellate court noted that the Plaintiff unit owner was covered but only under the LIABILITY coverage by definition for certain matters. The Court did not directly deal with a principle in Mississippi law called “severability” which essentially says that different coverages in different sections and even under the same section that have their own separate definitions are required to follow the definitions applicable to each, separate coverage. Here the fact that under some circumstances the insurer may have to defend this same unit owner, the property damage provisions of the policy did not apply. 

 Second, the unit owner argued that he was an “intended third-party beneficiary” of the association’s policy. The appellate court said that at most he was an “incidental” beneficiary as his name was nowhere in the policy and the fact that the company had liability coverage obligations did not mean that his benefit from that coverage was intended for him.

 This is not a surprising result based on these facts. What would have happened if the association had advised the unit owner that “it” would get property damage coverage and that it would cover damage to the condo? Without explanation or context, this is a true statement; then the unit owner relies on that and does not buy his own insurance. Suppose the association told the agent that is what they were doing, and the agent said this policy the way I read it will do the trick. The likely upshot: there will still be no coverage for the unit owner under the property damage coverage, but either or both the agent or the association “could” be held liable for the materially incorrect information the unit owner relied upon.

 Further, wouldn’t the association and the upstairs condo owner both be potentially liable for a water leak that came into the lower condo unit? Is the common floor above and ceiling below, technically part of the shell of each unit, generally the responsibility of the association?  A hole in the roof surely could be.  


The lesson: If you purchase a condominium whether a separate or connected unit, make sure that you have your own coverage for property damages that covers the “inside.”  That is unless you can convince the association to pick up the tab for the extra premium for adding each unit owner and their unit as additional insureds under their policy for property damage coverage. Do not wait until the water is pouring in to check on your coverage under any policy. The idea of being even partially protected if there is “a hole in the roof where the rain pours in and a hole in the floor where it runs right out again” is fiction described in the Elvis Presley Song, “We’re Gonna’ Move” in the 1956 movie Love Me Tender.  Moving to another unit is not a good solution anyway in most instances!