On April 26, 2007, the Appellate Division of the Superior Court of New Jersey rendered its decision in the matter of Golomb v. Warwick Condominium Association, Inc., 2007 WL 1215083 (App. Div. 2007) which is instructive for condominium associations. The Warwick Condominium is a 9-story building consisting of 275 units located in Atlantic City. The 50-year-old building suffered severe damage in a storm. As a result, the Board of Trustees of the Condominium Association authorized three special assessments totaling in excess of $2,200,000. Most of this money was used to fix storm damage. The insurance carrier for the Condominium Association disclaimed coverage, arguing that the damages claimed were not caused by the storm.

The Condominium Association filed suit against the insurance company and ultimately obtained an award in excess of $400,000. By the time the Condominium Association received the money in January, 2003, the plaintiffs had already sold their units. Plaintiffs demanded that they be reimbursed from the insurance proceeds for their pro rata share of the special assessments that they had paid in order that the building could be repaired. Plaintiffs relied upon N.J.S.A. 46:8B-24(a), which provides:

Damage to or destruction to any improvements on the condominium property or any part thereof or to a common element or elements or any part thereof covered by insurance required to be maintained by the association shall be repaired and restored by the association using the proceeds of any such insurance. The unit owners directly affected shall be assessed on an equitable basis for any deficiency and shall share in any excess.

The trial judge found that the statute was unambiguous. Based upon the plain meaning of the statute, the By-Laws of the Association and the Master Deed, the court found that the insurance proceeds were “solely the cost of damage caused by the storm, and since costs for that damage [were] fully covered by the assessments, the monies awarded in the underlying trial are properly identified as excess.” That being the case, the trial judge found that the plaintiffs were entitled to be reimbursed for their pro rata share of the special assessments they had paid prior to selling their units.

On appeal, the Condominium Association challenged the claim of the plaintiffs that they were “unit owners directly affected” within the meaning of N.J.S.A. 46:8B-24(a). The Appellate Division reasoned that:

It is hard to understand how the unit owners actually paying, by way of assessment, for repairs to the building that were ultimately found to be the responsibility of an insurer could not be considered “directly affected.” Those owners paid for the repairs; they are surely directly affected by the damage to the condominium property for which insurance is in place.

Having reached that conclusion, the Appellate Division next stated that it could not imagine
“how the proceeds, no longer needed to repair the damage by virtue of the previous assessment, cannot be ‘excess’ proceeds.”

In explaining its reasoning, the Appellate Division stated as follows:

Owners paying for repairs should not be prejudiced because an insurance carrier wrongfully denies coverage. Had the proceeds been paid promptly, plaintiffs would not have paid at least some of the assessment. They should not be in a worse position because of the delay in receipt of those insurance proceeds. Indeed, if the assessment is viewed as a loan pending receipt of the insurance proceeds, the obligation of [the Association] is clear.

The Condominium Association further argued that its fiduciary duty to unit owners did not extend to those unit owners who had already sold their units at the time the insurance proceeds were collected. The Appellate Division rejected this argument noting that “the sale of the plaintiffs’ units, under these circumstances, does not discharge that duty with respect to the insurance proceeds.”

In short, the Appellate Division felt that it would be unfair to the owners of condominium units who had sold their units before the insurance proceeds had been received, but who had paid their pro rata share of special assessments, for the current owners of those condominium units to receive the benefit of those insurance proceeds. In the opinion of the Appellate Division, this would “allow a windfall to those [current] owners because they would receive both the benefit of repairs funded by others and funds intended to pay for those repairs that may now be used for other purposes.”

Interestingly, the Appellate Division noted that if the Condominium Association had provided in its Master Deed or By-Laws that insurance proceeds need not be used to repair a covered loss, it might have ruled otherwise. In the absence of such a provision, the Appellate Division affirmed the judgment of the trial court in determining that the Condominium Association “could not appropriate the insurance proceeds for purposes other than reimbursing those who had funded the repair of the covered losses by way of assessment.”