(originally published in Winter 2005)

Palacin v. Allstate Insurance Company (2004) 119 Cal.App.4th 855.

California case law generally provides that because individual owners pay for association insurance through their assessments, they are entitled to whatever insurance coverage is available under the association’s master policy subject to the policy’s deductible. The master policy is considered primary, and until the benefits of that policy are exhausted, the coverage provided by an owner’s individual policy is typically not triggered. In the recent court decision of Palacin v. Allstate Insurance Company (2004) 119 Cal.App.4th 855, the California Court of Appeal reviewed an insurance company denial of a claim made by the insured homeowner because the association where the insured was living was required to maintain insurance coverage for the entire property. The court held the insured homeowner was implicitly responsible for insuring certain items, and therefore, the individual owner’s policy was triggered and responsible for certain damages.

Ms. Palacin, the plaintiff homeowner in this case, lived in the Casablanca condominium development. The Casablanca community’s Covenants, Conditions and Restrictions (“CC&Rs”) required the Association to obtain a master policy of fire insurance and extended coverage insurance for the full insurable value of all improvements within the development. The CC&Rs further required the policy to name each homeowner as an insured.

The CC&Rs also provided that homeowners could purchase individual insurance to the extent such coverage did not separately insure or overlap with the coverage the Association was obligated to maintain. Specifically, a homeowner could insure his or her personal property and any owner made “improvements” in his or her unit. Such improvements were limited to the type and nature commonly known as “tenant improvements.” Pursuant to this provision, Palacin purchased insurance from Allstate Insurance Company (“Allstate”) covering personal property and improvements within her unit. With respect to the real property protection, Palacin’s Allstate policy stated, in relevant part, “[w]e will cover items of real property pertaining directly to your resident premises which are your insurance responsibility as expressed or implied under the governing rules of the condominium . . .”

When Palacin tendered a claim to Allstate for water damage to her walls and floors, Allstate denied the claim, stating the damaged items were not Palacin’s “insurance responsibility” under the governing documents. Allstate further asserted the Association’s CC&Rs did not impose any insurance responsibility on Palacin. Instead, Allstate argued the CC&Rs placed exclusive responsibility for obtaining all property insurance on the Association.

Palacin filed a complaint against Allstate alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud, alleging the loss “was precisely the type of loss” that the Allstate policy “is designed to and expressly covers.” Allstate filed a demurrer to Palacin’s complaint asserting that there was no coverage available under its policy as a matter of law. The demurrer was sustained and Palacin appealed that ruling.

The Court of Appeal began its analysis by acknowledging the fact that the primary purpose of the CC&R insurance provisions was to avoid double coverage. The court noted if both the master and individual policies covered the same loss, a homeowner may be compelled to pay twice for the same insurance, once through Association dues, and then again through an individual policy premium. The court further noted such double coverage could lead to disputes over control of the insurance proceeds where the “association could be faced with an obligation to repair where a portion of the insurance proceeds is controlled by a member.”

In response to Allstate’s argument that the Association’s CC&Rs did not impose any insurance responsibility on homeowners, Palacin argued the CC&Rs identified certain items that a homeowner is implicitly responsible for insuring, and that her policy covered these items as real property pertaining directly to her residence, which are her insurance responsibility “expressed or implied under the governing rules of the condominium.” The court agreed with Palacin’s argument, stating that because the CC&Rs provisions make exceptions to the association’s insurance responsibilities, “these exceptions effectively establish the items for which the homeowner (rather than the Homeowners Association) will be responsible for insuring.”

The court approved of this interpretation for policy reasons as well, determining that taking Allstate’s position to its logical conclusion, would lead to undesirable results: “Allstate’s position means that it was not in fact selling Palacin any real property insurance because Palacin had no responsibility to obtain any of the coverage. An insurance policy should not be interpreted to make policy terms meaningless . . . .[Citations omitted] We decline to conclude that the only reasonable interpretation of the Allstate policy is one that essentially provides the real property provisions of the Condominium Owners insurance policy have no potential value to a condominium owner.”

Based upon this analysis, the court determined Palacin did have an implied responsibility to insure those components of her unit not covered by the Association’s master policy. As such, her Allstate policy was “triggered” when she filed her claim for the cost to repair her damaged wall and floor coverings, which the court concluded could conceivably constitute the type of improvements covered by Allstate’s policy. Ultimately, the court stated that if Palacin could amend her complaint to allege the Association’s insurance policy did not cover her losses, it would be “reasonable to conclude that Palacin was permitted to obtain such coverage and therefore the coverage was within Palacin’s implied insurance responsibility triggering the Allstate policy’s coverage.”

In the current insurance climate, many Associations are amending their CC&Rs to expressly require homeowners to obtain individual insurance coverage for the components of their units that are not covered under the master policy and which owners are required to maintain. In most cases, such amendments also reduce the Association’s insurance coverage to so called “bare walls” policies. The majority of CC&Rs, however, do not contain such express obligations, but rather, authorize or permit homeowners to obtain individual insurance coverage, provided such policies do not overlap with master policy coverage. Depending on the language of the individual owner’s policy, the Palacin opinion makes it clear that even where there is no express individual insurance responsibility, a court may find an implied responsibility in such permissive provisions.