After losing nearly everything in the July 27-28 floods, some face even more loss - their good credit ratings, and, potentially, the deeds to their properties.
Their struggle began after the condo owners learned their condominium association took out an inadequate insurance
policy prior to the floods.
Loopholes in coverage
When it comes to purchasing flood insurance for a condominium, there are slightly different rules than for a typical single-family residential homeowner.
Basically, there are two types of flooding insurance for condominiums.
The first is called primary insurance, which is taken out by a condominium association. This typically covers the property, common areas and exterior of buildings.
Federal regulations encourage a condo association to take out a policy that will cover at least 80 percent if there is a total loss.
The primary policy usually does not cover the interior of a condo - including plumbing inside walls and a unit owner's personal contents.
These items are usually covered for an individual unit owner when they purchase their own secondary flooding insurance policy.
So when the Millstone Condominium Association took out
a policy that covered only $268,000 in damages, it was hardly enough to cover the
$5 million in losses.
But what has caused so much of the legal nightmare for Millstone residents is a loophole that applies because the condo association was underinsured.
Federal regulations state that before any secondary insurance taken out by a condo owner can kick in, the primary insurance policy by the condo association must reach and pay out this 80 percent threshold, said Dino DiSanto, district director for U.S. Rep. Steven C. LaTourette, R-Concord Township.
Coverage from the secondary policy cannot be added to the primary policy to reach the threshold, he said.
"The real crux of the matter is the primary policy has to kick in before the second one can," DiSanto said. "Based on the way the flood insurance rules are, you have to hit a threshold (on the primary policy) for the secondary insurance to kick in."
Another glitch in the system is that a mortgage lender, who is governed by Federal Deposit Insurance Corp. regulations, also is typically covered legally if they required the unit owner to purchase secondary insurance, he said.
"If (the condo association) is underinsured, the secondary never kicks in, but the lender is covered legally because they have made sure that secondary insurance is in place," DiSanto said.
Insurance agents also must review co-insurance clauses on a primary insurance policy before they sell secondary flooding insurance to a condominium owner because they could be selling a policy that might never pay, he said.
But here's the biggest argument cited by the condo owners: People like former Millstone resident Diane Braunlich; Dan Nicholson, the condo association's current president; and other former residents say they were never required by their lenders to obtain secondary flooding insurance.
So their legal claim is that the lender was at fault when their mortgage loans were issued because the lender failed to make sure adequate insurance was in place.
They say residents who fall under this scenario should be off the hook for their mortgages.
Most of the former Millstone residents in this situation have stopped making their mortgage payments because they contend that the law is on their side. In the meantime, some lenders are reporting missed payments to the three credit bureaus.
Court battles are likely to settle the matters between people who still have mortgages and their lenders.
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Nicholson began his term as the Millstone Condominium Association's president in September - more than a month after the flood.
Of the 38 units in the Millstone complex, he discovered 35 units had mortgages remaining in July 2006, Nicholson said.
Since then, he's discovered most of the individual owners did not have adequate flood insurance.
To help sort out the mess, he organized meetings with condo owners. At the last one, Jan. 28 at Morley Library in Painesville, Nicholson told them they
shouldn't sit back and do nothing.
Nicholson stressed that it's important to establish and maintain dialogue with lenders, especially when they've threatened to foreclose.
Several residents have told Nicholson their lenders started foreclosure proceedings, and as they showed they'll fight, the lenders have backed off - at least temporarily.
Nicholson has encouraged condo owners to hire private attorneys and to explain their situations in writing.
He also said they should contact their federal and local lawmakers to ask for help.
A spokeswoman for state Sen. Tim Grendell, R-Chester Township, said the condo owners are reaching out, as their office has received at least a dozen contacts by phone or e-mail in the past few weeks.
Nicholson stresses that it was the lenders' responsibility to make sure adequate flooding insurance was in place.
"Federal regulations require the burden to lie with the bank to make sure we have proper flood insurance," he said. "We didn't have proper flood insurance."
After studying federal regulations for months, he asked the board association's attorney to rule whether the board should have been responsible for guaranteeing adequate insurance was in place for the entire complex.
Nicholson said, essentially, the opinion says that because the condominium association did not hold a mortgage on the property, they weren't responsible to provide flood insurance.
He says the legal opinion states that flood insurance is only required on properties that have mortgages.
"The banks that issued those loans are the ones, statutorily, to (require) flood insurance," he said.
In light of this opinion, condo owners such as Braunlich stopped making their mortgage payments.
Looking back, Nicholson said it would have been better if the board hadn't purchased any flood insurance.
Nicholson said the presence of insurance - even though it wasn't enough for secondary insurance policies held by individual unit owners to kick in - might have fooled lenders into thinking the properties were fully covered.
But he said their mistakes are inexcusable.
"Banks should have seen that we didn't have adequate insurance," Nicholson said.
He has tried to get an answer, but he remains unsure why the board originally bought its policy and continued to renew it annually for that value.
"I don't know why the board chose that number," Nicholson said. "It sounds like it came out of thin air."
Millstone's future
Many condo owners are hoping the city of Painesville will buy the properties.
The city wants to buy the 80 condominiums in 10 buildings in Millstone and nearby Gristmill Condominiums.
Then, they would demolish the buildings and create deed-restricted open space or recreation areas.
But the city must find additional funds because it can only apply to the Ohio Emergency Management Agency for about $3.6 million of the estimated $8 million that's needed.
If that funding is secured and the application process goes well, it's possible residents could get their buyouts as early as August.
If needed, the condo association plans to offer the $268,000 from its flood insurance as leverage toward obtaining property buyouts.
One reason Nicholson said the money is being withheld is that each homeowner would get only about $6,400 - hardly enough to pay off most of their mortgages. And the ability to use the money to assist in the purchase would be gone.
If the property buyout occurs and the condo association's money was already distributed, that money would also be deducted from the amount each owner would get. So far, the buyout process appears to be going as well as can be expected.
Grendell said it will be a challenge to come up with the $3.6 million after reading Gov. Ted Strickland's proposed budget, but Grendell will make it his top budget priority.
"It seems to me that this would be $3.6 million well-spent to help these Ohioans through a major disaster," he said.
The city's two pre-applications - an invitation to submit full project applications - for the Millstone and Gristmill condominiums rank at the top of the Ohio Emergency Management Agency's Hazard Mitigation Grant Program.
The deadline for the city to submit the full applications is June 22, according to the Ohio Department of Public Safety.
