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ESchuster

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    29 May
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    Insurance Options To Consider

    Insurance building blocks

    Part 2 of 3: California HOA Insurance Issues

    Insurance carriers throughout California are non-renewing homeowner association insurance policies. As a result, premiums and deductibles for available policies are increasing exponentially and the level of coverage offered is decreasing. In part two of a three-part monthly series, we discuss what to do when insurance policies are cancelled.

    Given the state of today’s insurance market, many boards are asking about their options when presented with a much higher premium than before or the inability to obtain full coverage of the property. Boards facing insurance challenges can consider the below options, although several are far from ideal. As with all insurance matters with potential legal implications, community managers and boards should consult with the association’s insurance broker and legal counsel to learn whether these options will work for your association.

     

    Go “Bare Walls”

    For condominium associations whose property insurance policies typically cover the full building, including the separate interest units, it may be possible to obtain “bare walls” or “walls out” coverage instead. This type of policy often covers everything in the building except the separate interest units. Owners would be expected to insurance their separate interest units with their own individual policies. Additionally, the association’s governing documents may require an amendment (see further information below). This kind of change in coverage may come with a unique set of challenges and may not ultimately reduce the overall cost, so consult with the association’s insurance broker and legal counsel to discuss the risks and benefits of this type of coverage and how to properly communicate changes to owners.

     

    Increase the Deductible

    It may be possible to decrease the premium by increasing the deductible. However, whether this option is available – or prudent – depends on the individual circumstances of your association. Consult with the association’s insurance broker and legal counsel about whether this option is suitable for your association. Boards may also consider adopting a policy describing how insurance deductibles are handled if the governing documents do not already address that issue. Legal counsel should prepare the policy.

     

    Consider Less Than Full Replacement Value

    Another option is to obtain coverage for less than the full replacement value of the property, even temporarily. However, this option, in particular, poses risks to the association, so it should be considered very carefully and only with the guidance of the association’s insurance broker and legal counsel. One risk of note: potentially decreased availability of financing for buyers by lenders such as Fannie Mae and Freddie Mac.

     

    Amend the Governing Documents

    Your association’s governing documents may contain specific insurance requirements, including maintaining a policy which covers the units (sometimes referred to as a “walls in” policy) or coverage for full replacement value of the property. Boards may consider amending these provisions to provide greater flexibility or less responsibility for the association. Amendments to the CC&Rs, Bylaws, and Articles require member approval.  Legal counsel can advise on the types of amendments which may benefit the association and their approval requirements. Legal counsel should prepare the amendments.

     

    Adopt a Policy

    Regardless of an association’s specific insurance concerns, boards can consider adopting a water damages and leak policy. The policy should provide a consistent process, in compliance with the governing documents and the law, for the community manager, board, and owners to follow when addressing a water leak or other water damages issues. The policy can include details about how insurance claims and deductibles are handled. Legal counsel should prepare the policy.

     

    Work Closely with Your Insurance Broker

    With current market conditions, it’s important to work closely with your insurance broker and ensure they are specialists in working with HOAs. Your association’s policy is only as good as its endorsements so it’s imperative your broker understands the complex requirements and nuance involved with insuring HOAs. 

     

    These options may be less than ideal, but they may be worth considering as boards navigate the challenging and uncertain insurance market in California. Contact your insurance broker and attorney to discuss what options may be available to your association.

     

    Read part one here: Your Association’s Insurance Policy is Cancelled – Now What?

    04 Apr
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    Your Association’s Insurance Policy is Cancelled – Now What?

    Part 1 of 3: California HOA Insurance Issues

    Insurance carriers throughout California are non-renewing homeowner association insurance policies. As a result, premiums and deductibles for available policies are increasing exponentially and the level of coverage offered is decreasing. In part one of a three-part monthly series, we discuss what to do when insurance policies are cancelled.

    Your association’s insurance policy is not renewed and affordable alternatives are nearly impossible to find. What do you do? What options are available? How should you communicate the situation to the members? Below are considerations for associations facing these immense insurance challenges.

    Investigate Other Options
    Boards and their managers should talk to their association’s current insurance broker, and potentially other brokers, about their options. There are occasions when different brokers have access to or are able to negotiate various options. Ask questions and learn about the association’s current and future options.

    Emergency or Special Assessments
    If an emergency or special assessment is needed to pay for increased insurance premiums or other expenses, boards should consult with legal counsel as soon as possible.

    The law imposes detailed requirements for associations to properly levy emergency assessments and special assessments. For instance, the Civil Code defines what is considered an “emergency” for purposes of an emergency assessment. There are also various notice requirements, depending on the type of assessment being levied.

    Assessments not imposed properly can be successfully challenged by owners – potentially a very costly mistake for associations already confronting financial concerns. By involving legal counsel early, boards can mitigate risk or avoid challenges altogether.

    Communication with Owners
    You have heard it before: communication is key! Some governing documents require associations notify owners about insurance coverage changes. Even without such requirements, it is crucial to keep owners informed. Some governing documents contain complicated or extensive insurance obligations. Work with legal counsel to understand the requirements and options pursuant to the governing documents and on how to communicate coverage, deductibles, and cost changes to owners. Like with assessments, involving counsel early in the process can help boards mitigate or even avoid certain risks.

    Town Hall Meetings
    Bring in the experts! Invite the association’s consultants – the insurance broker, legal counsel, a reserve study analyst, and/or a finance expert – to discuss the issues and answer questions at the meeting. Remember that a town hall meeting is not a board meeting! No decisions will be made and no minutes will be taken. The goal of the town hall meeting is to educate owners about the issues, answer owners’ questions, and, hopefully, assuage owner concerns. All of the written communications about the insurance issues should be prepared by or with legal counsel, so work with counsel to prepare the town hall meeting notice.

    Difficulty Refinancing and Selling Separate Interests
    Non-renewal and increased premiums can affect owners’ ability to refinance or sell their separate interest property. Associations should consider telling owners to contact their mortgage or real estate brokers to discuss concerns.

    Risk of Litigation and Threats
    Increased premiums can lead to increased financial pressure on associations. That pressure is felt by members, who may have concerns about their own ability to pay increased or new assessments as well as their ability to refinance or sell their property.

    Owners facing personal financial issues either caused or compounded by assessment increases are more likely to attempt to block or reverse an assessment, challenge the association’s actions, or initiate litigation. Emergency assessments are especially prone to challenge because owners may balk at paying significant sums without their approval.

    Avoiding or mitigating the risk of challenges, threats, and lawsuits are important reasons to involve legal counsel when there is significant change in the insurance status of the association.

    03 Aug
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    Penalize This! Fines and Penalties Imposed on Associations

    We talk a lot about the fines and other penalties associations can impose on members who violate the governing documents. What about the fines and penalties which can be imposed on associations? Associations that violate certain Civil Code sections may have to pay monetary penalties or fines (typically called “civil penalties”) in addition to paying for actual damages, attorneys’ fees, and court costs.

    At a time when members are increasingly challenging associations and associations are under increased scrutiny, it is important to understand the common violations which can subject associations to significant fines and penalties.

    Open Meeting Act (Civil Code §4900, et seq.)

    Associations that violate the Open Meeting Act may have to pay attorneys’ fees, court costs, and a civil penalty of up to $500 per violation. (Civil Code §4955(b).) Common violations include failure to provide the required 4 days’ or 2 days’ notice of an open board meeting or executive session, respectively, failure to post an agenda, and failure to include time for the homeowner forum at an open board meeting.

    Member Elections (Civil Code §5100, et seq.)

    A member who successfully challenges an election can be awarded their attorneys’ fees, court costs, and a civil penalty up to $500 per violation payable by the association. (Civil Code §5145(b).) Association violations could include conducting an election in the absence of compliant election rules, improperly disqualifying a candidate, failure to appoint a qualified inspector of elections, failure to provide a ballot at least 30 days before the return deadline, and failure to comply with the election by acclamation notice requirements. Consult with legal counsel to ensure elections are conducted pursuant to the association’s governing documents and the law.

    Record Inspection (Civil Code § 5200, et seq.)

    A member who is not provided with all requested association records within the statutory timeframe may be awarded their attorneys’ fees, court costs, and a civil penalty up to $500 for the denial of each separate written request, payable by the association. (Civil Code §5235(a).) To clarify, this could mean a $500 civil penalty for each document requested by the member to which they are entitled. Common violations include denial of records to which a member is entitled, failure to provide records within the statutory timeframes, and imposing costs on the member for which the member is not responsible. Each association should establish a process to respond timely and accurately to records requests, perhaps including a review by legal counsel, to mitigate the risk of these penalties.

     

    While the following violations may be less common, be aware that they could result in fines and penalties as well.

    Peaceful Assembly

    Associations that violate members’ rights to peaceful assembly can be charged a civil penalty of up to $500 for each violation. (Civil Code §4515(d).) Associations should be careful not to restrict members’ rights to peacefully assemble and should consult with legal counsel to amend governing documents containing illegal prohibitions, such as prohibiting meetings among residents or circulating information to other members at reasonable times and in a reasonable manner.

    Escrow Documents to Sellers

    Associations are required to provide specific documents to a current owner (i.e., the seller) during the sale of the owner’s separate interest, and failure to do so can subject associations to civil penalties of up to $500 in addition to paying actual damages and attorneys’ fees to the purchaser. (Civil Code §4540.) You read that correctly: not only can the seller be liable to the purchaser for failure to provide documents, but ostensibly the association can be liable to the purchaser for failure to provide required documents to the seller. This means that associations should not only provide the seller with the documents but also maintain a record of having done so. Each association should establish a process to respond timely and accurately to these requests to mitigate the risk of these penalties.

    Rental Restrictions

    Violations of rental restriction laws can subject associations to civil penalties of up to $1,000 in addition to paying actual damages. (Civil Code §4741(g).) Two common pitfalls are restricting rentals to less than 25% of the separate interests and counting owner-occupied separate interests toward the number of rentals and thereby improperly restricting someone’s right to vote. Consult with legal counsel to amend governing documents containing illegal rental restrictions.

    Solar Energy Systems

    Associations may reasonably restrict solar energy systems but cannot prohibit them altogether. Associations which violate these statutes are subject to civil penalties of up to $1,000 in addition to paying actual damages and attorneys’ fees.  (Civil Code §714(f) and (g).) Consult with legal counsel to establish a solar energy system policy to ensure compliance with the law.

    Electric Vehicle Charging Stations

    Associations may reasonably restrict electric vehicle charging stations and electric vehicle time tracking meters but cannot prohibit them altogether. Associations which violate these statutes are subject to civil penalties of up to $1,000 in addition to paying actual damages and attorneys’ fees.  (Civil Code §§4745(j) and (k) and 4745.1(h) and (i).) Consult with legal counsel to establish an electric vehicle charging station policy to ensure compliance with the law.

    Given how detailed the statutory requirements are for many of these sections of the Civil Code, associations should consult with legal counsel to ensure compliance and avoid civil penalties.

    30 Jun
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    It’s All in the Details

    Hearing Notices 101

    Hearing notices are simple, right? Just include the date, time, and place and you’re good to go! Not so fast…

    Do you remember the five W’s: Who, What, Where, When, and Why? A hearing notice that does not include all of this information could result in an unenforceable disciplinary action, including the inability to impose fines or reimbursement assessments for common area damage.

     

    Civil Code §5855(b) requires the hearing notice to include:

    1. The date, time, and place of the hearing; AND

    2. The nature of the alleged violation for which the member may be disciplined; OR

    3. The nature of the damage to common area and facilities for which a monetary charge may be imposed;
    AND

    4. A statement that the member has the right to attend and may address the Board at the hearing.

     

    Adequately describing the nature of the alleged violation includes:

    1. The member’s specific conduct which violates the governing documents; AND

    2. The specific provision(s) of the governing documents which the conduct violates.

    For example:

    “The Association received a report that on (date), you (conduct). This conduct violates (provision), which states…”

     

    Adequately describing the nature of the damage to common area and facilities includes:

    1. The specific damage caused by the member; AND

    2. The specific provision(s) of the governing documents which subjects the member to monetary charges for causing that damage.

    For example:

    “On (date), you (conduct which damaged common area). This conduct subjects to you a monetary charge for the damage caused pursuant to (provision) which states…”

     

    Further Recommendations

    We also recommend listing all disciplinary actions that may be imposed after the hearing, such as monetary penalties (fines), reimbursement assessments, suspension of use of common area facilities, internal dispute resolution (IDR), alternative dispute resolution (ADR), and legal action, including injunctive relief, lien, and foreclosure. Consult with legal counsel and check the governing documents to confirm which disciplinary actions are available for this violation at a particular association.

     

    Still not certain how to prepare your notice? Remember the five Ws: who, what, where, when, and why. Be sure to include the date of the reported violation that is the subject of the hearing. Then, add information about the rule or policy their conduct has violated and the kinds of discipline to which they are subject.

     

    If any of the required information is missing and the member challenges the Board’s enforcement or disciplinary action, the Board’s action could be reversed. We always recommend consulting with counsel to confirm that your hearing notice complies with the Civil Code and the governing documents and is appropriate for the particular violation and community. It also may be appropriate for legal counsel to prepare a hearing notice.