Homeowner Association Managers, Agents and Officers Beware - Check Insurance Requirements to Avoid Lawsuits From Individual Members!!

Many of you are familiar with the following scenario—an insurance claim is denied because there is no coverage. Subsequently, the insured pursues a claim against their insurance broker for failing to obtain the coverage requested and pursues damages against the insurance broker for the insurance coverage that would have been available but for the negligent conduct of the insurance broker.

However, what many of you may not be familiar with is a similar claim that can be made against the Home Owner Association (HOA) where the HOA is required to obtain specified types of insurance coverage for the benefits of its members (according to the terms and conditions of the of CC&Rs) but fails to do so.

Assume that an HOA fails to obtain the coverage required under the Condominium’s governing CC&Rs (i.e., requiring that insurance coverage be purchased to cover damage to the common areas). There might be no coverage because the insurer takes the position that the cause of loss is excluded under the policy, or maybe the HOA simply dropped the ball and failed to obtain an insurance policy altogether.

In either event, there is no coverage for the loss to the common area as a result of the HOA’s negligence (failing to review the policy to ensure it provides the coverage required, or failing to purchase the coverage). In this scenario, HOAs can be exposed to lawsuits brought against them by the individual condominium or HOA members to recoup the costs necessary to repair the property.

HOAs need to be aware that condo owners can pursue claims against the HOA in scenarios like these by suing the HOA to “enforce” the HOA’s duties and obligations under the community’s governing CC&Rs (or similar documents). In this example, the allegations would be that:

  1. The CC&Rs required the HOA to obtain insurance coverage for the common area,
  2. there was property damage to the common area, and
  3. the HOA failed to obtain an insurance policy covering property damage to the common area, the HOA should be held liable for the costs incurred by the individual condominium owners to repair the common area.

In California, the prevailing party in a lawsuit to enforce the terms and conditions of CC&Rs (enforcement actions) may recover their attorney’s fees and costs.1 This provision can be used as a sword by condominium owners to recoup their attorney’s fees incurred in the litigation against the HOA. Not only would the HOA end up having to pay for the costs to repair the property, but would then also be on the hook for the attorney’s fees incurred by the individual condo owners to recover those repair costs. The mere risk of a substantial attorney’s fee award in protracted litigation against individual condominium owners should give an HOA’s risk management team cause to pause and make sure that the HOA is fulfilling its obligations in the CC&Rs.

The moral of the story is that HOAs must be diligent in fulfilling the obligations owed to the HOA community. The first step every HOA board should do is review the CC&Rs to identify their specific obligations to the HOA community. Unfortunately, because many of the governing documents are prepared by lawyers, they are not always written in easy to understand language. Consequently, HOAs should work with a lawyer when necessary to make sure the HOA is fully aware of what its duties and obligations are.

Second, regarding the insurance issue specified above, HOAs should work with insurance brokers to ensure that the insurance being purchased is sufficient to satisfy the requirements laid out in the CC&Rs. By (1) working with an insurance broker, (2) showing the insurance broker the HOA’s governing documents, and (3) requesting that the broker procure an insurance policy that satisfied the CC&Rs requirements, the HOA can go great lengths towards satisfying its insurance obligations to the HOA. Moreover, the HOA should also review the insurance policy with their insurance broker after it has been issued to ensure it will meet the HOA’s needs.

By taking these simple and straightforward risk management steps, HOA’s can both satisfy their obligations to the HOA community AND go great lengths to protect themselves from legal liability.

Last, in California, because the attorney’s fee provision of Civil Code 5975 is a “prevailing party” provision, a defending HOA that “prevails” can use Civil Code section 5975 as a shield to recover its attorney’s fees. If an HOA satisfies its duties and obligations (as described above) but the insurer denies coverage, and individual HOA members sue the HOA, the HOA will be in prime position to not only defend itself against an enforcement action but the HOA might recover its defense fees and costs to boot.

1 Cal.Civil.Code § 5975.


Residents Of A Florida Condominium Association Were Given A Week To Move Out Of The Building By The City After It Was Rendered Unsafe

The City of Bradenton, Florida, sent a letter to all thirty-six units of a condominium building, stating that the six year old building had been found unsafe by the city fire marshal. The city ordered the residents to move out within seven days. To paraphrase one of the residents living in the building; imagine coming home to your condominium thinking about your evening or the weekend ahead, and then finding out that you only have seven days to move out and find a place to live.

The structural problems seem to have begun about five to six years ago with repairs to a stairwell. A structural engineer’s assessment found rotting wood and the problems worsened and may be related to stucco work by subcontractors. That is the position taken by the association, which has filed a lawsuit against developers, subcontractors and others related to the project. Among other things, the lawsuit alleges that the materials and installation methods were insufficient and allowed water to leak through the vapor barrier and cause wood rot. While the cause of the water damage is likely in dispute, it is undisputed that there is wood rot that has resulted in a partial collapse of the building.

The rotting wood supports the two stairways on opposite sides of the building. In the month or two before requiring the residents to vacate, the City had a list of precautions for the association to take, such as:

  • -having a fire watch person there at night in case of a fire;
  • -reconstructing the stairways;
  • -lining the sides of the wall of the structure with wood supports; and
  • -improving the sprinkler system

The association was making efforts and spending money to remedy some of the issues on the City’s list. Yet, the City still required them to vacate. The City has stated that its top priority is the residents’ safety.

It is shocking that a municipality can force residents to vacate their homes in seven days’ time, particularly in this economy and when the association was spending some of its own money to remedy the structural problems. The association also says they have engineers who told them the building does not need to be vacated. Although I am not involved in this case, I felt compelled to comment on this disheartening story. The importance of life, liberty and property is deeply rooted in the ideals forming our Constitution and Bill of Rights. Seven days to vacate is drastic, and it seems certain to force some of these units into foreclosure. How could most people afford to pay their mortgage, taxes and assessments on the condominium and find another place to live?

It is unknown when the residents can return to their homes. The lawsuit against the developers and subcontractors for the alleged construction defects is scheduled to go to trial in April. Hopefully, there will be a resolution soon for this association before it is too late.