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.


Even with a Narrow Pollution Exclusion Limitation, California Court Denies Condominium Association's Property Claim for Asbestos Cleanup

Pollution exclusions in insurance policies are typically complex provisions that require a significant amount of legal analysis to apply correctly. Over the years, the body of law interpreting these exclusions has evolved into what is now a fairly narrow interpretation of what is and is not “pollution” under these exclusions. For example, in the case of MacKinnon v. Truck Ins. Exch., 73 P. 3d 1205 (Cal. 2003), the California Supreme Court limited a pollution exclusion in a commercial general liability (CGL) policy, holding that the exclusion only applied to “injuries arising from events commonly thought of as pollution, i.e., environmental pollution.”

Last week, in Villa Los Alamos Homeowners Ass’n v. State Farm Gen. Ins. Co., No. A128443, 2011 WL 3586475 (Cal. Ct. App. Aug. 17, 2011), the California First District Court of Appeal applied this MacKinnon standard to a first-party insurance policy. The court held that a condominium association’s accidental release of asbestos into one of its buildings during a remodeling project was excluded from the association’s insurance policy.

In Villa Los Alamos, the condominium association hired a local contractor to remove the popcorn ceiling in one of its buildings. When the contractor started, it disturbed asbestos in the ceiling tiles, spreading asbestos fibers throughout the building. The local Air Quality Management District cited the contractor, removed it from the project, and ordered the association to perform a comprehensive abatement of the building. Abatement cost the association approximately $650,000. The association sued the contractor, but also put in a claim with its property insurer, State Farm. The association won its lawsuit against the contractor, but the contractor was insolvent and the contractor’s insurer relied on the pollution exclusion in the contractor’s liability policy to deny coverage. When the association’s insurance company denied coverage on the association’s property damage claim, the association sued in an attempt to recover its cleanup costs.

The association argued that even though the MacKinnon standard technically only applied to third-party liability insurance policies, it should apply to first-party property insurance policies as well. The association wanted the narrower reading of the exclusion that MacKinnon provided so their claim for asbestos cleanup would be covered. Before applying third-party doctrines to a first-party case, the court reiterated its earlier distinctions between first and third party insurance saying,

[T]he right to coverage in the third party liability insurance context draws on traditional tort concepts of fault, proximate cause and duty. This liability analysis differs substantially from the coverage analysis in the property insurance context, which draws on the relationship between perils that are either covered or excluded in the contract. In liability insurance, by insuring for personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks.

The court then looked to the plain meaning of the exclusion, the expectation of the insured, the similarity of the exclusions, and the history of the exclusion before concluding that,

[A] reasonable insured would expect both exclusions to apply to environmental pollution. This conclusion is bolstered by the common history and the fact that the all peril property policies likewise broadly cover losses unless specifically excluded or limited.

Even thought the court adopted the narrower view of the pollution exclusion, this interpretation did not save the association’s claim for asbestos cleanup. The court examined the facts and found that the asbestos fell within the “environmental pollution” definition and affirmed judgment for State Farm. The association argued that the asbestos release was negligent rather than intentional, that it was contained within the building and did not escape outside, and that it only happened once. The court held that these arguments were not convincing enough to bring the association’s asbestos release out of the meaning of a traditional “environmental pollution.”

Under the specific facts of this case, it also appears that the association knew about the asbestos and hired a contractor that may not have been properly licensed to take the proper precautions for asbestos. California, in particular, has strict licensing guidelines regarding asbestos.

If you are planning remodeling or repairs to your condominium buildings, be sure to check with a licensed professional regarding the possibility of asbestos, because if there is a problem like the one in Villa Los Alamos, it may not be covered under your insurance policy.

Association Held Responsible For Repairs To Interconnected System Of Pipes Viewed As Common Property

The question of insurer responsibility for damages from a pipe break in a condominium association is a common question. Often times, the individual unit owner has an insurance policy providing coverage for portions of the interior of that unit, while the association has a master policy providing coverage for association property pursuant to the condominium declarations and certain state statutes. In a recent California case, Dover Village Association v. Jennison, (Cal. Ct. App. December 21, 2010), an individual unit owner had a leaky sewer pipe two feet beneath the concrete slab of his Newport Beach condo. The association said he was responsible for the repair bill on the theory that the sewer pipe was “exclusive use common area” for which he was responsible. The trial court entered a judgment declaring that the association should bear the expense of the repair cost, and awarded that unit owner damages, attorney’s fees and court costs. The association appealed that judgment.

The California appellate court looked at the Condominium Declarations and Restrictions, as well as California’s Condominium statutes, for guidance on whether the leaky pipe was located within “common area” or “exclusive use common area” property. These definitions found within the Declarations and state statutes would determine which party was responsible for repairing the pipe and damages. The California condominium statute (known as the Davis-Stirling Act) defines “exclusive use common area” as a portion of the common areas for the exclusive use of one or more, but fewer than all, of the unit owners of the separate interests. That definition includes fixtures designed to serve a single separate interest, but located outside the boundaries of the separate interest.

The California appellate court affirmed the judgment finding the association responsible for the repair costs from the sewer pipe. In reaching its conclusion, the Court ruled that:

[I]nterconnected sewer pipes cannot really be said to be the “fixtures” of any particular unit. A sewer system is a series of interconnected pipes which ultimately feed into one common line. Differentiating parts of that interconnected system is unreasonable. The portion of piping coming from one unit is no more affixed to that unit than it is to the sewer system and other pipes or piping within that system.

The Court concluded that a piece of a system of interconnected sewer pipes is physically connected to every other piece of the system. Every unit’s sewer pipes are a “fixture” of every other unit’s sewer pipes. The Court went on to state that some pipes, such as drain pipes that exclusively service one individual unit and are not connected to any other system of piping, might be defined as “exclusive use common area” property. In that situation, they could be compared to things such as shutters and window boxes that are truly “designed to serve a single separate interest.”

The last portion of the Court’s ruling is dicta and has no precedential value. Dicta is a judicial opinion expressed by judges on a point that does not arise in the case. However, it seems to express the California appellate court’s feeling that should a blockage have originated within a drain line that is exclusively servicing that unit, the responsibility may fall on the unit owner and his or her individual insurer to repair the damage. But even that portion of a drain line located completely within the unit’s boundaries would likely connect to the system of pipes of the entire association. Therefore, as is often the case with law, we are left with a gray area subject to interpretation.

Again, given the overlapping layers of coverage and these gray areas, those in need of guidance in such scenarios should consult professionals with experience in such insurance coverage work to explore and evaluate the potential insurance coverage.

Can a Condo Association Get Out of an Insurance Settlement Agreement?

What happens when a condominium or homeowners association enters into a settlement agreement with an insurance company and later finds out that the settlement was not enough or was fraudulently induced? That is exactly what happened in California in the case of Village Northridge Homeowners Ass’n v. State Farm Fire and Cas. Co., 237 P.3d 598 (Cal. 2010).

Village Northridge Homeowners Association entered into a settlement agreement with its insurance company for $1.5 million for earthquake damage, based on representations from the insurance company that the insurance policy only provided $4.9 million worth of coverage. The settlement agreement expressly stated that the association could not bring suit against the insurance company for any issue related to the earthquake damage after the settlement. The association later learned that the policy actually provided $11.9 million worth of coverage, and filed suit against the insurance company for fraudulent inducement into the settlement agreement.

The problem with the homeowners association’s lawsuit for fraudulent inducement was the settlement agreement expressly prohibited it from filing a lawsuit against the insurance company. The trial court told the homeowners association that it would have to return the $1.5 million in settlement funds if it wanted to proceed on the lawsuit for fraudulent inducement, but the appellate court reversed the trial court’s ruling. The California Supreme Court sided with the trial court and told the association it would have to return the $1.5 million it received in settlement benefits if it wished to pursue its case for fraudulent inducement.

The homeowners association would have to return the money because of the legal doctrine of rescission. The dictionary defines rescission as the act of taking back or canceling. Often coupled with the word rescission, is the word restitution. Restitution is the act of restoring something to its rightful owner. In the context of contract law, this means canceling the contract and putting the parties back into the positions they occupied before the contract was entered into, which includes repaying any money that was paid in consideration for the contract.

In the Northridge Homeowners case, this meant that the homeowners association would have to choose between keeping the $1.5 million in settlement money and foregoing its suit for fraudulent inducement, or returning the $1.5 million to the insurance company so it could file suit. This California decision was based on several factors, including the language in the settlement contract, California case law, and California statutes. While the outcome of similar facts may vary depending on the jurisdiction, the same result may occur in areas outside of California based on the common law doctrines of rescission and restitution.