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.