HOA Neighborhood Watch Liability After Trayvon Martin

August 6, 2013

By Curtis G. Kimble.

Since the Trayvon Martin death in Florida, neighborhood watch groups in HOAs have become a hot button issue.  The neighborhood watch group that George Zimmerman, the man that was carrying a gun and shot Trayvon Martin in self defense, was a part of was overseen by the homeowners association.  That HOA was sued by Trayvon’s family for wrongful death and other claims and ended up settling for an undisclosed amount of money that is thought to be over $1,000,000.

When something like the Trayvon Martin death occurs, claims are filed against anybody who could possibly have any culpability, which will include the HOA when the issue even remotely involves or implicates the HOA.  So, what’s an HOA to do?   Should your condominium or HOA establish, or continue, a neighborhood watch?  What are the risks and how do you mitigate them?  HOA insurance specialist Béat Koszinowski answers these questions in his recent article here: Neighborhood Watch Groups in Your HOA.

The single biggest factor as to whether a watch group will create more issues and liability for an HOA isn’t whether the neighborhood watch volunteer carries a gun or other weapon, because if it gets to the point where a weapon could be used, the HOA will likely be sued either way.  For instance, if the volunteer ends up being beaten to death and was not allowed to carry a weapon by the HOA, the HOA will likely be sued by the family of the volunteer (whether rightfully or not).  Instead, it’s when volunteers go beyond simply reporting suspicious activity and instead take law enforcement into their own hands that the issues and liability open up like floodgates.  As Béat points out, “watch groups can do more harm than good when group volunteers go beyond contacting the local police department and act as the HOA’s own law enforcement.  Watch groups that engage perpetrators, use physical force or carry weapons put your HOA at risk for a lawsuit.”

Béat also points out, and I agree, that, ideally, to reduce liability, a neighborhood watch program should have no official connection to the HOA and the board should have no involvement in the creation or regulation of the watch group.  But if your HOA decides to start a watch group, it’s imperative that the HOA:

  1. establish specific written guidelines and policy for the group stating what the volunteer should and should not do, what the volunteer’s duties are exactly, and a procedure when suspicious activity is encountered,
  2. contact the local police department to receive watch group training, and
  3. check that its insurance covers the watch group.

While neighborhood watch groups can serve an important and effective purpose, they can also create more issues and liability.  An HOA board should contact its association insurance professional and attorney and follow certain risk mitigation steps if it operates, or plans to institute, a neighborhood watch group.

It’s Spring, Time to Ward Against Water Issues

April 1, 2013

By Curtis G. Kimble.

It may be April Fools Day, but it’s no joke that every year around this time insurance companies see many flood issues and claims from homeowner associations.  What’s worse, flood insurance is expensive and the typical HOA insurance policy does not provide coverage for flood and surface water claims.  So, how do you protect yourself and your community?  An HOA insurance specialist Béat Koszinowski of the Buckner Company shared some loss prevention tips with us that I’m passing along:

1.   Problem:  Irrigation system floods.

  • Broken pipes, leaks and breaks that occur during the first few weeks of operation
  • Malfunctioning or incorrect setting of the system causing overwatering
  • General overwatering of certain areas or watering while the ground is still frozen (this can also cause slip and fall liability claims)
  • Runoff due to changes in landscaping, etc.

Solution:  Check the entire irrigation system thoroughly and inspect all areas where the sprinkler system operates at the start of the season and on a regular basis.  Do not activate the system without checking it and making sure it operates properly. The average amount of this type of claim is between $15,000 and $25,000 and preventing this type of issue is a good investment in your property.

2.   Problem:  Landscaping, gutter and roof water runoff.

  • Settling, sinking, expanding or shifting of the ground or landscaping features
  • Ground cover or other landscaping features that are causing water to accumulate near the home and or penetrate the building envelope via the surface or below the ground.
  • Water runoff near buildings that is not properly channeled away

Solution: Check the entire HOA grounds for problem areas and or hire a skilled contractor to check your landscaping, building envelope and other important areas.  This helps to ensure your property and investment is protected.

Tip:  Board members or homeowners should notify the manager or maintenance crew if they notice areas of concern. Don’t assume they know. It is important to understand that most insurance companies will not pay for damages that cause a claim due to wear and tear, rot, mold, latent defect, rust and corrosion, faulty workmanship, faulty design and inherent vice. Inherent vice means losses caused by a quality in a property that causes it to damage itself or destroy itself.

Hopefully, these tips will help keep this important issue in everyone’s mind at this time of year and will help avoid problems that are worse than any April Fools joke.

Bills That Passed This Legislative Session and How to Comply

March 26, 2013

By Curtis G. Kimble.

The 2013 Utah General Legislative Session has ended and the bills that passed have been finalized in their enrolled form to await signature by the Governor. Which bills passed and which ones didn’t?

Only three of the six bills I discussed in my last post ended up passing the House and the Senate.  They all affect condo and non-condo HOAs in more or less the same way.

SB 64 Homeowner Association Reserve Account Amendments

As I noted before, this law will give the decision back to the board of whether and how to fund a reserve (as most CC&Rs require, and where the decision makers will be subject to fiduciary duties).  Specifically, the law:

  • Specifies that a reserve analysis must include certain things, such as a list of the maintenance items that will require reserve funds,  their remaining useful life, and their cost to repair or replace; an estimate of the contribution to a reserve fund necessary to meet the cost to repair or replace each component; and a reserve funding plan that recommends how the association may fund the annual contribution.
  • Requires an association to provide a summary each year of the reserve analysis to each owner (not just to those at the annual meeting) and a complete copy of the reserve analysis, including any updates, to an owner upon request.
  • Requires the board to include a reserve fund line item in the annual budget in the amount the board determines based on the reserve analysis and based on what “the board determines is prudent under the circumstances” (there is no requirement that the amount be higher than 1$ or even 0$ – not that I recommend that).  This is important because it is almost inevitable that the association will not agree with the amounts recommended by a professional reserve study.  Almost every association feels that their reserve professional has recommended that they set aside more than they really need.  This law allows flexibility so the board can fund reserves in the amount they deem is prudent with all things considered.   However, if the CC&Rs requires a certain level of reserve funding, the CC&Rs will control; this law does not authorize a board to fund reserves lower than what their governing documents might require.
  • Allows the homeowners to veto the reserve fund contribution if they don’t like it (whether too low or too high) by a 51% vote of the owners at a special meeting called within 45 days of when the annual budget is adopted.

Additionally, the law provides for specific enforcement procedures if the association fails to comply with certain of its provisions.  An owner can sue for a court order compelling the association to comply, for $500 or the owner’s actual damages, whichever is greater, other available remedies, and costs and attorney fees.

HB 101 Homeowners Association Amendments

This revision to the statute requiring all HOAs to register as an HOA with the state of Utah merely restates what it said before in a little different way. There is no change in the law’s requirements or implications.

SB 90 Condominium and Community Association Amendments

  • With this new law, an association cannot charge a fee for review and approval of plans for construction or improvement of a unit or lot that exceeds the actual cost of reviewing and approving the plans.
  • The law clarifies what happens when there’s a loss to a unit that initially doesn’t look like it will exceed the association’s deductible but then the loss ends up costing more than the amount of the deductible.  The law says that if the board determines that a covered loss is likely not to exceed the deductible, and until it becomes apparent the loss exceeds the deductible and a claim is submitted to the association’s insurer, the unit owner’s policy is the primary policy for coverage.  So, the unit owner’s policy is primary, but only until it becomes clear that the damage will cost more to repair than the deductible.
  • For commercial condominium projects ( projects with no residential units), the insurance requirements of Utah Code 57-8-43 no longer apply for insurance policies issued or renewed after July 1, 2013.  For mixed-use projects (projects with both commercial and residential units), a commercial unit, including any fixture, improvement or betterment therein and including appurtenant limited common area, does not have to be insured by the association, unless the CC&Rs require it.
  • The Community Association Act is now applicable to any association with at least one residential lot (not just associations made up entirely of residential lots).  So, it will generally apply to mixed-use (commercial/residential) projects (except the insurance provisions were amended to not be applicable to commercial lots, the same as with condominium projects).

The following changes will not take effect until July 1, 2014:

  • The law will now authorize not only condos, but non-condo HOAs as well to access a unit or lot as necessary for maintenance, repair or replacement of common areas or for making an emergency repair, provided that 24 hours’ notice is given, or reasonable notice is given (or attempted) in an emergency.  The association is liable to repair damage it causes to the common areas or to a lot or unit the association uses to access common areas, and it must repair that damage within a reasonable time, except in developer-controlled community associations (where many of the laws in the Community Association Act don’t apply, thanks to legislators favoring developers much more than homeowners (contact your legislator and let them know favoring developers over homeowners isn’t acceptable!)).
  • The law authorizes a unit or lot owner to remove or alter a wall between two units or lots if the owner owns both units/lots, even if the wall is common area, unless restricted by the CC&Rs (most condo CC&Rs do, in fact, restrict this) and unless it would impair the structural integrity, mechanical systems or support of the building, the common areas, or a unit/lot.  The board may require the owner to submit, at the owner’s expense, an engineer’s or architect’s opinion stating that a proposed change will not impair the structural integrity or mechanical systems of the building or either lot, reduce the support or integrity of common areas, or compromise structural components.  The board may require the owner to pay all of the association’s legal and other expenses related to the proposed alteration, as well.  The removal or alteration of the wall does not change the assessment or voting right attributable to either of the units/lots (unless the CC&Rs say so).
  • The law also contains a procedure for the unlikely event that two or more associations want to consolidate or merge together into one association.

While these bills are not actually law until signed by the Governor, there is little chance that the Governor will veto any of them (I will, of course, let you know if he does).   (UPDATE: Each of these bills were signed by the Governor and are now law.)   The laws take effect May 14, 2013, except the ones mentioned above that don’t take effect until July 1, 2014.

As always, please note that none of the above is legal advice and should not be relied on as statements of the requirements of the law applicable to any particular scenario or circumstance.  The statutes themselves should be referred to for their exact and full contents and an attorney consulted with for application of any relevant law to a particular set of facts.

Who Pays the Association’s Insurance Deductible in This Hypothetical?

November 16, 2012

By Curtis G. Kimble.

I attended the fourth annual Utah Community Association Insurance Forum Wednesday which is put on by leading experts in community association insurance.  We discussed the new 2011 insurance laws that apply to HOAs, and which are especially applicable to condominiums and attached housing communities, such as townhomes.

We discussed some hypothetical situations and how the new 2011 insurance laws come into play to determine the outcome.  In one situation, an association with attached townhomes, where each owner owns their own lot and the home on the lot, has CC&Rs recorded in 2003 that do not require each owner to insure their dwelling and lot.  A windstorm damages roofs and siding on three contiguous, attached homes.  The total damage is $9,000.  The association deductible is $10,000.  Who pays the $9,000?  How is it figured out?

The first question is whether the new insurance laws apply to this association.  The new laws don’t apply to an attached dwelling project with CC&Rs recorded before January 1, 2012 if the CC&Rs require each lot owner to insure the lot owner’s dwelling (unless the association specifically amends their CC&Rs to subject the association to the new laws).  So, the new laws apply to our association.

Because the new laws apply, the association is required, regardless of what the CC&Rs say, to insure the individually-owned homes under a master policy, and if a home is damaged, the owner of the home (or the owner’s insurance) is responsible for paying the deductible and the association is responsible for repairing the damage within a reasonable amount of time.  If the damage isn’t likely to exceed the deductible amount, as determined by the board exercising their business judgment, the association doesn’t have to tender the claim to their insurer.

So, who pays what where three homes (and no common area) were damaged?

Assuming the association had already given notice to all owners of the amount of the association policy deductible, the law requires that if a lot (including the home) is damaged as part of a covered loss, the owner of the lot is responsible for “an amount calculated by applying the lot damage percentage for that lot to the amount of the deductible under the association’s property insurance policy.”  In other words, the deductible is divided between the affected owners according to the cost of repairing the damage to the respective lots.  So, if homeowner A’s lot received 20% of the damage, homeowner B received 30%, and C received 50%, then A is responsible for $1,800, B for $2,700 and C for $4,500.

Another hypothetical.

A board receives a letter from an attorney representing a homeowner who claims the board has improperly levied a special assessment against the homeowners.  The attorney asks the board to contact him to discuss the matter further.

Should the board provide notice of this to their insurance carrier?

Most boards are afraid that doing so will adversely affect their premiums, causing them to go up.  However, D&O insurance is very different from property insurance.  Claims on the property insurance coverage very well could increase your premiums, even if no money is paid out and they turn out to be a non-issue.  But that won’t happen with D&O coverage.  If the claim doesn’t go anywhere, it will not affect your premiums.  Underwriters do not use that information when they underwrite D&O coverage.

Additionally, D&O is “claims made” insurance, which means that as soon as you have notice of something that could be a claim, you should notify your carrier as soon as possible or you risk losing coverage for part or all of the claim.

Fidelity Insurance – Is Yours Adequate?

September 6, 2012

By Curtis G. Kimble.

What would your association do if you discovered tomorrow that the association’s bank/investment accounts had been completely emptied by a board member and it was obvious that the association would not be getting the money back?

Levying an immediate and large special assessment wouldn’t solve all the problems this situation would create and is an incredibly hard pill to swallow for homeowners in this circumstance.  The association’s fidelity insurance is the key source of hope here.  Fidelity coverage is often called “employee dishonesty” coverage, and that phrase sums up its purpose quite well.  It protects against theft or embezzlement by employees or officers of a company.

However, one important issue could prevent the insurance company from paying out under your policy – volunteers.

Utah law now has detailed insurance requirements that apply to policies issued to Utah homeowners associations (HOAs).  These laws specify the property and liability coverage required for an HOA’s master policy.  But they do not require or mention fidelity coverage.

So, very often, the coverage of an association’s fidelity insurance policy or bond will simply mirror the fidelity coverage required by the association’s CC&Rs.  This is because insurance companies often make coverage determinations based on what coverage the CC&Rs require.  However, many CC&Rs were not written with an adequate understanding of fidelity coverage in an HOA context, so they simply require fidelity coverage in the same form as any company or corporation would carry.

The problem with that is that typical fidelity coverage for a company only covers paid employees, not volunteers.  This is a square hole and round peg situation.  HOAs are not typical companies or corporations.  HOAs are generally served primarily by volunteer officers and directors, and their fidelity coverage needs to reflect that.

So, CC&Rs have to be carefully written to require coverage of volunteer board members and officers and any other volunteers handling the association’s money.  Additionally, a board should be careful to ensure that their policy for fidelity coverage includes an endorsement modifying the coverage to include volunteers.

If your association is professionally managed, it is important to understand that a property management company’s own fidelity coverage does not necessarily protect a client homeowners association, it protects the management company itself from loss of its own funds.  So, the association’s fidelity coverage should also include coverage for the property manager handling association funds.  This is also typically done through an endorsement (which is like an addition or addendum) to the original policy.

Condominiums maintaining or applying for FHA certification (so the units can be purchased with FHA-backed loans, which account for a majority of purchases today) should be aware that FHA requires an association to carry fidelity coverage in an amount no less than three months aggregate assessments plus reserves.  That amount of coverage is good practice for any association.  Fannie Mae and Freddie Mac also have requirements for fidelity coverage.

Finally, it’s also important not to confuse fidelity coverage with director’s and officer’s (D&O) insurance, which protects the association when it is sued for the “wrongful acts” and decisions of its board of directors or officers, and which is also crucial for every association.

Can the Insurance Industry Put Profits Above Good Faith Claims Handling?

January 9, 2012

By Curtis G. Kimble.

In Utah, an insurance company has an obligation to act in good faith in all aspects of claim handling.  “The implied obligation of good faith performance contemplates, at the very least, that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim.  …  The overriding requirement imposed by the implied covenant is that insurers act reasonably, as an objective matter, in dealing with their insureds.” (Billings v. Union Bankers Ins. Co., 918 P.2d 461 (Utah 1996)).

The consequences to an insurer breaching these obligations can be significant.  As the court in the Billings case said, an “insurer who breaches the implied covenant by unreasonably denying the insured the benefits bargained for may be held liable for broad consequential damages foreseeably caused by the breach, damages which might include those for mental anguish” and may include attorney fees incurred as a result of the breach.

On the other hand, when an insured’s claim is fairly disputed by the insurer and it is truly debatable as to whether the claim is covered under the policy, the insurer is entitled to debate it (deny the claim) and cannot be held to have breached the covenant of good faith if it chooses to do so (even if the claim is denied and then later found by a court to be a properly covered claim).  An insurer who has a legitimate dispute with an insured over a claim must act reasonably and in good faith, but they are entitled to have the dispute resolved before having to pay the claim.

The problem arises when the insurers don’t act reasonably, promptly, fairly or in good faith.  A problem that some would say has increased dramatically since the mid-90’s.

As this article explains, “a new system to boost the bottom line” took over the insurance industry in the mid-90’s, where, rather than adjusting claims the traditional way, which gave claims managers wide latitude to serve customers reasonably and fairly, “insurers embraced a computer-driven method that produced purposefully low offers to claimants.”

Those who took the low-ball offers received prompt service, while those who didn’t had their claims purposefully delayed with the strategy of making such claims so expensive and time-consuming that people would just give up.

This strategy “put profits above all,” and has apparently worked in that regard. Allstate made $4.6 billion in profits in 2007, double its earnings in the 1990s, an increase which came through “driving down loss values to an average of 30 percent below the actual market cost.” In other words, the strategy has been to pay dramatically less on claims. A strategy that, in practice, is in direct opposition to the legal obligation of insurers to diligently investigate the facts to enable it to determine whether a claim is valid, to fairly evaluate the claim, and to act reasonably in rejecting or settling the claim.

Again, the article can be found here:  Insurance Claim Delays Deliver Massive Profits To Industry By Shorting Customers.

All consumers who buy insurance, HOAs and homeowners included, should take note of these issues and be prepared to push back when an insurer breaches its obligation to diligently investigate, fairly evaluate, and act reasonably and in good faith in any aspect of claim handling.

Never Happen in Your HOA? Think Again. Risk Management Is More Important Than Ever.

September 30, 2011

Ignorance is not bliss.  A recent Indiana case highlights the need for homeowners associations to diligently seek out and limit their liabilities.  In March 2011, a jury found an Indiana homeowners association 100% at fault for the drowning death of one child and the personal injury of two other children, resulting in a $30.7 million judgment against the Association.

In March, 2001, three boys were playing on property owned by a homeowners association in Indiana. The property, which contains a lake created by an earthen dam, is open for use by the homeowners.  While there, the boys walked onto the ice near the dam’s overflow crib when one fell through the ice. The other two attempted to aid their brother, but they both fell through the ice as well. One boy drowned.

The Association was sued for negligence.  The plaintiffs claimed the overflow crib created currents that dangerously weakened the ice near the crib from below. They claimed this created a dangerous condition the plaintiffs could not reasonably have had knowledge of, as the ice was visibly safe for walking on at all other areas of the lake.

The plaintiffs claimed that the Association was aware of this condition, but that it failed to place warning signs or restrict access to the area in violation of standard dam safety practices. They also argued that the Association should have anticipated an accident like this would occur, but that it failed to provide safety life preservers, rope or any other safety equipment near the crib.

As Joel Meskin Esq., CIRMS and Amanda L. Krenson, Esq., point out, this case is a wakeup call for all homeowners associations.  Their article reminds us of the many benefits of comprehensive reserve study: “A reserve study is a method of understanding  the HOA’s exposures to risk and liability, whether it be a lake with latent dangers, an unfenced pool, sick trees [that could fall over or with brittle branches ready to break] or the like.  Very often, counsel or management companies, without having a baseline to work from, may not be able to help the association comply with safety issues.  Many dangers and exposures may arise from elements of the association that need repair.  Again, these are items that are monitored in a reserve study.”

Once identified, any dangerous conditions on a property should have warning signs or fences.  The CC&Rs should also contain notice and warning of any such conditions.

We can mutter and disagree with this jury all we want or try to rationalize the distinction between that case and our association, but nothing will change the fact that liability faces HOAs from all directions and a concerted and focused effort is needed to limit those liabilities or risk facing the consequences.

Curtis G. Kimble

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