California Business Insurance

HOMEOWNER ASSOCIATION INSURANCE TIP OF THE WEEK – THE POWER OF RESERVE STUDIES

Do you have an Elephant in the Living Room?  The Power of Reserves Studies for Community Associations 

Do you have an elephant in the living room? That is a way to describe something that everyone knows about, but nobody talks about because it is too awkward. Community Association budgets, and particularly Reserve contributions and disclosures, are such a thing. Although  most of the governing documents for the over 300,000 associations throughout the country and many of the 50 states require that community associations have reserve studies,  the reality is that most do not, or if they do they are not regularly updated, and if they do, they are not properly funded. 

Community Associations are created because the members have chosen to live in a community where they have a common interest with the other members.  The basic notion is that the common interest creates enhanced value to the community by providing common amenities and services or a protection of a certain lifestyle.  Inherent in this common interest is the need to manage and maintain this enhanced value.  This process is the foundation of a community association’s management team – and is the board of directors or trustees’ fiduciary obligation. 

The Reserve Study is potentially the greatest tool to comply with this fiduciary obligation.  Many of the challenges for an association and complaints for a board arise from the fact that the board does not have its finger firmly on the pulse of the physical aspects and assets of the association.  Two key excuses raised by associations are that they “cannot afford a reserve study” or it is too late.  Both of these are week excuses.  The board of directors may be breaching its fiduciary obligation by taking no action.  As we all know, knowledge is power and a reserve study gives the board knowledge that could lead to the power to protect member investments.   

Some associations have budgets designed to create problems with income less than expenses. Even more associations skimp on their Reserve contributions (normally afraid to increase assessments).  But Reserve expenses typically average out to be 15-40% of an association’s total budget. If the contributions aren’t going in slow and steady on a regular and long term basis, than what results is a big community association nightmare. There will be special assessments. As we all know, the special assessment may be limited to what is allowed by the governing documents and/or state regulation, forcing special assessments going on for years.  The result is the requirement to disclose to future purchasers, which will have a direct impact on home values. 

It’s just expenses higher than income, all over again. Many associations don’t know their Reserve status, going years without evaluating their Reserve needs, calculating the size of Reserve contributions they should be making, and reporting to the owners the state of their Reserve Fund. The result? Budgets are based on wishful thinking, the owners are confused and uninformed, and due to lack of cash there are instances of deferred maintenance or special assessments. Fortunately, it doesn’t have to be that way. 

Imagine an association where budgets are balanced (income matches expenses) and distributed to the owners each year. Imagine an association where the Reserve contributions are re-evaluated each year. Imagine an association where every year the Board communicates to their members how they are dealing with the reality of funding future Reserve expenses. Imagine an association where the Board communicates the relative size and strength (Percent Funded) of the Reserve Fund to the members each year.

Would regular ongoing assessments be higher? Probably, but remember that Reserve contributions are typically less than a premium coffee, per unit, per day. Would there be future special assessments? Less likely. Would owners be surprised by the financial status of the association? No. Would Real Estate values be maximized? Most likely. Would owner enjoyment of the association be maximized? Most likely.  What is further accomplished is the board and the association have created a very strong risk management tool which should have an impact on insurance costs and may very well eliminate a number of different types of claims and will result in less complaints by association members. 

Running your association in a fiscally responsible manner is not as hard as it would seem, based on the high number of associations running themselves into financial trouble! Simple management tools like a “budget to actual” report throughout the year helps a Board know the truth about income and expenses at the association. New tools periodically arrive on the market that make preparing budgets and disclosures easier. Association websites are assisting and sometimes replacing mailings and newsletters in keeping members regularly informed. Novel free web-applications like QuickReserves place remarkably easy and powerful Reserve budgeting and disclosure tools into the hands of board members and managers everywhere. It is simply not that hard to be fiscally responsible and earn the rewards of shorter board meetings, less (threat of) litigation, and higher property values. 

It boils down to being your community. You get to choose how it is run. You can choose to ignore some of the big issues like balanced operating and Reserve budgets, or you can choose fiscally responsible behaviors that bring peace and order. Continuing down the path of wishful thinking and hiding information from the owners leads to special assessments, disappointment and disarray. 

 So is there an elephant in your living room? Start your association on the path to a better future by annually preparing a balanced Operating and Reserve budget, and making clear annual disclosures to the members. Being financially responsible is not that hard to do. 

**The information contained in this HOA Tip of the Week is for information purposes only and is not specific legal advice or a substitute for specific legal counsel.  Please note that this specific tip was “Reprinted from article by Joel Meskin, Esq., CIRMS, V.P. Community Association Products, McGowan & Co., Inc., and Robert Nordlund, President, www.QuickReserves.com”  Readers should not act upon this information without seeking professional counsel.  If you do not want us to contact you by email, we will gladly unsubscribe you from our online community by replying to this email with the word “remove” in the subject line**

Homeowner Association Tip of the Week – Annual Disclosures

ANNUAL DISCLOSURES   

Last week we sent out a tip on information for upcoming budgets especially for Associations with calendar fiscal years.  Budget time also means disclosure time so we have included some tips below to assist in making this Civil Code requirement more “user friendly” for the unit owners. This can also be a great opportunity to better inform the unit owners about what the master policy covers and does not cover for the unit owner. 

 As you know, the Civil code on disclosures offers very little real information to the unit owner other than the name of the carrier, limit of coverage, amount of deductible and expiration date.  On all of our renewals and for the benefit of disclosures we offer our “Dear Homeowner” brochure.  This is a single page produced in such a fashion to be “user friendly” to allow unit owners of that particular Association to know what the Master Insurance will and won’t due, what the deductible amount is and when the unit owner may be responsible for the deductible and how to insure personally against that exposure.  We recommend all disclosures have such information as it helps to alleviate disagreements prior to a loss rather than after one between the Board, management and the unit owner. 

Hope the above is of assistance.  On any Association we insure for you, contact us if you need a Dear Homeowner brochure when requesting an updated disclosure.  As always, with all the competitive markets we have and our 28 years+ experience, we always look forward to assisting in providing competitive proposals for you clients we don’t currently insure. 

 **The information contained in this HOA Tip of the Week is for information purposes only and is not specific legal advice or a substitute for specific legal counsel.   Readers should not act upon this information without seeking professional counsel

Homeowner Association Tip of the Week – Workers Compensation Coverage                                                

     ASSOCIATION WORKERS COMPENSATION COVERAGE

Most Associations (like the one where I serve on the Board) have no direct employees, so I am often asked why we would recommend workers compensation to these Associations.  There are two reasons.

First, per Labor Code 2750.5, it states that if any entity (Association) contracts with a third party to perform a job that requires a contractors license and workers compensation coverage and if an employee of this contractor is injured and if at the time of the injury the contractor was either unlicensed or failed to carry workers compensation coverage, than that contractors employee may be considered an employee of the Association.  Remember that the Associations general liability policy will not provide coverage for this type of loss as employment related injuries are not covered as this loss is supposed to be covered under workers compensation.

The second reason for suggesting this coverage is that as a result of a case such as above (Heiman v. Workers Compensation Appeals Board) there was a loss per above and the Appeals Board assigned 1/3 of the loss to the Management Company.

Accordingly, all Management Companies are recommended to amend their contracts to require that all of their clients provide workers compensation coverage for this potential exposure.

Note, this coverage is readily available and costs only $603.00 annually.

Please call us with any questions or if you’d like us to order this coverage for you?

 **The information contained in this HOA Tip of the Week is for information purposes only and is not specific legal advice or a substitute for specific legal counsel.   Readers should not act upon this information without seeking professional counsel

 Homeowner Association Tip of the Week – Gadlflies & Scorpions

GADFLIES & SCORPIONS

QUESTION: We have a homeowner that is a real pill. She has been harassing boards for 5 years now with unending demand letters, e-mails, and lawsuit threats. The board can NEVER do anything right and she tells them so at open meetings and likes to show off her knowledge with “stump the board questions.” She monopolizes meetings with “simple 5-part questions” to the point where they are unpleasant to attend. A lot of owners don’t get to ask their questions because of her.

What makes matters worse is that board and management spend so much of their time trying to appease her unending demands that it is costing the rest of us money. Plus, she has a lawyer who sends letters whenever she is not satisfied. Do you have any advice on how to deal with an owner like this?

ANSWER: There are two kinds of owners who continually challenge boards–gadflies and scorpions. Gadflies can be good for boards if they gently push directors to take care of business, enforce the CC&Rs and comply with laws. They respectfully nudge boards. Even though directors get irritated with gadflies, the association ultimately benefits.

Scorpions are neither gentle nor respectful. They jump on the smallest mistakes with glee and sting their victims. They disrupt meetings and interfere with management. They are never satisfied because they have no interest in being satisfied; it’s not in their nature. Their never-ending threats and challenges drive up legal expenses, bog down management, and scare away volunteers. It sounds like you have a scorpion. I wish there were a simple way deal with them but there isn’t. As long as a scorpion lives in your association you will need to increase your budget for legal expenses. 

 **The information contained in this HOA Tip of the Week is for information purposes only and is not specific legal advice or a substitute for specific legal counsel.  Please note that this specific tip was “Reprinted from Davis-Stirling.com by Adams Kessler PLC.”  Readers should not act upon this information without seeking professional counsel.

Important Message for Our Association Clients Regarding Worker’s Compensation Insurance Coverage

As you may know, it has been a common suggestion for many years that associations may want to consider carrying worker’s compensation coverage.  This is not necessarily to provide worker’s compensation coverage for board members or committee members.  The California Labor Code 3363.7 seems to clearly indicate that volunteers of a non-profit private corporation are not considered employees.   The reason that many of the associations were concerned about carrying worker’s compensation coverage was the concern that injured employees of an unlicensed/uninsured sub-contractor may become the responsibility of the Association.  While this seemed to be a far-fetched possibility, attorneys, property managers and our own firm have recommended from time to time that an association should consider this as a possibility and make their own decisions as to whether or not worker’s compensation insurance should be acquired. 

 Just recently a case involving one of our associations has come to mind and it has caused us to shift our attitude from simply recommending that associations consider carrying worker’s compensation to strongly suggesting that no association should be without it.  The gist of the lawsuit is that a licensed and insured landscape contractor was asked to go up into a tree to remove a tree house that had been placed there.  In taking down the tree house, one of the employees on the ground was injured and rendered a partial quadriplegic.  The worker’s compensation carrier for the licensed and insured landscape gardener began to make payments; however, they have subsequently filed a lawsuit against the association and the management company for subrogation of their worker’s compensation expense. 

The basis for their suit is Labor Code 2750.5

The Insurance Company is claiming that the act of removing the tree house was an act of demolition for which this landscape contractor was not licensed, and therefore, the association and/or the management company may be responsible for the injuries to this employee.   Most legal scholars, and ourselves, believe this a “stretch” of the Labor provision, as the landscape gardener was a licensed and insured contractor.  Secondly, there will be a debate; I am sure, as to whether or not the removal of some plywood from a tree constitutes demolition rather than a landscape function.  I am sure that the removal of a dead tree branch from the top of a tree would have been considered landscaping instead of demolition.

The problem with this recent lawsuit isn’t that it is a real stretch of the Labor Code, but rather that an association and Management Company have now been sued.  In this case, the general liability carrier denied liability coverage arising out of worker’s compensation related injuries or occupational injuries; accordingly, there was no liability defense coverage for the association.  That being be the case, the association’s basic protection would have been provided by a minimum premium worker’s compensation policy.   In this particular instance, the association mentioned in this situation will now be fully responsible without the aid of insurance for all defense costs for this lawsuit and if found responsible, will be required to put forward the workers compensation benefits for this severely injured “employee.” 

Accordingly, without a workers compensation policy, the association could conceivably incur hundreds of thousands of dollars in defense costs, let alone, the possibility of having to actually pay compensation benefits if found responsible under this Labor Code provision.

Outside of the above example, please note that as we have indicated to all of our clients over the years, there is now a HUGE liability placed upon associations and property managers, if they hire an unlicensed and uninsured contractor.  In the case involving the association above, if the landscape contractor had been unlicensed and uninsured, there would be no question that some liability could be imposed upon either the association or the management company for injuries rendered to an employee of the unlicensed and uninsured contractor. 

I strongly recommend that if the Board of Directors has any questions, they may wish to review this letter and the enclosed material with their association attorney.   If the Association does not currently carry worker’s compensation insurance, they can obtain an inexpensive policy from Armstrong/Robitaille/Robco Business and Insurance Solutions for an annual cost of between $524 and $603.  

Please do not hesitate to call if you have any questions or concerns on the enclosed.

 **The information contained in these HOA Tips of the Week is for information purposes only and is not specific legal advice or a substitute for specific legal counsel.   Readers should not act upon this information without seeking professional counsel.