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As seen on the Santa Clarita Valley Signal:
Brad Watson: Battling confusion about HOAs and earthquake insurance
Written by Brad Watson
I am a board member for my association and recently read a newspaper article that said if our board does not approve an association earthquake insurance policy, that not only can we be held personally liable, but that residents in our community will be unable to obtain individual property insurance for their homes.
Both our board members and our residents are scared after reading this article. Obtaining earthquake insurance will increase our monthly assessments by almost 40 percent!
Can I actually be held personally liable for board decisions and will residents be unable to obtain individual insurance policies if the board does not vote to purchase association earthquake insurance?
Answer: I have had several association board members reach out to me recently regarding inaccurate or misleading articles related to association earthquake insurance, so let me try to help clarify some falsehoods being perpetuated by those who are not necessarily experts in the association industry.
First and foremost, you and your fellow board members will likely never be held personally liable for making a reasonable business decision whether to purchase earthquake insurance for the association.
As long as the board obtains and vets earthquake insurance quotes, consults with experts, and makes an educated business decision, you and your fellow board members are meeting your fiduciary duty.
As such, you will be protected by the business judgment rule and covered under the association’s directors and officers insurance policy.
Oftentimes I read articles on association earthquake insurance and the authors do not understand civil codes governing California homeowners associations.
For instance, if purchasing association earthquake coverage would require an assessment increase in excess of 20 percent, such an action would require an affirmative vote of at least a majority of the membership. The association’s Board of Directors does not even have the legal authority to unilaterally make such a decision.
In your specific situation, given that purchasing earthquake coverage would increase your association’s assessments by nearly 40 percent, the decision to purchase earthquake coverage requires membership approval.
The association would be required to hold a special election and obtain approval of the owners before purchasing such an insurance policy. How could a Board of Directors legitimately be held liable for a decision that is outside of board members’ authority?
This notion that associations without earthquake insurance coverage make it difficult for owners to obtain individual insurance policies is completely unfounded.
I have been in the association management industry for 15 years, and my management firm works with nearly 100 associations throughout Los Angeles and Ventura counties, from condominium communities to single-family home developments, and I have never heard of such an issue.
That said, because I am not an insurance expert, I reached out to industry expert Scott Litman of Scott Litman Insurance Agency, who specializes in homeowners association insurance, and more specifically association earthquake insurance.
Mr. Litman confirmed: “In my 24 years of specializing in HOA insurance, no one has ever been denied individual property insurance due to an association not having earthquake insurance.”
Association board members are well protected from personal liability by California case law. So long as board members follow the business judgment rule, acting with a duty of care and making reasonable decisions as a prudent person would, there is no need to worry about personal liability exposure. Should there be a claim filed, your directors and officers insurance will cover you.
To learn more about association earthquake insurance or mitigating association and board member liability, please feel free to contact me for referrals to leading industry experts who would be happy to answer questions and advise your board.
Brad Watson, CMCA, AMS, is president of Property Management Professionals LLC in Los Angeles, an accredited association management company. This column contains general information about HOA practices and does not represent the specific CC&Rs of each HOA or replace the advice of an attorney.