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Articles Posted in Insurance

*New Legislation

hoa-financial-protection

AB 2912, passed in 2018, provided welcome protections to homeowners in HOA’s from fraudulent activities by those entrusted with managing an HOA’s finances. AB 2912’s protections included: 1) requiring Associations to secure fidelity bond insurance in an amount equal to or exceeding current reserves, plus three months of assessments; 2) requiring a monthly review of financial statements rather than quarterly; and 3) prohibiting electronic transfers of funds without board approval. However, certain provisions of AB 2912 were unclear.

To settle any confusion, AB 1101 was passed by the California Legislature in September of 2021.  Effective January 1, 2022, Civil Code Sections 5380, 5502, and 5806, will be amended in order to clarify existing law by:

1) Specifying that HOA funds shall be deposited into accounts insured by Federal Deposit Insurance Corporation or the National Credit Union Administration Insurance Fund. This ensures that HOA funds are properly preserved and not invested in any high-risk investments or stocks.

2) Establishing clear limits before board approval is required for the transfer of HOA funds. While AB 2912 provided a process by which HOA’s should approve major expenses, the process for calculating those limits was somewhat confusing and was subject to change based on the amount of money on deposit in the HOA’s bank accounts. With AB 1101, the process is clear. For HOA’s with 51 or more units, transfers of $10,000.00 or more must be approved by written approval of the board. For HOA’s with 50 or fewer units, transfers of $5,000 or greater must be approved in writing by the Board.

3) Specifying that the HOA must not just maintain fidelity bond coverage, but that it must now also maintain crime insurance and employee dishonesty coverage, or their equivalent, for dishonest acts of the person or entity and their employees. This coverage would extend not just to the HOA and its directors, officers and employees, but also to managing agents and their employees.

California HOA lawyers Common sense legislation that protects the financial interests of HOA’s, which are unfortunately often targets for embezzlement, is a breath of fresh air. As always, HOA’s with questions regarding new legislation or legal requirements related to insurance or finances, should contact their HOA lawyer.

-Blog post authored by TLG Senior Attorney, Carrie Heieck

denied-stampWhen there is a potential for litigation regarding property damage, your association’s legal counsel will sit down with the Board of Directors to analyze whether the alleged property damage resulted from the association’s negligence in any form.  If the association is put on notice of a potential negligence claim, it is advisable to immediately report the matter to your Commercial General Liability (“CGL”) insurance carrier.

For example, a popular homeowner concern is a common area roof leak.  Upon notice of the alleged leak, it is the association’s duty to follow-up with the homeowner and initiate an investigation within a reasonable timeframe. (Corp. Code §7231(a)).  The association has a duty under its governing documents to determine if the homeowner’s allegation of a common area leak is true or not (i.e., hire a leak detection specialist).  Upon analyzing the specialist’s report, if it is determined there is a leak within the common area, the association is bound by its governing documents to fix it. (Civil Code §4775.)  Note that in the common area roof leak scenario, the association would repair the common area roof, but not any interior or content damage.  Therefore, the homeowner may sue under the CGL policy for any interior repairs and content damage on the basis the association failed to maintain the common area roof.  The association looks to the CGL policy for the insurance company’s duty to defend and coverage of the loss.

Of course, investigations are time consuming and costly as they often require the contracting of knowledgeable experts.  The CGL policy may kick in if there is a clear allegation that the association was negligent in failing to repair and maintain the association’s common areas as required under the governing documents.

However, what if the insurance adjuster denies the claim because it is not covered under the CGL policy or falls under one of the policy’s exclusions?  This is where your legal counsel will dispute the adjuster’s argument and advocate why the CGL policy should cover the claim.

There are key provisions within the CGL policy that your attorney will analyze. “Property damage” and “occurrence” are two of the main terms insurance adjusters will often use to either provide or deny coverage under the Commercial General Liability policy.

“Property damage” usually means:

  1. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use will be deemed to occur at the time of the physical injury that caused it; or
  2. Loss of use of tangible property that is not physically injured. All loss of use will be deemed to occur at the time of the “occurrence” that caused it.

“Occurrence” usually means, “An accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Most CGL policies will cover a potential property damage claim if: (1) the property damage is caused by an occurrence within the covered area; (2) the property damage occurs during the policy period; (3) the association did not have notice of the property damage occurring, in whole or in part; and (4) the claim was reported as soon as possible to the insurance company.  Usually, property damage will be deemed to have been known to have occurred at the earliest time when the association received notice of an occurrence or a claim.  Therefore, it is extremely important to notify the association’s insurance agent, property manager and your legal counsel as soon as possible if there is a potential for a claim.

California HOA lawyers The above is but a snippet of a potential issue an HOA might face.  For more on arguing bad faith claims, please see our blog post on Insurance Coverage Denied & Bad Faith Claims.

-Blog post authored by TLG Attorney, Vivian X. Tran, Esq.

Image-1-1024x654-1*New Case Law

Many homeowners associations (“HOA”) are professionally managed by a managing agent (“Manager”). The Manager is generally tasked with the obligation of carrying out the decisions of the HOA’s Board of Directors (“Board”), as well as day-to-day operations of the HOA. Because they operate as an agent of the HOA, most Managers require the HOA to indemnify them from any claims, damages and losses arising out of Manager’s performance, except to the extent that such claims, damages or losses are the result of Manager’s gross negligence or willful misconduct.  Because of this indemnification obligation, HOAs typically name their Manager as “additional insured” under the HOA’s commercial general liability insurance policy (“CGL Insurance”). If the HOA and Manager are sued, and there is potential coverage under the policy, the insurer will provide a defense for both the HOA and Manager (at the insurer’s expense). However, as one HOA recently learned, it is equally important to name Manager as additional insured under its Directors and Officers insurance policy (“D&O Insurance”).

In Auburn Woods I Homeowners Assn. v. State Farm General Ins. Co., an owner brought a lawsuit against Auburn Woods I Homeowners Association (“Auburn”) and its Manager alleging various improprieties with Auburn’s collection practices. (2020 Cal.App.Unpub.LEXIS 6323, **4-5.) The owner sought declaratory and injunctive relief, as well as an accounting. (Id. at p. *4.) Auburn’s insurance carrier, State Farm General Insurance Company (“State Farm”), denied the tender of the claim concluding that the claims were not covered under both the HOA’s CGL and D&O Insurance. (Id. at p. *7.) Auburn successfully defended against the owner’s lawsuit. (Id. at p. *8.)

Undeterred by Auburn’s success, owner filed a second lawsuit against Auburn and Manager, requesting that the trial court set aside the foreclosure sale that had taken place, as well as other forms of relief. (Id.) Auburn tendered the action to State Farm who denied the claim under Auburn’s CGL Insurance but accepted the claim as to Auburn only under its D&O Insurance; State Farm refused to provide Manager with a defense thereby requiring Auburn to defend Manager at its own expense pursuant to Manager’s full-service management agreement. (Id. at p. *9.) Again, Auburn successfully defended against the owner’s lawsuit. (Id. at p. *10.)

Shortly thereafter, Auburn and Manager filed a lawsuit against State Farm for breach of contract, claiming, among other things, that State Farm had breached the terms of Auburn’s D&O Insurance policy when it refused to provide a defense for Manager. (Id.) The trial court agreed with State Farm’s position, holding that Manager was not named as additional insured therefore relieving State Farm of its obligation to defend. (Id.) The Court of Appeal affirmed the trial court’s decision. In affirming the trial court’s decision, the Court disagreed with Auburn’s argument that the “declarations page…clearly showed [Manager] was an additional insured under [the D&O Insurance],” noting that the “declarations pages did not mention [Manager]” (id. at p. *27); in other words, Manager was not clearly listed as an additional insured under the D&O Insurance.   The Court further disagreed with Auburn’s argument that its insurance agent had a contractual duty to provide Manager with D&O Insurance coverage. (Id. at pp. **27-28.)

California HOA lawyers This case is important because it highlights the need for an HOA to include its Manager as additional insured not only on the HOA’s CGL Insurance, but also its D&O Insurance. HOAs should therefore inquire with their insurance agent to confirm adequate coverage in light of the Court’s holding in Auburn.

-Blog post authored by TLG Attorney, Matthew T. Plaxton, Esq.

Medical-Necessity-Criteria-1080x675-1Community associations buy insurance to obtain coverage in the case it becomes necessary.   The reality is pre-litigation costs are expensive, ranging anywhere from a few thousand to tens of thousands of dollars.  Litigation itself can be even more and this is not including any estimated fees for an appeal.  No association wants to pay out of pocket for all these fees when there is a perfectly good insurance policy bought just for these types of situations.  However, sometimes, an insurance company will want to cut corners to avoid paying out its policy coverage amount.  If an association’s insurance carrier(s) denies coverage, your association’s legal counsel will work together with the insurance adjuster to persuade the insurance carrier to provide coverage, as a bad faith insurance claim would not be beneficial to either parties.

What is a bad faith insurance claim?

The law implies a covenant of good faith and fair dealing in every contract, including insurance policies. (Wilson v. 21st Century Ins. Co. (2007) 42 Cal. 4th 713, 720).    “[T]he essence of the implied covenant of good faith and fair dealing is that [t]he insurer must refrain from doing anything that will injure the right of the insured to receive the benefits of the [insurance] agreement, the terms and conditions of which define the duties and performance to which the insured is entitled.” (Brandwein v. Butler (2013) 218 Cal.App.4th 1485, 1514- 1515.)  Therefore, breach of a specific provision of the insurance contract is not a necessary prerequisite to bringing a bad faith claim. (Carson v. Mercury Ins. Co. (2012) 210 Cal.App.4th 409, 429.)

The implied covenant of good faith and fair dealing is breached where an insurer delays or denies payment of policy benefits unreasonably (i.e., without any reasonable basis for its position) or without proper cause. (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1072-1073; see Wilson, supra, 42 Cal. 4th 713, 723, —“[A]n insurer’s denial of or delay in paying benefits gives rise to tort damages only if the insured shows the denial or delay was unreasonable”; see also Chateau Chamberay Homeowners Ass’n v. Associated Int’l Ins. Co. (2001) 90 Cal.App.4th 335, 346.)

“[F]or a variety of [public] policy reasons, courts have held that breach of the implied covenant (in insurance cases) will provide the basis for an action in tort.” (Foley v. Interactive Data Corp (1988) 47 Cal. 3d 654, 684, 765 P.2d 373.)  Insurance companies know that people buy insurance to obtain peace of mind and security, and that they expect to be paid promptly in the event of loss.  (Egan v. Mut. of Omaha Ins. Co. (1979) 24 Cal. 3d 809, 819, 620 P.2d 141, 145.)  Having sold insurance on this basis, insurers are not permitted to put their interest (in avoiding claims losses) ahead of the insureds’ interests in obtaining the protection for which they bargained. (Id. at p. 819.

California HOA lawyers If the association timely notifies the insurance carrier upon learning of a potential claim that may be covered by their insurance policy, insurance companies must cooperate in the investigation or settlement of the claim or defense against the lawsuit among other things.

-Blog post authored by TLG Attorney, Vivian X. Tran, Esq.

34897866_1544762584740987_rBoth Commercial and Residential Condominium CC&Rs frequently contain insurance language requiring the Association to obtain hazard (fire) insurance and prohibiting Owners from obtaining such coverage.  Condominium Owners on the other hand are limited to obtaining liability insurance.  Similar language was found in the CC&Rs of the condominium association in Western Heritage Insurance Company v. Frances Todd, Inc. No. A152428 (Cal. Ct. App. Mar. 4, 2019).  The insurance language for The East Shore Commercial Condominiums located in Berkeley, California included the following:

Article 13.1 requires the Association to “obtain and maintain a master or blanket policy of all risk property insurance coverage for all Improvements within the Project, insuring against loss or damage by fire or other casualty. … The policy shall name as insured the Association, the Owners and all Mortgagees of record, as their respective interests may appear.” Article 13.3 provides in part, “Any insurance maintained by the Association shall contain [a] ‘waiver of subrogation’ as to the Association, its officers, Owners and the occupants of the Units and Mortgagees. …” Article 13.4 prohibits an individual owner from obtaining fire insurance while allowing an owner to obtain individual liability insurance. Article 3.1 requires that all “occupants and tenants” comply with the CC&Rs.

This language requires the Association’s hazard insurance policy to “name as insured the Association, the Owners and all Mortgagees”, thereby, protecting not only the Association, but also all Owners and Mortgagees as insureds.  Although tenants are not included as an “insured” by these CC&Rs, “occupants” are protected by these CC&Rs from subrogation.

FACTS OF CASE

Defendant, Frances Todd, Inc. was a furniture manufacturer; and a tenant leasing a condominium unit in a commercial condominium complex.   The Defendant (tenant) was negligent in causing the fire which destroyed the unit and surrounding units.  Western Heritage Insurance sued the tenant for indemnity to recover all amounts it paid the Association on the Association’s fire damage claim on a theory of the tenant’s underlying negligence.   The court looked at both the CC&Rs and the lease between the Owner and tenant and concluded the Association’s fire insurance policy also benefited the tenant:

The CC&R’s, applicable to both the Owner and defendants (tenants) as occupants, required the Association to obtain a policy of fire insurance and to name the Owner as an insured on that policy, and precluded any party other than the Association from maintaining fire insurance on the premises. The fire insurance purchased by the Association was intended to be the only fire policy on the property and was for the benefit of the property’s lessees absent language to the contrary in the lease.

The court also noted that:

“In California, courts have held a lessee is not responsible for negligently caused fire damages where the lessor and lessee intended the lessor’s fire policy to be for their mutual benefit.”

Even though the CC&Rs did not specifically state that tenants were to be named as insureds, the Court reasoned that such a conclusion was implied based upon its review of the CC&Rs and the lease between the Owner and the tenant.  The court also noted that the Owner pays for insurance through his or her dues and the tenant contributes to those dues by his/her rent and there is no requirement that a specific amount of dues or rent be allocated for the fire insurance policy.  Therefore, the tenant like an Owner was a beneficiary under the Association’s insurance policy and could not be sued for negligently causing the fire by the Association’s insurance.

Hazard (Fire) Insurance Policies are “no fault” Policies.  They cover Hazards (fires) whether or not they are caused by the Insured’s own negligence.

The fact that the furniture manufacturer tenant was negligent was not an issue in this case.  The only issue was whether they were a beneficiary under the Association’s insurance policy. The court noted that if negligent fires were not covered by fire insurance policies, then insurance companies would be incentivized to litigate the insured’s possible negligence in all fires; and litigation would be never ending:

A fire insurance policy which does not cover fires caused or contributed to by the insured would be an oddity indeed.  Otherwise, few insured fire claims would be paid without controversy and most would require litigation. For that reason we do not deem that a policy ‘for the benefit’ of a lessee excludes coverage for fires caused by his negligence.

How does this case affect the Association’s right to recover Common Area Damages from Owners under Civil Code §6858(b)?

Civil Code §6858 (b) allows the Association to recover damages to Common Areas:

An association has standing to institute, defend, settle, or intervene in litigation, arbitration, mediation, or administrative proceedings in its own name as the real party in interest and without joining with it, the members, in matters pertaining to the following:

(a) Enforcement of the governing documents.

(b) Damage to the common area.

(c) Damage to a separate interest that the association is obligated to maintain or repair.

(d) Damage to a separate interest that arises out of, or is integrally related to, damage to the common area or a separate interest that the association is obligated to maintain or repair.

California HOA lawyers In cases of fires covered by an Association’s hazard insurance policy the Association is responsible to pay the deductible required under the policy.  This case does not affect the Association’s right under Civil Code §6858(b) to sue the tenant or the Owner for that matter for the amounts (including the deductible) not covered by the fire insurance policy. 

-Blog post authored by TLG Attorney, Bruce R. Kermott, Esq.

*New Library Article!

electronic-funds-transfer-help-e1542145539349Assembly Bill 2912 (“AB 2912”) was recently enacted by the California Legislature.  Its changes to the law, which take effect January 1, 2019, are intended “to protect owners in a [HOA] from fraudulent activity by those entrusted with the management of the [HOA’s] finances.”  To that end, AB 2912 (a) significantly increases the financial review requirements of HOA boards of directors, (b) limits the ability for automatic transfer of HOA funds without board approval, and (c) imposes a requirement for the HOA to purchase and maintain a fidelity bond.

In the wake of AB 2912’s passage, questions and concerns have surfaced as to how HOAs and management companies may need to adjust their current operational procedures to comply with the new state of the law.  Our HOA attorneys have authored a new article to address some of those questions and to clarify some of AB 2912’s key components.

hoa laws The article, entitled “AB 2912: New Protections Against the Misuse of HOA Funds,” is available for download from our firm’s library. You can access the article by clicking here.

defibrillatorThe issue of whether or not a homeowners association is required to install and maintain an automated external defibrillator (“AED”) on-site is a question that has not been directly addressed by California courts. As a result, many community members and Board of Directors (“Board”) seek legal guidance and clarity as to the same. In particular, associations that maintain common area facilities and accommodations such as a gym, basketball court, tennis court, or swimming pool, feel the need to maintain an AED due to the rising number of lawsuits that are being filed against businesses and corporate entities for failing to maintain same.

The main cause of action named in these lawsuits is one of negligence, wherein plaintiffs claim the landowner has breached its duty of care by failing to maintain an AED on-site; chief among these cases is Verdugo v. Target Corp. (2014) 59 Cal.4th 312.  In this case, Verdugo, age 49, suffered a sudden cardiac arrest while shopping at Target and died despite the paramedics’ attempts to revive her. There was no AED in the store. Verdugo’s family members filed the suit against Target claiming that it breached its duty of care to its invitees (i.e., business guests) by failing to maintain an AED in the store. However, the Court ruled in favor of Target holding that it did not owe a statutory or common law duty to maintain an AED.

The Court found that Target did not owe a statutory duty of care under California Health and Safety Code (“CHSC”) §1797.196 because it only imposes obligations on an entity or person that maintains an AED; the statute does not require them to maintain same. More importantly, the Court reasoned that while Target owed a reasonable duty of care to provide assistance to a patron in medical need, maintaining an AED exceeded the scope of duty. The Court looked at two factors: (1) the degree of foreseeability that the danger will arise on the business’s premises and (2) the relative burden that providing a particular precautionary measure will place upon the business.

In its evaluation of the two factors, the Court found that there was no reason for Target to foresee that shopping within its premises would increase the risk or cause an invitee to go into cardiac arrest. Secondly, the burden of regularly maintaining an AED (in accordance with all federal and state regulations) and trained personnel on-site was not minor or minimal, outweighing the need for same.

Although Verdugo dealt with a for-profit corporation, it appears to support the position that homeowners associations are not required to maintain an AED. Like Target, a homeowners association does not have any reason to foresee an increased risk of cardiac arrest within its premises from the mere fact an individual—whether it is a homeowner, guest, or tenant—is occupying a unit within the community or visiting.

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hoa-water-damage-claims*New Library Article!

Many condominium associations face problems due to a misunderstanding of how their association’s policies of insurance operate and should be utilized—especially in connection with property damage emanating from broken pipes or plumbing fixtures. Those problems include, among others: (a) denying owners the benefit of the insurance coverage to which they are entitled; (b) having the association assume broader repair responsibilities than what it legally must or should; and (c) failing to adopt policies to allow for losses to be resolved in consistent, equitable and cost-efficient manners.

Our HOA attorneys have authored a new article to address these problems by dispelling some of the confusion at their core. In doing so, we provide recommendations as to how condominium associations should approach water damage claims with the assistance of their HOA legal and insurance professionals. Those recommendations include what we believe every condominium association should adopt as part of their operating rules: a “Water Loss Policy.”

hoa laws The article, entitled “Water Damage Claims in Your Condo Association,” is available for download from our firm’s library. You can access the article by clicking here.

Labor-Unions-Preventive-Practices-1024x683On August 27, 2015, the National Labor Relations Board (“NLRB”) published its decision in the Browning-Ferris Industries of California, Inc. case (“BFI Case”). In that case, Browning-Ferris Industries of California, Inc. (“BFI”) retained the services of Leadpoint Business Services (“LBS”) to provide staff to one of BFI’s recycling facilities. The contract between BFI and LBS recognized, and the parties understood, that the personnel staffed by LBS were the employees of LBS. Nevertheless, given the fact that the contract granted BFI with some control over the employees of LBS, the NLRB concluded that BFI was a joint-employer of LBS thereby obligating BFI to comply with federal labor laws.

In adopting a new legal standard for determining joint-employer status, the NLRB emphasized that such a determination should not be based solely on actual control over the employees of another, but the “existence, extent, and object of the putative joint employer’s control.” (Browning-Ferris Industries of California, Inc. (2015) 2015 NLRB No. 672, *12 (Emphasis added).) Otherwise, employers would be able to insulate themselves from their responsibility to comply with federal labor laws. (Id. at p. *21) Accordingly, as long as a company retains (e.g., through the execution of a contract) the authority to control the employees of another, said company shall be given joint employer status. (Id. at p. *2.) This is true even if control is exercised indirectly (e.g., through an intermediary). (Id.)

Many associations retain a community management firm for the purpose of executing the duties of the association. These community management firms in turn employ community managers and support staff to manage these associations. While historically recognized as the employee of the community management firm (and an independent contractor of the association), the BFI Case raises some questions with respect to the nature of the relationship between the employees of a community management firm and the association. Accordingly, associations must be cognizant that a Court may find that it is a joint employer of the community manager (and support staff), notwithstanding the fact that it exercises no direct and immediate control over said manager.

Similarly, associations and management companies must take care when hiring maintenance and service providers for the community.  When managers, committee members, or board members are conducting job walks with a contractor’s employee, reviewing specifications, or receiving invoices, the management company and the association may become joint employers. In Heiman v. Worker’s Compensation Appeals Board, Cal: Court of Appeal, 2nd Appellate Dist., 3rd Div. 2007 (“Heiman”), a community association manager hired an unlicensed and uninsured contractor on behalf of the association to install rain gutters on the condominium buildings.  An employee of the contractor was seriously injured on the first day of the project and sued the contractor, management company, and association for workers’ compensation.  The Court held that the contractor, the association, and the management company were all joint employers because the contractor hired the injured employee, and the management company, as agent of the association, hired the contractor.  The BFI Case seems to affirm this decision.

California HOA laws In order to insulate the association from a possible finding of joint-employer status, the association should ensure that its contract with independent contractors, requires all proper licenses and insurance, adequately sets forth the desired results, and sets forth the level of care and skill to be used in accomplishing the desired results. (See Id. at p. 12 (“mere ‘service under an agreement to accomplish results or to use care and skill in accomplishing results’ is not evidence of an employment, or joint-employment relationship”).) The agreement should also include a provision that requires the contractor to indemnify and hold the association harmless in the event a labor dispute arises.

Blog post authored by TLG attorney, Matthew T. Plaxton.

hoa vendorsOne of the primary purposes of any homeowners association (HOA) is to manage, maintain and repair the common areas throughout the HOA’s development. This naturally requires the HOA to contract with third-party vendors to furnish goods or services to the HOA (e.g., landscaping, construction, remediation, painting, plumbing, etc.). We are consistently surprised at how some Board members and management professionals fail to recognize how the HOA’s use of improperly vetted vendors can result in potentially significant legal and financial implications for the HOA, among other problems. Therefore, the need to properly vet vendors—and their contracts—is critical before the Board executes any vendor’s contract on behalf of the HOA.

We previously drafted a library article entitled “HOA Concerns in Contracting with Vendors” that provides some guidance as to how a HOA’s Board and Managing Agent can protect the interests of the HOA and its members. This blog post touches on some of the information contained in that article, and sets forth some recommended procedures which should be utilized before any vendor begins work at the HOA’s development.

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