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*Asked & Answered

Untitled-1Asked – Our insurance was cancelled and with the new policy the premium sky rocketed. There is not enough money in the operating account or budget to pay for the new premium. Can we pay from reserves?   

Answered – California has suffered significant wildfire damage in recent years.  Coupled with several years of severe drought and increased wildfire risk, fewer and fewer insurance companies are willing to write policies for communities that may experience wildfire damage.  In addition, admitted carriers are highly regulated by the Department of Insurance, which limits the amounts they may charge for insurance premiums.  This has caused many associations to be cancelled or non-renewed by admitted carriers or those in the “primary” market.

As a result, HOAs are left to purchase insurance from the non-admitted or “surplus” market. Carriers in the surplus market are less regulated and, when demand is high and supply is low, prices skyrocket.  The HOA’s CC&Rs generally include language specifying that the association “shall” purchase insurance, and may require coverage to provide for “full replacement cost.” If the association does not purchase the insurance as required by the governing documents, the association and its board of directors could be exposed to liability for failure to obtain adequate coverage.

So, what is an HOA to do if it doesn’t have the money to pay for the skyrocketed insurance premiums? Yes, an HOA may temporarily borrow funds from reserves in this situation without membership approval because this act would be needed to “meet short-term cash flow requirements or other expenses.” (Civ. Code § 5515(a).) This action should only be taken with the guidance from the association’s legal counsel due to the significant procedural requirements that must be satisfied under Civil Code section 5515. Those requirements include, among others, providing the membership with notice of the board’s intent to borrow the funds.  The notice must additionally include the reasons the transfer is needed, the options for repayment, a description of how the funds will be restored to the reserve account within one (1) year of the date of the transfer, and a whether a special assessment will be utilized for that purpose.

A special assessment will likely be the mechanism utilized to restore the borrowed reserve funds. However, special assessments greater than five percent (5%) of an HOA’s annual budget cannot be imposed without membership approval.   Civil Code section 5610 fortunately exempts boards from having to comply with this membership approval requirement in situations where the special assessment (regardless of its amount) is needed to address an emergency expense which “could not have reasonably been foreseen by the board when preparing and distributing the annual budget report.”  While this emergency special assessment could allow for the board to restore the borrowed reserve funds the first time, the question then becomes whether levying a similar assessment in future years would remain a legally valid option as the assessment would no longer be tied to an unforeseen expense.  HOAs should therefore consult with legal counsel on this issue before imposing an emergency special assessment to understand its implications on future budget planning.

HOAs should also consult with legal counsel and their association’s insurance professionals for guidance as to how the increased premium expense may be mitigated carrying forward. For example, boards may be able to reduce their association’s insurance premiums by increasing deductible amounts. To illustrate, if the HOA has a $5,000 deductible, an increase to $25,000 or higher may be sufficient to generate a significant premium decrease under the master policy. That is because more risk (the higher deductible amount) is being transferred from the association’s master carrier onto the individual homeowners and the carriers of their respective HO-6 insurance policies.  The HO-6 (aka “unit owner’s insurance”) policies are designed to cover anything that the association’s master policy does not—namely, anything below the deductible on the association’s master policy.  Most sets of CC&Rs fortunately allow the board to make these adjustments to deductible amounts without triggering the need for any membership approval or vote on the matter.

Other options may include reducing the scope of insurance coverage the association is required to purchase under the CC&Rs. For example, if the CC&Rs require full replacement cost, or an ‘All-In’ policy, consider an amendment to a ‘Bare Walls’ policy, which only covers the common areas.  This type of amendment would likely require membership approval and should therefore only be considered if the board is ready to devote the time and resources needed to properly educate the membership and secure enough participation in the voting process. We typically recommend in these situations that the board conduct one (or more) townhall meetings to show the cost comparisons of (a) the special assessment(s) and/or assessment increase(s) that would be needed to maintain All-In coverage over the coming years versus (b) shifting to Bare Wall coverage for the association and each homeowner only incurring a minor increase in premium under the average HO-6 policy.

California HOA lawyers This is often successful in giving the membership a clear and powerful explanation as to why voting for the amendment is in their best interest; in our experience, this substantially increases the likelihood that the ballot measure will be successful.

-Blog post authored by TLG Attorney, Steven J. Tinnelly, Esq. and Ramona Acosta, PCAM.

Newsletter-Issue-57-300x167In case you missed it, Issue # 57 of our ‘Community Association Update’ newsletter is available now!

Topics covered in this issue include:

  • AB 1410 – Speech on Social Media; Room Rentals; Enforcement During Emergencies
  • AB 1738 – EV Charging Stations in Existing Multi-Family Developments
  • SB 897 – Accessory Dwelling Units
  • Artus v. Gramercy Towers
  • Fowler v. Golden Pacific Bancorp, Inc.

A link to the newsletter is here.

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New-Client-Photo-Template-0219-1-300x169It’s our privilege to welcome Seabridge Village Master Community Association to Tinnelly Law Group’s growing family of HOA clients.

Located in Huntington Beach, Seabridge Village is a 24-hour guard gated community that is surrounded by mature landscaping and man made lakes.  Residents enjoy two clubhouses, multiple swimming pools/spas, 4 tennis courts, racquetball court, and gym.

hoa law firm Our HOA lawyers and staff look forward to working with Seabridge Village’s Board and management.

New-Client-Photo-Template-0219-300x169It’s our privilege to welcome Los Lagos Homeowners Association, Inc. to Tinnelly Law Group’s growing family of HOA clients.

Los Lagos was started in 1980 on 35 acres. The eighty-nine beautiful custom homes were designed by renowned architect Barry Berkus. The hand-carved imported entry fountain, abundant trees, lush landscaping, ponds, winding waterways, four pools with spas, plus tennis and pickleball courts envelop the community in uniqueness. Los Lagos proudly stands among the finest private communities in the Coachella Valley.

hoa law firm Our HOA lawyers and staff look forward to working with Los Lagos’ Board and management.

bigstock-Businesswoman-Raising-Hand-Up-230281444-scaled-1-e1668125240647In the State of California, most HOA’s are non-profit corporations managed by a board of directors composed of volunteer homeowners elected by the membership. Boards derive their authority from the governing documents including the Articles of Incorporation, Bylaws, and Covenants, Conditions, and Restrictions (CC&Rs) that impose rules and restrictions on the use of property within the development. The board of directors, acting on behalf of the HOA, is responsible for the maintenance of the common areas of the property, enforcing the governing documents, and collecting assessments. While most boards delegate duties to management companies and rely on experts such as attorneys and CPA’s to aid in decision-making, the board is ultimately responsible for decisions and actions taken by the HOA.

HOA board members are not compensated for their services and are typically not experts or even very familiar with the strict requirements for HOA management. While new directors typically run with an altruistic motive to help their communities and “get things done,” it is important that they understand the structure of a community association, the association’s authority over the development and its owners, and the unique way an association is governed. Board education is a great way to familiarize new members with an overview of their duties and responsibilities and to provide a refresher for existing Board members so that the HOA runs smoothly, efficiently, and with minimal exposure to liability. Board education can also help protect directors for incurring personal liability for decisions made in the scope of their duties.

Board education is offered by management companies, law firms, CAI chapters, and others with expertise and knowledge in HOA governance. There is no one-size-fits-all educational program as the issues faced by HOA’s are often unique to each association. Some general topics for Board education include but are not limited to:

  • General Duties and Responsibilities of Directors
  • Laws Applicable to Common Interest Developments
  • Types and Hierarchy of Governing Documents
  • Business Judgment Rule
  • Conducting Meetings
  • Enforcement and Disciplinary Matters
  • Financial Responsibilities
  • Maintenance Responsibilities
  • Assessments & Collection
  • Director Conduct
  • Contracts
California HOA lawyers An educated board oftentimes results in a better-functioning HOA with less legal fees, less special assessments, less contentiousness, and higher property values. Board members who are willing to put personal differences and agendas aside, are open to considering expert advice and differing viewpoints, and who work collaboratively with other directors and in the best interests of the Association as a whole, are the directors who best serve their communities. While directors will always be subject to criticism since it is impossible to please everyone, with proper education, those directors’ actions will better withstand such scrutiny.

-Blog post authored by TLG Attorney, Carrie N. Heieck, Esq.

Pinnacle-300x169It’s our privilege to welcome Pinnacle at Dublin Ranch Subassociation to Tinnelly Law Group’s growing family of HOA clients.

Pinnacle is a gated high end community in Dublin Ranch. Residents enjoy lots ranging in size from 1/4 to 1/3 acre, many of which have sweeping views of the Dublin Ranch Golf Course and Amador Valley.

hoa law firm Our HOA lawyers and staff look forward to working with Pinnacles’s Board and management.

Broadmoor-Northridge-300x169It’s our privilege to welcome Broadmoor Northridge Community Association to Tinnelly Law Group’s growing family of HOA clients.

Broadmoor Northridge is a collection of single family homes located in Anaheim Hills. Residents enjoy two community pools and a small tot lot.

hoa law firm Our HOA lawyers and staff look forward to working with Broadmoor Northridge’s Board and management.

Civil-LitigationSince COVID-19, followers of the real estate market may have noticed that the housing market is currently booming.  There are not as many sellers as there are buyers, so the competition to obtain a buyer’s dream home is through the roof.  Many of these potential buyers are looking to buy their next home within a community association (“HOA”).  The competition to buy homes creates an increase in the number of questions from real estate agents and mortgage/escrow companies that are directed toward the association and its agents regarding any litigation involving the association.  What should the Board and manager be aware of?  What should they do in certain situations?

The HOA has no legal obligation to make disclosure to buyers of properties within the HOA or other third parties.  These third parties may be real estate agents, loan processors, escrow companies, or anyone else looking for information regarding the HOA and is not an HOA member.

Even though the HOA has no legal obligation to make disclosures, its management company and even its Board will be asked numerous times by third parties to provide further information regarding any pre-litigation matter or lawsuit the HOA is engaged in. Some typical questions are:

      • Can the HOA or management provide a copy of the complaint?
      • Can the HOA provide certain certifications or expert documentation?
      • How much money is the HOA and/or management being sued for?
      • Would the anticipated or known damages and legal expenses be expected to exceed some percentage of the HOA’s reserve fund?
      • Can the HOA’s attorney provide an opinion that any award granted in the lawsuit will be covered under the HOA’s master insurance policy?
      • When will the matter be resolved and will it be resolved in the HOA’s favor?

Sometimes, these third parties will require that the answer to the above questions come from the HOA’s legal counsel. In any case, neither the HOA’s Board, nor its managing agent, or any of its agents (including legal counsel) should answer any of the above questions.  If legal counsel is handling the matter, they should prepare a disclosure letter that the HOA may use to present to any third parties requesting further information.  In addition to not answering any of the questions above, the disclosure letter should also not contain any predictions or conclusions.  The more vague the better, as the disclosure letter is meant to be an official tool to block further communication from third parties.  If applicable, the disclosure letter will provide the appropriate contact information if the HOA’s insurance carrier picked up the case and assigned insurance defense counsel and an adjuster. If the HOA and its managing agent need help navigating this scenario, they should direct all questions to its legal counsel.

If a homeowner wants more information regarding any pre-litigation or lawsuit in order to refinance their home, and the pre-litigation or lawsuit is not resolved, no material or information should be disclosed beyond the fact that things are in progress.  The general disclosure letter may be provided to the homeowner.  The HOA is not obligated to assist homeowners in refinancing and should not if the information being requested is privileged (confidential).

Any questionnaire sent to the HOA or its managing agent should be forwarded to legal counsel for analyzation.  The questionnaire should not be filled out and returned without legal counsel’s input as any disclosures might create unwanted liabilities for the HOA.

California HOA lawyers While evading questions from homeowners and third parties might seem frustrating, such action is a necessity.  Pre-litigation and the proceedings of a lawsuit do not guarantee any outcome.  The HOA and its managing agent should know that homeowners and third parties will be very aggressive in trying to obtain further information.  However, the best course of action would usually be to: (1) direct the matter to the HOA’s legal counsel; (2) provide the disclosure letter; and (3) indicate, in some fashion, that there is no further information at this time as the matter is ongoing or in the process of being resolved (descriptions will vary depending on each scenario).

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

Canyon-Crest-Estates-300x169It’s our privilege to welcome Canyon Crest Estates Homeowners Association to Tinnelly Law Group’s growing family of HOA clients.

Canyon Crest Estates is a condominium community located in Corona Del Mar. Residents enjoy a community pool, spa and tennis courts.

hoa law firm Our HOA lawyers and staff look forward to working with Canyon Crest Estates’ Board and management.

Waverly-Terrace-300x169It’s our privilege to welcome Waverly Terrace Owners Association to Tinnelly Law Group’s growing family of HOA clients.

Waverly Terrace is a condominium community located in the Silver Lake area of Los Angeles. Residents enjoy a community pool, sauna, and fitness center.

hoa law firm Our HOA lawyers and staff look forward to working with Waverly Terrace’s Board and management.
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