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Original Article: https://www.davis-stirling.com/Main-Index/Duty-to-Buy
Davis Sterling – The Davis–Stirling Common Interest Development Act is the popular name of the portion of the California Civil Code beginning with section 4000, which governs condominium, cooperative, and planned unit development communities in California. It was authored by Assemblyman Lawrence W. “Larry” Stirling and enacted in 1985 by the California State Legislature. In 2012, the Act was comprehensively reorganized and recodified by Assembly Bill 805.
QUESTION: Several times over the past ten years the board has gone to the membership for a vote on earthquake insurance. Each time it was soundly defeated. The high premiums, high deductibles and low pay-out simply didn’t make sense to the majority. Is the board obligated to set aside the vote and purchase earthquake insurance anyway?
ANSWER: That is a tough question. Unless required by their governing documents, associations are not obligated to buy earthquake insurance. Even so, the better course of action for condominium associations in high-risk areas is to buy earthquake insurance. This is especially true since individual members cannot insure the structure around their units, only the association can.
Fiduciary Duty. When members vote against earthquake insurance, they have no duty to act in the best interest of other members, only in their own best interests. Boards, on the other hand, have a fiduciary duty to make decisions that are in the best interests of the association as a whole. Since earthquakes can be devastating, that would argue in favor of overriding the membership’s vote if the association is located in an area vulnerable to earthquake damage.
Accordingly, boards should consider factors such as the location of fault lines, the type of soil upon which the structures are built (are they vulnerable to liquefaction?), the type of construction in the development (wood frame, steel & concrete, etc.) and premium costs, deductibles and pay-out levels.
Funding master earthquake insurance without a vote. If the board decides to set aside a membership vote, it faces a practical problem–how to fund the insurance? The board can either increase annual dues or impose a special assessment. For most associations the cost of a master earthquake insurance is more than the 5% special assessment limitation imposed by the Davis-Stirling Act, which effectively eliminates this funding option.
The other option is to increase annual membership dues up to 20% to cover the cost. However, the dues increase only applies to next year’s budget. If the board wants to immediately purchase earthquake insurance, it can bridge the funding gap by borrowing money from reserves and repaying it within one year.
Not Overriding the Vote. If the board chooses not to override the members’ vote, its decision is governed by the Business Judgment Rule, which means directors are not subject to personal liability if their decisions are made in good faith, in the best interests of the association and with such care as an ordinarily prudent person would use. However attorneys will advice you that courts could apply a related rule called the “Judicial Deference” where courts defer to business decisions of a board even if a reasonable person would have acted differently. In this scenario directors could be held personal liable for not overriding a vote.
RECOMMENDATION FROM WWW.DAVIS-STERLING.COM: Obviously, these are not easy decisions for boards to make. Whichever direction they go, to buy or not to buy, the decision should be well supported in the minutes and explained to the membership.
Read the Full Article: http://articles.latimes.com/2013/jul/19/business/la-fi-associations-20130721
By Donie Vanitzian. Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator.
“Question: I’ve been president of our homeowners association for several years. We have fewer than 20 units and have managed to keep our HOA dues low at around $330 a month, mainly because we don’t have earthquake insurance. We’ve saved a lot of money because we haven’t paid for earthquake insurance for more than 15 years and have been very lucky. Do we have to get it?
“Answer: With one earthquake, your luck may run out. However, after 15 years of savings, and in the best interests of the association, the board should have been depositing those savings in an interest-bearing bank account. If so, your association would now have the money to purchase earthquake insurance.”
“Although keeping dues low is a valid concern, artificially suppressing dues at the expense of the safety and stability of the association’s infrastructure is not a “good faith” course of action, let alone sound business judgment”
“The mere mention of “earthquake insurance” under Civil Code section 1365 should alert even the most foolhardy boards that it is an important element in association management.”
Read the Full Article: http://www.latimes.com/business/realestate/la-fi-associations-20150322-story.html
By Donie Vanitzian. Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator
“Question: I’m on the board of directors of my homeowner association, and by choice we’re not buying earthquake insurance. If the board doesn’t get earthquake insurance for the development, can we, as the board, vote to buy insurance against a lawsuit that might be filed against us if our facility sustains damage from an earthquake while we’re uninsured?
“Answer: You’re talking about limiting the board’s liability for failing to perform its duty or trying to indemnify the directors for their knowing failure to act. Are you kidding?”
“Part of your job as a board director is to balance the risk of a lawsuit against the risk of your association going insolvent while fulfilling safety and maintenance requirements — and do all that while making well-reasoned and informed decisions”
“Directors limit their exposure by making well-reasoned decisions and acting in good faith. If the board has considered various insurance options for covering earthquake damage and balanced those options against the needs and resources of the association and its titleholders, then taking appropriate action as a fiduciary is your “insurance policy.”
“This means that if you spend your time looking for ways to circumvent doing the right thing and making the right decisions because it may cost your association some money, you can be sued and you may not be indemnified for those decisions.”