Resources
Learn more about the risks facing California condominium owners
California Earthquake Risk
Earthquake Recovery Challenges
Homeowners’ Association Resources
The latest research on earthquake risks in California.
What are the earthquake risks where you live?
2015 Federal Government Earthquake Forecast for California (United States Geological Survey) “The likelihood for magnitude 6.7 and larger earthquakes somewhere in the entire region remains near certainty (greater than 99 percent). The likelihood is 7 percent for magnitude 8 and greater, a 50 percent increase over [the prior USGS survey], resulting from both the inclusion of multifault ruptures and the particular readiness of some large faults.”
California Earthquake Risk by County (California Earthquake Authority) “Nearly everyone in California lives within 30 miles of an active fault that could cause a damaging earthquake…In fact, thousands of known faults crisscross California, and scientists continue to discover new ones.”
Do You Live Near the Hayward Fault? The Most Dangerous Fault in America (Steven Newton, Earth Magazine) “Most people have heard of the San Andreas, which they assume will be the source of the next big quake in the Bay Area…East of San Francisco, across the muddy, green waters of San Francisco Bay, sits a smaller fracture in the crust: the Hayward Fault. One day, the Hayward Fault could produce the greatest natural disaster ever to hit the United States.”
Condominium owners face unique challenges in
seeking recovery in the aftermath of an earthquake
Earthquake Risks to Condo Owners and their Options…Before Motus Became Available (SF Gate) “Condo dwellers can buy quake insurance that covers the interior of their unit and certain other expenses…Homeowners associations can buy insurance that covers the building and other common areas, but nothing inside units…To be fully protected, a unit owner needs both. If unit owners buy coverage for themselves, but the HOA has not purchased it for the building and it is destroyed, the owners might have nothing to come home to.”
The Inadequacy of Federal Assistance for Condo Owners Affected by an Earthquake (LA Times) “Officials of the Federal Emergency Management Agency…have decided that condominium owners who have been living in their units [after an earthquake] cannot collect federal housing assistance because their homes–while in need of repair–are ‘not uninhabitable’.”
Just The Facts — Northridge Earthquake (Public Policy Institute of California) “In total, almost 450,000 [residential] units (84% of which were multifamily units) were inspected and found to be damaged.”
The Loma Prieta, California Earthquake of October 17, 1989 — Building Structures (United States Geological Survey) “Of the 12,000 units lost, 9,000 were multifamily buildings. Of these, nearly 90 percent were still out of service one year after the earthquake…”
California Earthquake Zoning and Probably Maximum Loss Evaluation (California Department of Insurance) “In the Loma Prieta earthquake, for every $100 of insured residential damage, there was an average of $20 of contents damage, and $10 of loss of use. It turned out that these ratios were the same for the 1994 Northridge earthquake, even though the dollar amounts were much greater.”
Understand the responsibilities of Homeowners’ Association Boards in protecting members from earthquake-related loss assessments
The question of whether or not to purchase earthquake insurance represents one of the largest liability exposures facing board members of California Common Interest Developments (CIDs). Most D&O policies do not cover insurance-related claims, so if there is an earthquake, the members of a board that has declined to purchase earthquake insurance may find themselves to be the targets of unit owner claims – even if the association as a whole voted against buying insurance.
In this section we hope to outline what and how your board should approach earthquake insurance through advice from attorneys, arbitrators and the California government.
The Motus Insurance Program offers a new solution for both CID unit owners and boards. By enrolling in the Motus Insurance Program, the board will make individual policies available to unit owners. Furthermore, by making these policies available, the board will have demonstrably fulfilled its duty to act in the best interest of the association and it members, thereby helping to limit any earthquake-related legal exposure in the wake of an event. We understand why boards, against the advice of attorneys, pass on master earthquake policies since they are expensive, have large deductibles and are difficult to fund. However, boards have a fiduciary duty, that we will outline, which means the board must protect the best interest of the association.
The Motus earthquake program allows the boards to take a new, reasonable step to insure the association against earthquake – without the need for an association vote or forcing insurance on all members.
Fiduciary Duty: A duty to act for someone else’s benefit, while subordinating one’s personal interest to that of the other person. It is the highest standard of duty implied by law (e.g., trustee, guardian). – Black’s Law Dictionary
Select 3rd Party Resources for Common Interest Development Board Members
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.
Motus Update: This last sentence is no longer true thanks to the California Department of Insurance’s approval of the Motus earthquake program. Individuals can now insure the structure around their units and common areas if an association enters a Motus program.
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.
Funding the Motus earthquake program: Due to the minimal cost of entering a Motus program the board will have no issues funding the program without a vote.
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.
RECOMMENDATION FROM MOTUS: With the California Department of Insurance’s 2017 approval of the Motus Insurance Program, HOA boards have a new option available to them. For a minimal annual fee, an HOA board can now obtain coverage for the complex AND give each individual HOA member the ability to purchase comprehensive coverage, including common areas and residential structures. Furthermore, under the Motus Insurance Program, both the Association and the individual will be named insured, giving each a seat at the table in the wake of a catastrophe. By entering into the program, the Board will be going a long way toward fulfilling its fiduciary responsibility to the HOA and its members – without relying on a vote of the HOA membership. By contrast, a Board that declines to enter into the Motus Insurance Program will effectively be preventing its membership from accessing comprehensive condominium earthquake insurance coverage – a position that may be difficult to defend to members who have suffered a loss.
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.
Select Highlights
“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
Select Highlights
“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.”
Read the Full Article: http://www.latimes.com/business/realestate/la-fi-associations-20150111-story.html
By Donie Vanitzian. Michael Krieger, a Los Angeles attorney practicing business contract, technology and intellectual property law, co-wrote this column. Vanitzian is an arbitrator and mediator.
Select Highlights
Question: As a board of directors, we investigated various earthquake insurance policies and found that a policy with a 20% deductible amounts to about $16,000 annually in premiums. That increases our monthly dues by at least $70. The board proposes to decline earthquake insurance. To absolve the board of liability for no coverage in the event of an earthquake, the board wants to hold a formal paper vote of all titleholders as to whether or not the board should buy earthquake insurance. If all the homeowners unanimously vote against getting earthquake insurance, and the board does what owners want, is the board on safe ground? Insurance is expensive and complicated, so besides the economic gamble what else should we consider?
Answer: Safe ground? One earthquake will answer that question with a resounding “no.” More immediately, have you considered what the liability exposure could be if the vote isn’t unanimous?
…
”Even a vote by all owners against carrying earthquake insurance is irrelevant because the board’s duty to protect association assets can’t be delegated. Buying earthquake insurance is part of that “protection.” By relying on such a vote, the board would abdicate its duty of due diligence to act in the best interests of titleholders who fund association operations.”
…
“A board’s fiduciary role requires acting in good faith and independently investigating the consequences of minimal or no insurance, and that requires seeking advice from professionals, not opinions of titleholders”
…
“Will the association’s directors and officers insurance cover board directors even though they carried out what the majority of titleholders asked for in a paper vote? Probably not, given that the board intentionally and knowingly was imprudent and failed in its decision-making duties.”
Original Article: http://articles.latimes.com/2013/nov/03/business/la-fi-associations-20131103
By Donie Vanitzian. This column was co-written by Michael Krieger, a Los Angeles attorney practicing technology business and intellectual property law. Vanitzian is an arbitrator and mediator
Select Highlights
Question: Our board directors found the lowest earthquake insurance premium is with a 20% deductible, costing our homeowner association about $20,000 annually; they voted against raising monthly dues to cover it. Our 20 units in a four-level, zero-lot-line Los Angeles complex average $650,000 per unit and the structural integrity of the building is at greater risk because of our subterranean parking. Directors argue we’ve got over $150,000 in reserves and around $350,000 in combined money market and certificate of deposit accounts. Directors say that’s more than enough money to cover any earthquake damage. Conservative estimates to build fire-escape stairs (presently we have none) are more than $90,000. To rebuild just a portion of damaged interior stairwells would cost over $40,000. The cost of elevator repair or replacement easily could surpass $100,000. Depending on the floor level, owners might not have access to their units for six months or longer. Rebuilding one damaged unit could cost $100,000 to $200,000 or more. Who’s responsible for damaged cars in the parking structure? What if our building causes damage to the building next door? What if the city “red tags” us? Does the homeowner association pay the housing cost of owners who can’t live in their damaged units? Are we adequately self-insured for this type of damage?
Answer: While $500,000 in liquid funds is commendable, the multiplicity of issues raised regarding vehicles, relocation and next-door building damage underscores the folly of thinking $500,000 is sufficient “self insurance.” Damaged cars in the garage could easily exceed $200,000.
As yours is a zero-lot-line building (built on the property line), your association may also be responsible for any damage to adjacent buildings near your property line.
…
“It is the height of arrogance for directors to impose their wishful thinking on owners rather than engaging experts in structural engineering and geology before drawing conclusions”
…
“An insurer brings not only money but valuable knowledge, experience and impartiality to the complex task of reimbursing and rebuilding”
A homeowners’ association board has a fiduciary relationship with its members. (Cohen v. Kite Hill.) It is well settled that directors of nonprofit corporations are fiduciaries. (Raven’s Cove v. Knuppe.) Directors of nonprofit corporations (such as the Association) are fiduciaries who are required to exercise their powers in accordance with the duties imposed by the Corporations Code. This fiduciary relationship is governed by the statutory standard that requires directors to exercise due care and undivided loyalty for the interests of the corporation. (Francis T. v. Village Green.)
Two Broad Duties as a Fiduciary. Upon their election to the board of a common interest development, directors become fiduciaries with powers to act on behalf of the association. As fiduciaries, directors are held to a higher standard of conduct and have two primary duties: (i) duty of care, and (ii) duty of loyalty. This applies to directors of both incorporated and unincorporated associations.
A. DUTY OF CARE (Due Diligence; Duty to Investigate). Directors must be diligent and careful in performing the duties they have undertaken. (Burt v. Irvine Company.) Directors must:
1. Attend and participate in meetings so they can be informed about the association’s business.
2. Make reasonable inquiry re maintenance issues, rules violations, etc.
3. Make decisions.
4. Keep corporate records.
5. Enforce the governing documents.
B. DUTY OF LOYALTY (No Self-Dealing). Directors must act in the best interests of the association even if at the expense of their own interests. This is more than just embezzlement of funds; it includes steering contracts to family members or taking actions that result in personal benefits to the director at the expense of the association. Violation could result in (i) liability for all profits received, (ii) all damages caused by the breach, and (iii) punitive damages.
“We note that the duty of undivided loyalty applies when the board of directors of the association considers maintenance and repair contracts, the operating budget, creation of reserve and operating accounts, etc. Thus, . . . [directors] may not make decisions for the association that benefit their own interests at the expense of the association and its members.” (Raven’s Cove v. Knuppe.)
Business Judgment rule defined (California Corporations Code)
Even though officers and directors are deemed fiduciaries, boards are not required to make the “right” decision. Corporations Code §7231(a) protects directors from personal liability if they make decisions that result in damage or loss to others, provided their decisions were made:
- In good faith,
- In a manner which the directors believe to be in the best interests of the corporation, and
- With such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
Judicial Deference. There is a related rule called the “Business Judgment Doctrine” or “Judicial Deference” under which courts defer to business decisions of a board even if a reasonable person would have acted differently.