REAL ESTATE
Q&A

HOA board seeks to avoid liability for not buying quake insurance

HOA board votes against buying quake insurance—but wants to be shielded from liability for that decision

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?

Once the board realized that its failure to buy earthquake insurance was a problem, its actions morphed into a type of conscious ignorance of the underlying issue in favor of self-preservation. The board's decision could prevent titleholders from obtaining individual policies for earthquake coverage, which probably is why the board is anticipating litigation.

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. The "business judgment rule" requires sufficient investigation regarding such matters. Simply, that means using common sense.

Your time and the association's money should be spent trying to limit the legal and financial exposure of the association and its titleholders, not the board of directors. 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." Although an association can benefit from insurance or bonds covering the omissions or improper acts of directors, it is not best served by forgoing payment on one type of policy in favor of a fantasy safety net for directors' involvement in that decision.

Directors are forewarned that although Civil Code section 5800 "limits liability" of homeowner association volunteer directors and officers, it does not "eliminate" that liability, and it is not a blanket immunity. It is a qualified immunity for an "uncompensated volunteer" director.

A volunteer director of an association that manages a residential common interest development shall not be personally liable, in excess of insurance coverage specified under Civil Code section 5800, to any person who suffers injury, including, but not limited to, bodily injury, emotional distress, wrongful death, or property damage or loss as a result of the tortious act or omission of the volunteer director or officer if all of the following are met:

The act or omission was:

•performed within the scope of the director/officer's association duties;

•performed in good faith;

•not willful, wanton, or grossly negligent.

In addition, the code requires that the association have one or more insurance policies in effect at the time of the act or omission and when the claim is made. The policies shall include coverage for general liability of the association and individual liability of directors and officers for negligent acts or omissions in that capacity.

The coverage must be for at least $500,000 if the common interest development consists of 100 or fewer separate interests and at least $1 million if the development consists of more than 100 separate interests.

Irrespective of the statutory requirements, it is the board's job to ensure the common interest development is adequately insured with an amount of coverage tailored to protect association assets.

Nothing in Civil Code section 5800 is to be construed to limit the liability of the association for its negligent acts or omissions, or for any negligent act or omission of a director. 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.

Be forewarned, the association's insurance carrier will have conditions and exclusions for coverage detailed in the policy with a caution that it unequivocally reserves the right not to defend claims it considers to be outside its coverage.

Whether a board director receives compensation for services, he or she can still be liable when actively participating in wrongful conduct.

Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.

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