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Don't rely on bad advice on skipping earthquake insurance

Skipping earthquake insurance can have dire consequences for HOA

Question: I'm on the board at our common interest development with about twelve townhouse units. We're built on bedrock, so the management company says the attorney said we don't need homeowner association earthquake insurance. And if something ever did happen, well, he says, "That's what FEMA is for." I'm not certain how this works. What's FEMA going to do for us?

Answer: Your association buildings may be built on bedrock but your board's reasoning is stuck in the sand.

The board's duty is to manage the association prudently. That means making decisions based on reasonable business judgment, using common sense informed by a level of due diligence appropriate to the issue.

A wrong decision regarding earthquake coverage, including having no coverage, could be devastating to the association and individual titleholders. To justify no coverage or substantially less than full coverage, a board would have to consult competent authorities (including geologists, structural engineers, statisticians and accountants) culminating in a complex risk analysis.

But nature cannot be controlled. Despite the best advice, an earthquake can occur sooner rather than later. The more time a board spends massaging the issue, the greater the risk to which it exposes the association, owners and itself.

The required expertise has in effect already been gathered and distilled by insurance companies and is reflected in policies available to homeowner associations. Your board has little choice to discharge its obligations other than comparing and choosing among available insurance providers and their policies as soon as possible.

Accepting geological advice from a lawyer is akin to hiring that attorney to also advise on tree trimming and heart surgery. This isn't even your association lawyer. The board shouldn't be listening to that attorney even for legal advice since his client, the management company, is potentially adverse to your association. Compounding these errors, the lawyer's advice your board relies on is channeled through an intermediary third-party employee who is not subject to any enforceable obligation to be accurate let alone legally bound.

Assuming the scrap of hearsay is correct, being "on bedrock" might sidestep some geologic perils, but bedrock can still shake violently, crack, rise, dislodge or be subject to other destructive and unpredictable forces. Succinctly, best put your bedrock hopes to bed.

Like the lawyer's geology "wisdom," his advice about the Federal Emergency Management Agency is without foundation. First, he's not the association's lawyer, so you have no claim for reliance on bad advice. Rather, your owners could have a claim against the board for relying on it.

Second, FEMA is not a supplemental or "default" insurer. Nor is it an insurer of last resort. Rather, it is a United States agency in the Department of Homeland Security. FEMA provides financial or direct assistance to individuals whose property has been damaged or destroyed as a result of a federally declared disaster and whose losses are not covered by insurance. It's meant to help with crucial expenses that cannot be covered in other ways.

As an emergency relief program for providing temporary shelter and food, FEMA is not intended to return you to your standard of living prior to the disaster. In particular, this assistance is not intended to restore damaged property to its pre-disaster condition. Most of its long-term disaster assistance consists of loans administered by the Small Business Administration. While FEMA does include the Flood Insurance and Mitigation Administration, it insures for floods, not earthquakes.

Moreover, FEMA will look to get back at least 80% of the funds it has expended via state and local agencies, which likewise assist in recovering the funds from individuals.

More important, FEMA's mandate is helping individuals, not corporations. Homeowner associations are typically nonprofit mutual benefit corporations, and each homeowner association owns and manages its common property as a corporate entity. FEMA may make a loan if your association qualifies, but that loan has to be paid back.

Finally, not everyone qualifies for FEMA. The application process can be prolonged and cumbersome. There's no guarantee an application will yield any assistance at all. Individuals may be provided assistance, but FEMA provides no coverage for common areas and facilities, even the common walls that are destroyed.

Proposing magical thinking to justify no coverage, your board's aversion to paying for earthquake coverage seems unbounded. Risking no coverage is even more appalling considering that earthquake insurance per titleholder typically costs no more than treating a few friends out to dinner once or twice a month at a modest restaurant.

Michael Krieger, a Los Angeles attorney practicing business contract, technology and intellectual property law, 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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