Homeowners association insurance protects board and titleholders from liability

Question: It is my understanding that homeowners associations are required to carry insurance coverage to protect the titleholders and those who serve on the board from liability for actions conducted by board directors in good faith during the ordinary course of business.

I’m on my homeowners association’s board and we do carry this insurance for the directors and our third-party property management company. One of our three directors believes we don’t need this coverage since all the individual homeowners have their own liability insurance, and he has proposed dropping this coverage to save around $5,000 a year.

Other than common sense and good business practices, can you cite the “requirements to carry insurance coverage” for me?

Answer: California Civil Code section 1365.9 provides that the individual owners in an association shall not be personally liable for such damages provided that the association maintains the minimum insurance required by that code section.

Civil Code section 1365.7(a) notes that a “volunteer” director cannot be held personally liable if the association maintains insurance minimums as specified in that section.

The Davis-Stirling Act sets forth that for the individual owners and board directors to avoid being held personally liable for injuries to others, the association must carry this insurance. As long as directors’ acts were committed in the course and scope of the directors’ duties, in good faith, were not willful, wanton or grossly negligent, and the association carried, and had in force, the minimum insurance as specified in section 1365.7, those directors or officers and the individual titleholders cannot be held personally liable.

Without the general association insurance and directors and officers coverage, the individual directors and officers may not only be held liable but also would be negligent in permitting individual titleholders to be held liable. Each homeowner’s individual liability would be based solely upon his or her membership in the association and not whether he or she had contributed to the act causing the harm, a situation avoided when the association has the required insurance coverage in place.

The board is required to advise every titleholder in the project when the insurance is either modified or canceled. It’s up to the titleholders to warn the board that canceling insurance coverage is not what they want and demand the board renew and/or keep in force insurance minimums required by law.

A board’s decision to cancel insurance coverage mandated by law is a breach of their duty owed to the association and all titleholders thus exposing all — including the board directors — to liability.

Canceling the insurance also means that each owner could sue each director to be reimbursed for any damages or costs they might incur or have to pay should someone be injured and damages awarded.

The insurance the board can cancel is the coverage for the management company and its personnel. A professional company should carry and pay for its own insurance. If the management cannot provide its own insurance coverage, it should not be providing services to your association.

Send questions to P.O. Box 10490, Marina del Rey, CA 90295 or e-mail noexit@mindspring.com.