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The limits of homeowner’s insurance at a homeowners association

Question:  I live in a residential, two-on-a-lot common interest development with a homeowner association; the other owner and I comprise the board. The covenants, conditions and restrictions state all buildings, driveways and sidewalks are common areas whereas the balconies and a back patio are designated as “exclusive use” common areas.

My neighbor, the other owner, refuses to acknowledge the homeowner association and will not enter into an insurance policy for the association. I tried to obtain individual homeowner’s insurance for my detached single-family dwelling but several insurers refused, stating that the only way to insure me was to follow the laws in the common interest development act. Eventually, though, we each managed to obtain individual homeowner’s insurance on our respective single-family dwellings.

 My insurance agent told me that my personal homeowner’s insurance covers the common areas so the association doesn’t need to purchase its own insurance. Is the association really covered by my individual homeowner’s insurance policy, and is there exposure because we don’t follow the CC&Rs? Is my individual earthquake insurance for my building’s structure valid?

Answer: In California, some insurance companies may decline to insure individual property (e.g., units, town homes and detached homes) within common interest developments unless the association itself is adequately insured, which includes earthquake coverage. It can be complicated to separate the loss responsibilities of an owner from that of the association, especially from loss due to third-party vendors, visiting guests and public access in mixed-use developments. And even if you do obtain an individual homeowners insurance policy, you may only find out that coverage is limited or the entire policy void when you try to submit a claim, which by that time is too late. 

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If your insurance agent told you that the association doesn’t have to purchase its own insurance, get that statement in writing. It will have to include an explanation of what coverage, if any, is provided by your insurance policy for claims made against the association and not just you as an individual. But since your CC&Rs state that “all buildings, driveways, sidewalks are common areas,” it appears that your insurance agent was wrong to say your personal individual homeowner’s and earthquake insurance will cover those in-common owned areas following a catastrophic event.  

Also, in the event of a lawsuit against the board or association, your liability as a volunteer director hinges on whether the board’s actions were performed in good faith and whether they were willful, wanton or grossly negligent. 

The law establishes strict provisions for insurance based on the size of your association. As a director of an association with fewer than 100 units, in order to protect your personal assets, the association must have directors and officers liability insurance with a minimum coverage of $500,000 in case you are sued for negligent acts or omissions in your role as a director or officer.  (Civil Code section 5800)

The association as a whole also must be protected by general liability coverage with minimum coverage of at least $2,000,000. (Civil Code sections 5805).

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A board director’s job is to balance the risk of a lawsuit against the risk of your association going insolvent while fulfilling safety and maintenance requirements, all while making well-reasoned and informed decisions. The “business judgment rule” requires sufficient investigation regarding such matters. 

Your time and the association’s money should be spent trying to limit the legal and financial exposure of the association and its titleholders, and one way to do that is to follow the law. The law states that the “association” has to carry insurance.

Zachary Levine, a 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 ornoexit@mindspring.com


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