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. More specifically, suppose after a quake some owners sue the board for not having insurance. 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. Not only does that put board directors at risk personally, it means individual titleholders have no deep pocket to collect from even if they were to win such a suit — in essence owners are suing themselves because any potential judgment would have to be paid by all. The board is gambling with losing odds.
Without association earthquake insurance, sorting out "which" unit is responsible for paying "what" is a legal nightmare because a "unit" that is physically attached to others means that damage to one unit implicates damage to other units. In one case: among five attached townhouse units, the middle one collapsed in a quake but those adjacent did not. After several years of wrangling, the board and owners decided not to rebuild that one unit. They came to their senses later, recognizing it had to be rebuilt. The townhouse-unit owner endured years of expenses living elsewhere while funding his own legal battles.
It may be complicated separating other loss responsibilities of an owner from that of the association, especially loss due to third-party vendors, visiting guests, public access and mixed-use developments.
Consequently, some insurance companies may decline to insure individual property (e.g., units, townhomes, detached homes) within common interest developments unless that association itself is adequately insured, including earthquake coverage. Meaning, if the association is uninsured for earthquake, individual owners may not be able to get any, let alone adequate individual earthquake coverage for themselves.
One reason common interest development insurance appears complicated is that titleholders merely own a fractional interest in property (components and facilities) that are held in common by the association, thereby giving the impression of affordability through shared costs. Depending on the development's governing documents, individual owners may not own or control as much as they think they do: for example, doors, yards, easements, inside/outside walls, windows, roofs, plumbing and other structural and quasi-structural elements that may be subject to association control or responsibility. Consequently, an owner's individual insurance is unlikely to cover all damage sustained, earthquake-related or not.
Buyers and owners must be alert; many boards are changing governing documents to shift association-related obligations and costs onto titleholders. Legal or not, some associations that don't change their governing documents are bypassing that process by redefining "common" property, which unilaterally imposes prior association obligations onto owners.
Though it shouldn't happen this way, sometimes costs are shifted to the owner by the creation of so-called matrix charts that seek to specify — and perhaps reduce — what is considered common property. In that way, once-statutory association responsibilities to repair, maintain and replace common property are systematically eliminated or substantially minimized. All this argues for buying insurance coverage wisely.
To better understand potential obligations and costs, buyers should be comparing "prior" governing documents with those provided in escrow and specifically requiring copies of all matrix charts for the same time period. Buyers should require full, not summary, copies of all association and sub-association insurance policies.
Jonathan Forouzan of Forouzan Insurance Inc. explains that for an owner to have adequate coverage, the homeowner association must carry both a general loss and a master earthquake insurance policy. In addition, owners should carry both individual homeowner insurance with general loss assessment and earthquake insurance with earthquake loss assessment coverage, he says. Loss assessment coverages, both general and earthquake, have their own premiums, loss limits and deductibles, so they should be evaluated carefully.