2024 Mid-Session Legislative Update
Aug 22, 2024
Pending California Legislation Impacting Community Associations; the Corporate Transparency Act Overview; and California Insurance Update
By Matt Ober, Esq., CCAL, CAI-CLAC Delegate Emeritus
We are pleased to provide our annual mid-session summary of pending California legislation making its way through the State Capitol, along with a newly signed urgency law. Also included is an update on the California FAIR Plan insurance coverage and the Corporate Transparency Act compliance requirements.
Effective Immediately: Assembly Bill 2114 (Irwin)
Civil Engineers can now inspect condominium balconies, under Civil Code 5551.
The new California Legislative Action Committee (CAI-CLAC) sponsored “urgency” law, eases the pressure of the January 1, 2025, deadline for inspection of exterior elevated elements. With the high demand for, and limited availability of, eligible inspectors, CAI-CLAC sponsored AB 2114, adds nearly 50,000 civil engineers to the list of eligible compliance inspectors, previously limited to architects and structural engineers. The urgency measure went into law immediately with the Governor’s signature on July 15, 2024.
Pending California Legislation
SB 900 (Umberg). Common Interest development: repair and maintenance.
SB 900 would provide amendments to Civil Code 4775, 5550, and 5610. The bill seeks to ensure that an association meets its common area maintenance and repair responsibility for restoring interrupted utility services that originate in the common area. It carves out an exception in cases where the failed utility is caused by a public or private utility service provider; in certain cases where a state or federal disaster or state of emergency materially impacts compliance, or as otherwise provided in the governing documents.
Proposed amendments to Civil Code Section 4775 include (1) requiring the board to “commence the process” and to make the necessary repairs within 14 days of service interruption; 2) allowing the board to vote on the repairs electronically; 3) providing for a reduced quorum of the board on decisions to commence the repair process; and, 4) in the case of insufficient reserves, to fund the utility service repairs, to obtain financing and impose an emergency special assessment to fund the repayment. No definition of what constitutes “commence the process” is provided.
The bill is focused on the prompt restoration of the failed utility through measures that facilitate a board’s ability to meet and make the decision to proceed. It would authorize an association to obtain financing to make the required repairs, without a membership vote, and to levy an emergency assessment to fund the repayment. In this regard, the bill amends Civil Code Section 5610 (b) adding to the conditions for an emergency special assessment to include situations where “another hazardous condition or circumstance on the property is discovered.”
As mentioned, new amendments provide for a rather novel reduced board quorum provision. If the board cannot meet within 14 days due to a lack of quorum, the number of directors at a board meeting following the 14th day shall constitute the quorum. In effect, a single director would be able to make the required decision.
Finally, SB 900 amends the reserve requirements of 5550 to expand the definition of “major components” to include “gas, water, and electrical service to the extent the association is required to repair or replace these components.
Overall, this bill seems to place additional maintenance, repair, and financial burdens on an association. Additionally, it frees up an association’s ability to respond quickly to essential utility service line failures by streamlining membership approval, financing requirements, and emergency special assessment provision necessary to restore these services in a timely manner.
Assembly Bill 2149 (Connolly). Gate standards, inspections.
AB 2149 seeks to amend Civil Code Section 3496 and adds Civil Code Section 7110, “Regulated Gates.” Named the “Alex Quanbeck Gate Safety Act,” AB 2149 is in response to the accidental death of a 7-year-old boy who died when a 300-pound rolling gate malfunctioned, fatally injuring him. Although these code sections fall outside the Davis-Stirling Common Interest Development Act, the breadth of the legislation includes community associations. The bill would require communities with certain specified “regulated” gates to meet certain standards. The gate must be inspected regularly, and the property owner must maintain a written report of compliance for a minimum of ten (10) years. Finally, any gate failing to comply with the law, thirty (30) days after receiving a notice of violation, would be deemed a public nuisance and subject the property owner to an injunction preventing its use, civil penalties, court costs, and attorney’s fees.
The proposed legislation would only apply to community association gates installed on or after July 1, 2025, and require inspections by a professional or qualified employee on or before July 1, 2026, or upon installation, and every ten (10) years thereafter.
Assembly Bill 2159 (Maienschein). Electronic Voting.
AB 2159 is CAI-CLAC’s effort to help California law catch up with technology and bring electronic voting to community association elections. Currently, 27 states allow for electronic community association voting.
From its inception, this bill was an example of persistence and compromise. Previously attempted a decade ago, in its current form, AB 2159 seeks to enable community associations to conduct director elections, governing document votes, and the uncommon Civil Code 4600 approval for the exclusive use of common area transfers, electronically. The proposed legislation excludes special assessment votes from electronic voting.
Understandably, this bill requires amendments to several existing elections Civil Code sections that were adopted with only written ballot elections in mind. Sections to be amended by AB 2159 include Civil Code sections 5105, 5110, 5115, 5120, 5125, 5200, and 5260.
Among the most important aspects of AB 2159 is that it does not require membership approval for electronic voting. Instead, AB 2159 adds subsection (i) to Civil Code Section 5105 permitting an association to adopt election rules to allow for an inspector of elections to conduct elections electronically. The bill does allow a member to opt out of electronic voting and vote by traditional written ballot. To ensure transparency, the bill imposes additional notice requirements with instructions for voting electronically, the process for opting out of electronic voting, and key deadlines leading up to the vote.
AB 2159 also seeks to amend Civil Code 5110 to include electronic voting among an election inspector’s duties and specific responsibilities. Civil Code Section 5110 would also be amended to include specific notice requirements to be sent to the members 30 at least 30 days before the ballots are distributed.
Like most new laws impacting our community associations, there will be a learning curve to the electronic voting process. Updates include adopting new electronic voting rules, providing notices specific to electronic voting, and handling a two-track voting process for communities with members who prefer to vote by written ballot. But in the end, allowing associations to vote electronically should improve voter turn-out, increase the likelihood of achieving quorum, and perhaps save a few trees along the way.
Assembly Bill 2460 (Ta). Reduced Quorum.
While this may read like Deja Vu all over again, rest assured that this CAI-CLAC sponsored bill is an effort to “clean up” some ambiguity left in last year’s AB 1428. CAI-CLAC’s successful effort will provide much-needed relief from many associations’ inability to achieve quorum, to hold annual meetings, and elect directors.
AB 2460 proposes further amendments to Civil Code Section 5115 and Corporations Code Section 7512; including, the key placement of a comma. To clarify that the quorum is 20% of the members, as opposed to 20% of members present in person, by proxy, or by secret ballot, this bill would replace the word “present” with the word “voting” and place a comma after the word, “members,” to read “20 % of the members, voting in person, by proxy, or by secret ballot. The modifying phrase “voting in person, by proxy, or by secret ballot” simply describing how this 20% of the membership would be voting.
Further, there was confusion over the process of “adjourning” a meeting and then holding an “adjourned,” meeting with a reduced quorum of 20%. To clear up this confusion, Civil Code 5115, and Corporations Code section 7512 would be amended to replace “adjourned meeting” with “reconvened meeting,” at which time a reduced quorum of 20% would be needed.
FEDERAL LAW UPDATE: THE CORPORATE TRANSPARENCY ACT (CTA)
The CTA is alive and well with a January 1, 2025, compliance date.
Incorporated Community Associations Must Comply with the CTA.
It’s hard to read anything about common interest developments these days without some reference to the looming January 1, 2025, compliance date. The CTA is a federal reporting requirement designed to combat tax fraud, money laundering, and terrorist activity. It is designed to track funds sourced through criminal or terrorist activity and safeguard national security, and the U.S. financial system.
At its core, the CTA requires corporations to comply with certain filing requirements through the Financial Crimes Enforcement Network (“FinCEN”). However, the CTA, perhaps inadvertently, applies to the more than 365,000 incorporated homeowners associations throughout the United States. The one known exemption is for corporations with more than 5 million dollars in annual gross income and more than 20 employees likely applies to few if any community associations. Also, the CTA does not apply to unincorporated associations.
The Community Associations Institute (CAI) is pursuing legal avenues to release the hold the CTA currently has on incorporated common interest developments. In addition, pending federal legislation seeks to exempt community associations from the CTA’s reporting requirement. However, as of now, the CTA is the law; it applies to non-profit incorporated community associations, and the reporting deadline is January 1, 2025 for existing community associations.
Directors are required to file as “Beneficial Owners.”
Any individual who exercises substantial control over the association, or owns or controls 25% more of the association ownership interests, is a beneficial owner under the CTA and must file with FinCEN. Substantial control includes an individual who is a senior officer (i.e. president, treasurer), an individual who is an important decision-maker, or an individual with any form of substantial control over the association. In other words, community association officers and directors.
FinCEN has not confirmed whether a community manager and/or management company qualifies as a beneficial owner (i.e. an individual with substantial control over the association). However, a CTA exception exists for an individual who merely acts on behalf of the beneficial owner, such as an agent. As the community managing agent has no greater authority than the Board or its directors, it is unlikely that a community association manager qualifies as a beneficial owner.
Association’s Must File by January 1, 2025.
The CTA filing deadline is January 1, 2025. Moreover, associations must file within thirty (30) days of any changes, corrections, or additions, such as a director’s resignation or appointment. And of course, each year following the annual election of directors.
What Information Must Be Submitted by the Association and its Directors?
The CTA requires each director or officer to report their 1) full legal name; 2) date of birth; 3) current business or residence address; and, the identifying number from the individual’s US passport, driver’s license, or US identification.
In addition, an association point of contact or representative must file with FinCEN the 51-question initial report. The information provided in response to the 51 questions goes into a US Department of Treasury database. Anyone the association board authorizes to act on its behalf—such as an employee, owner, or third-party service provider—may file the initial report on the association’s behalf. Thereafter, individual officers and directors will file their basic contact information above.
FinCEN allows for online filing at: https://boiefiling.fincen.gov. You can file directly through FinCEN’s online system or via a PDF document. For instructions on how to file, please visit: https://boiefiling.fincen.gov/help.
The consequences of noncompliance with the CTA are significant.
The penalties are significant for any association not in compliance with the reporting requirements. Any person who violates the reporting requirements shall be liable to the United States for 1) up to $500.00 a day for each day of noncompliance; 2) up to $10,000, imprisoned for up to 2 years, or both.
FinCEN allows for online filing at: https://boiefiling.fincen.gov. You can file directly through FinCEN’s online system or via a PDF document. For instructions on how to file, please visit: https://boiefiling.fincen.gov/help.
Community associations are urged to confer with legal counsel prior to reporting to address any uncertainty about the CTA reporting requirements or their applicability to the association or any individual officer or director.
A WORD ABOUT INSURANCE
California FAIR Plan Update: Is This Really a FAIR Solution for California Community Associations?
The lack of fire insurance coverage and its impact continues to rage throughout our State. Communities continue to face significant premium increases, cancellations, or non-renewals. Those communities with coverage are reluctant to make claims, for fear they too will be canceled or suffer unanticipated and unaffordable premium increases. While statewide efforts to address this crisis in Sacramento continue, there appears no real solutions and no concrete relief in sight.
Desperate community associations are looking to the California FAIR Plan as a stopgap measure. Before opting for the California FAIR plan, a board should evaluate whether the FAIR plan coverage satisfies the requirements of the association’s governing documents and does the board satisfy its fiduciary obligations to the association and its members by securing fire insurance through the California FAIR Plan.
The California FAIR Plan is an association of all admitted insurers licensed to provide “basic property insurance” in California. The enumerated FAIR Plan’s purposes are:
(a) to assure stability in the property insurance market for property located in the State of California;
(b) to assure the availability of basic property insurance;
(c) to encourage maximum use, in obtaining basic property insurance, of the normal insurance market provided by admitted insurers and licensed surplus line brokers; and
(d) to provide for the equitable distribution among admitted insurers of the responsibility for insuring qualified property for which basic property insurance cannot be obtained through the normal insurance market by the establishment of a FAIR Plan.
Due to a significant increase in wildfire claims in recent years, the “traditional” insurance market ceased writing new property insurance policies. Many carriers have non-renewed a substantial number of property insurance policies in areas throughout the State exposed to wildfire risk. This has resulted in a sharp increase in California consumers who must rely on the FAIR Plan as California’s insurer of last resort. Not only is there a lack of available commercial property insurance in the “traditional” insurance market, but also, the State Insurance Commissioner recognized that the available FAIR plan coverage limits were insufficient to address California’s insurance needs.
In July of this year, the California FAIR Plan and the California Insurance Commissioner reached an agreement that increases available FAIR Plan coverage from $20 million per location to policy limits to $20 million per structure, and an aggregate of $100 million per location. The agreement is part of California Insurance Commissioner Ricardo Lara’s “Sustainable Insurance Strategy,” which includes 1) Accessible Insurance for Californians; 2) Create a Resilient Insurance Market; and 3) Protect Communities from Climate Change. You can find details on the Commissioner’s Sustainable Insurance Strategy here.
So what does this mean for California community associations?
While this agreement may provide an alternative solution to required fire insurance coverage, there are risks. First, for communities whose governing documents require full-replacement value coverage, there is no guarantee that a FAIR plan policy will satisfy this requirement. The available funds may be limited in cases where a wide geographic location suffers a significant loss resulting in insufficient coverage to meet required repairs or replacement. Second, the FAIR plan allows its insurers to surcharge policyholders if there is a large loss that dries up available funds and more money is needed to pay claims. If losses exceed the FAIR Plans reserves, policyholders could be called upon to replenish the fund. According to Commissioner Lara, the FAIR Plan would allow losses suffered by the FAIR Plan to be recouped by surcharges on FAIR Plan policyholders.
Despite its risks, for communities struggling to obtain fire insurance coverage, or that cannot afford the increased premium for a renewal, the FAIR plan may offer an interim solution. However, the board must conduct a thorough due diligence investigation to understand exactly what the association is covered for and to be able to communicate it to the members.
- Understand the type and level of insurance your community’s governing documents require.
- Obtain as much information from your broker about the FAIR plan coverage proposed; what property is insured and what coverage limits are provided.
- Seek guidance from counsel and an opinion as to whether the FAIR plan coverage complies with your governing documents and meets the Board’s fiduciary obligation to the association and its members.
Finally, as in all things community association, disclose! Be transparent about the impact of the insurance crisis on your community, what options are available, and the insurance coverage the Board obtained and why.
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