Reader Questions - Insurance Coverage

Dear Kelly,

Is it required that an HOA purchase earthquake insurance? Does it have to be stated in the CC&R’s? Can the board be held liable if it doesn’t purchase the insurance?

Our board has chosen not to purchase a master policy which I think is foolhardy but differing views believe it is a waste of money. I will be moving to a single family home so I won’t have this concern anymore but I would like to know if there is a requirement.

Thanks for your time,

H.W., South Pasadena

Dear H.W.,

Adding earthquake damage to an association’s property damage insurance coverage is a good idea, but expensive. Lawyers routinely recommend such insurance, particularly with condominiums. Where the association is required by the governing documents to repair or rebuild the buildings, such insurance may be the only way the association can fulfill its responsibility in the event of a major earthquake.

Some association CC&Rs require such insurance, and those boards have no choice in the matter. However, insurance acquisition is a basic board responsibility, and is not required to be submitted to the members for decision (absent some unusual provision in the governing documents requiring such a vote).

So long as a board follows the business judgment rule, it should not be liable for breaching its duties to the association if it decides to forego such insurance. Presumably a board would consider the cost and the impact upon the budget and member assessments.

If a board is considering whether to have such coverage, even though it is a board decision, consider consulting the members on the subject. Let them know the premium cost, and how it would increase assessments. You might find they agree with the board decision on the subject.

Best,
Kelly

Mr. Richardson,

I have a question regarding Civil Code Section 5805. Can you tell me if that Section states “per occurrence”? It appears on the surface that it does not yet some case law states otherwise and property managers too. If 5805 does in fact mean per occurrence then why hasn’t the Civil Code corrected the language or wording?

Your thoughts please,

T.J., Santa Clarita

Dear T.J.,

Civil Code 5805 (formerly 1365.9) protects individual association members from being sued in an injury case solely because they are members, so long as the association has at least $2,000,000 (100 or fewer members) or $3,000,000 (over 100 members) general liability insurance coverage. The statute refers to the overall limit of the policy, and does not specifically indicate whether an association could have a smaller “per occurrence” limit on each individual claim but keep the larger overall aggregate coverage limit.

The statute, enacted in 1994 as Civil Code 1365.9, was intended to make sure associations had significant liability insurance, and responded to the case of Martha Ruoff, who in 1988 suffered a serious injury and sued the Harbor Creek Community Association. The association only had $1,000,000 in insurance, and her lawyers successfully convinced the appellate court in 1992 that Ms. Ruoff should also be able to pursue each of the 152 association members. Therefore, I think the intention of the Legislature was that the “per occurrence” limit would need to be the full $2 or $3 million limit, depending on the association size.

Thanks,
Kelly

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.