* Originally Published in the CAI-CV April, 2021 Edition of Quorum Magazine

By Jon H. Epsten, Esq. CCAL
Founding Member and Co-Managing Shareholder at Epsten, APC

I have been fortunate to represent common interest developments for close to thirty-eight years.  At the onset of my career I became involved in assisting associations with contracting for repairs, including major renovations and many post litigation reconstruction projects in the millions of dollars.  The basic rules of contracting for this type of work have not changed much over the years. What has changed is the complexity of the work and the insurance issues.

Our cottage industry has expanded over the years from cookie cutter “stick-built” homes constructed over hundreds of acres to much smaller foot prints and to more vertical construction with complex and ever-changing construction methodologies integrated with construction materials that oftentimes equally complex to install and repair.

To assist community managers and boards of directors through the contracting process I have put together some issues for the Board to consider which address problems I have encountered over the years. These issues are not exhaustive but touch upon the obvious issues which are often over-looked and can result in even a simple project failing.  Not every project will go well no matter how much work is put into the selection of the contractor. The goal is to minimize risk and when things aren’t going well have a good exit strategy or resolution process in the construction contract.

Here is an analogy. I grew up working on boats in San Diego. I learned that the process of painting a boat is a monumental task. But, it’s not spraying the paint on the hull that is difficult, rather it is preparing the hull for the paint that takes the most work.  Planning and preparation for your construction project is the difficult part of the project not necessarily the actual work being performed.

One of the most common mistakes is not defining the scope of work in enough detail. The absolute key to a good contract is a solid definition of the scope of work. By way of example, it is prudent to have an arborist define the scope of tree trimming while it may be prudent to have an architect define the scope of a roof repair or replacement.  Attorneys do not define scopes of work. The scope should be defined by the professional in the discipline. For you do-it-yourselfers there are resources on the web that contain plans and specifications for work (e.g. asphalt paving, painting, landscaping and irrigation). No matter what methodology you undertake to arrive at the scope of work you must always have a clearly defined scope of work in the contract.

I recently had a contractor argue successfully that their scope did not include painting the siding after the siding installation. He understood when bidding that the association was painting the siding. He referred back to the scope of work and while not specifically excluded, painting was not specified in the contract. Spend time understanding the scope, read and re-read the scope and incorporate all the scope documents (plans and specifications) into the contract and consider incorporating illustrative diagrams or photographs into the scope that show the site conditions. The scope needs to clearly define what is being repaired, the locations, the means and methods of repair and the material specifications, including warranties.

A very basic and old school approach to contracting is to interview contractors prior to selecting a contractor to perform work. This basic rule can bring out a lot of issues and calm nervous board members concerns.  That said, interview with a purpose. Just recently, I suggested to a board they interview a plumbing contractor.  I was not asked to attend. I called the manager the next day and asked how the interview went and she replied, the board only had two questions and they weren’t even sure what to ask. Take interviewing the contractor seriously.

• A list of questions should be developed so you are always comparing apples to apples when interviewing a contractor for the job.
• Check out their references.
• Speak to other association boards of directors of similar sized communities the contractor has performed similar work for in the past.

I have found that a board interviewing contractors and taking the time to speak to other communities who used the same contractor(s) yields good information to make informed decisions. Do not just speak with the associations on the contractor’s reference list. They have typically been chosen because they will give the contractor a glowing review. Use your industry contacts to see if there are other projects not on the contractor’s list and get their input too. For example, when a problem arose on the project did the contractor deny responsibility or did it acknowledge the issue and work with the association to find a solution.

Many of us have to visually observe things to understand them. For me, it is no different with construction. By way of example, I need to see the paint colors, how the flashing will lay up against the fascia, and how the new windows compare to the windows that remain in place. I encourage my clients when possible, to have the contractor perform prototype repairs or illustrative mock-ups. Mock-ups and prototype repairs allow the board to better understand the work, adjust the work prior to formally committing to it and use the prototype or mock-up to explain the work to the owners or other contractors who may have to integrate their work with others.

Prior to starting work it is important to communicate with the owners and residents about what they can expect. Ideally, the contractor will assign a liaison to assist management and the board with communications with the residents and owners.  Good communication leads to a successful project. Regular communications between the contractor and the board is also important. Consider inviting the contractor to your regular board meetings to answer owners’ questions and address the board on the progress of the work.

Your Community Association Manager is your consultant, but do not assume the manager has the time and/or expertise to handle a construction project. These projects can be time consuming and can take away from day to day association issues that need to be addressed. Always discuss with your manager their role in any construction project; set expectations early. It is possible you may need to hire a third party to administer the work. If the management of the work is being delegated to a committee make sure the members are knowledgeable in construction or willing to learn about the work to be performed – don’t take the first volunteer who raises their hand.

I am often asked, does an attorney need to review the construction contract? Answering, yes, appears self-serving, but in fact oftentimes these contracts are fraught with poison pills such as antiquated insurance provisions, indemnity language and limitation of liability provisions. Those provisions need to be reviewed by counsel and understood by the board. Another key consultant is your association’s insurance agent. Make sure your agent reviews the insurance provisions in the construction contract.

It’s difficult for me to conclude this article when I have so much more to say! Let me leave you with some closing thoughts.

• Take the time you need to get the contract that gets the work done properly.
• Don’t overly complicate or delay the process.
• Use professionals, and board members remember, what you may do if you were the contracting party is not necessarily what the association should do (e.g. offering cash incentives to a contractor).
• And lastly, always keep in mind that price variances in bids are a signal that bidders may not be bidding the same scope.

Insurance for “The Big One”

By Jon H. Epsten, Esq

Although California is known for its easy lifestyle and climate compared to the snow and flood regions of the country, the Golden State is not without its calamity risks.  California is the land of wildfires and earthquakes.  The specter of a catastrophic earthquake naturally leads to the question of whether community associations should purchase earthquake insurance.  Given the notoriously high cost of the premiums, this is a big dilemma for many governing boards — especially for those communities along the major earthquake faults.

Must, may, or should an association buy earthquake insurance?

The purpose of this article is not to answer this ultimate question for all community associations. Whether and what insurance is appropriate is going to be different for each association. Instead, this article summarizes generally the law governing the question about an association’s rights and duties to obtain (or not obtain) earthquake coverage.  We also propose questions boards may wish to direct to their insurance brokers to fully understand the various earthquake insurance products available. This article helps guide boards through the important process of deciding what to do about earthquake insurance – and, we are here to help you through it.

Check Your Governing Documents!

To understand whether an association must or may purchase earthquake insurance, the first place to look is the association’s governing documents.  Most associations have comprehensive sections in their CC&Rs (less often in the Bylaws or Articles of Incorporation) specifying the type of insurance the association must purchase.  If the governing documents specify that the association must purchase earthquake insurance (rare), then that arguably creates a duty for the board to buy that insurance and include the premiums as part of the association’s annual budget and assessment structure. The alternative would be to obtain membership approval to delete the requirement from the CC&Rs.  However, most CC&Rs only require fire and casualty, liability, and “director’s and officer’s” coverage – either remaining silent about earthquake coverage or stating the association may purchase it. A careful review of the association’s governing documents is the first place to start.

What Does The Law Say?

The Davis Stirling Act (the “Act”) does not require community associations to purchase earthquake insurance.  In fact, the Act merely encourages, without requiring, associations to purchase other insurance and is completely silent about earthquake insurance.  Under Civil Code section 5047.5(e) and 5800, the Davis Stirling Act incentivizes associations to buy liability insurance and directors and officers coverage by providing a qualified immunity to the directors for buying policies with limits of either $500,000 or $1,000,000, depending on the size of the association.  Civil Code section 5806 requires an association to maintain fidelity bond coverage for its directors, officers, and employees.  That’s it for insurance under the Act!  Earthquake insurance is not contemplated by any of these provisions.

However, just because earthquake insurance is not mandated by the association’s governing documents or the Davis Stirling Act does not mean an association cannot, and arguably in some regions along the fault lines should, at least consider purchasing earthquake coverage.  What is clear is that each year the association must disclose to its homeowners the full extent of its insurance portfolio, whatever it includes.  Civil Code section 5300, subdivision (b)(9) requires disclosure of a summary of the association’s property, general liability, earthquake, flood, and fidelity insurance policy as part of the association’s annual report to members.

Overview of Available Earthquake Products and Questions for Insurance Broker

What earthquake insurance products should a board consider, and what questions should the board ask its broker?   The main earthquake insurance products presently available fall into three basic categories:

Master Earthquake Policy:  Purchased by the association to cover the entire project (with certain exclusions and exceptions).

Individual Owner Policy: California Earthquake Authority (“CEA”):  Purchased by the individual owners through carriers approved by the CEA to cover the (sometimes large) deductible an association might have to pay through a special assessment and other gaps between the association’s master policy limits and the cost to rebuild.  Often, these policies include owner relocation costs during reconstruction.

MOTUS: Association “Mini” Master and Individual Owner Enrollments:  This product is newer, and might require some additional homework.  The association purchases a “mini” (limits of $10,000.00) master policy, allowing the owners the opportunity to enroll individually to purchase coverage roughly equal to what a special assessment would be for an uninsured catastrophic earthquake loss.  Some brokers describe the MOTUS as designed to be supplemental to a full Master policy – make sure your broker explains this!

The main questions to ask an insurance broker are:

• What are the premiums?
• What exactly does the “master” policy cover versus the individual CEA policy, and how does that compare to a MOTUS product with the association as insured under a “mini” ($10,000 limit) master policy, with individual owner enrollments?
• What is the association’s deductible (often a percentage of the loss)?
• What are the policy limits?
• What is the estimated cost to rebuild the entire project in the event of a catastrophic loss?

The premium for a master policy is tied to the policy limits and the amount of a deductible the association chooses in the event of a catastrophic event.  An important fact for boards to understand about their project, in evaluating the adequacy of a proposed master policy, is what is the actual estimated cost to rebuild the project?  Understanding this is important to assessing how close to complete coverage the proposed policy would yield in the event of a total destruction of the building(s).  The MOTUS model of insurance is an interesting concept, but it relies almost exclusively on individual owners to enroll and most brokers explain that even with 100% owner participation the MOTUS does not replace the value of a full coverage Master policy. Moreover, if only a few owners enroll in the MOTUS, the policy is not going to do much for the community in the event of the Big One.  Another useful comparison is to consider what the total cumulative premium cost is for all owners to enroll in a MOTUS, and that compares to the total premium for a traditional association master earthquake policy?  It may be less expensive overall, with better coverage, for the association to simply purchase a master policy with limits sufficient to cover the reconstruction, passing the premium on to the owners through the assessments.  But a MOTUS is sometimes viewed by some as better than nothing, and it does provide the association an opportunity to educate owners on options which are available.

Membership Involvement in the Decision.

In most cases, the board makes all the arrangements and final decisions for the association’s final insurance profile.  However, when it comes to earthquake insurance there are many reasons why membership input (or vote) is either a good idea and in some cases required. If your association does not already have earthquake insurance built into its budget and assessment structure, the decision to purchase earthquake coverage might require membership approval as a practical matter because of the significant increase in revenue needed to cover the premium.  It might require an increase in regular assessments beyond the discretionary increase the board may make each year without membership vote.  If your governing documents require earthquake insurance, but the premium is deemed by the board cost prohibitive, an amendment to delete the requirement might help mitigate a breach of duty claim for failing to obtain the insurance.  If your governing documents are silent or permissive on the question of earthquake insurance, and boards wish to confirm the membership has had an adequate opportunity to participate in this important decision, a vote to clarify the governing documents (to expressly state earthquake insurance is not required) might help protect boards against claims they did not meet a duty in the event an uninsured catastrophic loss occurs.  All of these amendments would require membership vote, and that process is a useful one in which the pros and cons of earthquake insurance can be the subject of homeowner discourse and education.  Short of a membership vote, an advisory “straw” poll of members as to whether they wish to pay the premiums through a master earthquake policy purchased by the association or face an uninsured catastrophic loss through an earthquake can also be a useful and informative process.  Overall, getting membership input on these important issues can be extremely helpful in the overall education of the community and potentially to mitigate claims that the boards breached any duty by failing to get earthquake insurance in the event of the Big One.  Hindsight is often 20/20 in lawsuits, and the more board members can do to educate themselves and solicit, where appropriate, membership input, the better in defense of a breach of duty claim.

By Jon H. Epsten, Esq.

Many board members believe that when an email is sent to the association’s attorney, it is automatically a “privileged communication” and therefore not admissible in a legal proceeding.  That mistake has landed clients in hot water over comments which are not necessarily privileged and inadmissible.

If the predominate purpose of the communication is related to an attorney’s advice or opinions, the communication will most likely be protected and not admissible in a legal proceeding.  However, if the email is a communication to the attorney and copied to other board members, but the primary purpose of the email is, by way of example,  to tell all of the recipients the sender’s opinion of another person, it may very likely be discoverable.  Think about this scenario, a board member and the association’s attorney are discussing a contract and in that communication the board member calls the vendor, a liar and a thief.  After signing the contract, a dispute arises between the association and the contractor and the contractor subpoenas the board member’s emails.  A court may not allow the legal advice about the contract in that email to be admitted into evidence, but may allow the board member’s (potentially defamatory) comments about the vendor to be admitted.  Be mindful, this same type of partial admissibility might apply to executive session minutes, as to items discussed and noted in the minutes which are not properly the subject for an executive session.

Beware, too, of sending any emails to “reply to all.”  Take the time to check the actual recipients.  Don’t make the mistake and send a critical email, summarizing attorney advice, to an adverse party—by pressing: reply to all. Yes, this scenario really happens and it happens more frequently than you would expect.

Consider that most Board email communications concerning association business are severely limited by the requirement that normal business of the association is to be conducted only in noticed meetings, pursuant to a published agenda.  While it is still permissible to receive (and send) emails to counsel, any discussion of the subject matter, by a majority of the board, of the email is supposed to take place in a meeting (most likely an executive session).  While under limited circumstances, such as an arbitrary and urgent deadline, discussion via email can be proper, in many cases, it is not.

Remember too that the attorney-client privilege may be forfeited by including persons other than the attorney, the board, and in most cases management.  Whatever privilege may have existed is likely lost when the email is sent to somebody not entitled to assert a privilege (e.g., neighbor, friend, vendor, roommate).

When a privileged communication is inadvertently sent to an opposing party, it must be immediately “clawed back” by the sender.  A “claw back” means taking prompt, specified actions to notify the opposing party of the mistaken transmission.  If you need to claw back an email, it is wise to discuss the process with legal counsel.  Communications between board members are typically not privileged unless the attorney’s opinions or strategies are being shared.  In that case, always copy the lawyer.

Before you hit “Send,” ask yourself, “How would this email look to a judge or jury, or to the media?”  If you can see that the words might be problematic, or that the communication via email might violate the prohibition on communicating with board members via email in place of a duly-noticed meeting, DON’T hit “Send” but rather pick up the telephone and have a “conversation” with the proposed recipient.

Related articles of interest:

Email Policies for Community Associations

Emergency Board Meetings via Email

Email Do’s and Don’ts for Community Associations

By Jon H. Epsten, Esq.

One of the most important roles a board performs is the purchase of association insurance protecting the association’s assets and its directors, officers and committee members.  Be mindful that most Directors and Officers insurance policies EXCLUDE coverage for the failure of the board to purchase adequate insurance.

Oftentimes I find that association boards spend more time on landscaping issues (e.g., tree trimming, grass cutting and watering) than the purchase of the association’s insurance. In the board’s defense, the squeaky wheel gets the oil and most owners, and oftentimes the board members, care much more about the landscaping than they do about the adequacy of the association’s policies. For this reason, the focus on insurance often becomes secondary to the cosmetic issues an association faces. Not making insurance a number one priority can have devastating consequences to an association. A book could be written on how to make certain your association has adequate insurance!

Let me offer a few basic tips:

• Use insurance agents who are well versed in association insurance.
• Review the insurance application and be certain that known or threatened claims have been carefully reported.
• Have the insurance agent perform policy comparisons showing the different coverages in each policy being offered.
• Ask questions of the insurance agent, don’t assume he/she knows your association’s liability risks (e.g., association having responsibility to insure an easement area).
• Talk to your insurance agent about the different types of policies available such as earthquake and cyber insurance.
• Do not make your decisions based on the amount of the premium but rather on the quality of the coverage.
• Don’t save money by buying lesser insurance – your association will get what it pays for, guaranteed.
• Always ask your agent in writing, “Do you have any recommendations on coverage?” Your agent should provide a letter stating that he/she has reviewed the coverages and the coverages comply with the CC&RS and the law, thus placing the onus on your insurance agent.
• Lastly, meet with your agent no less than annually to check on the health of your insurance coverage.

I urge boards to make insurance a priority and devote the necessary time to make certain the best possible coverage is in place.