Temporary Restraining Orders & Preliminary Injunctions for the Protection of Association Workers and Board Members

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In response to escalating violence in the workplace across the country, California enacted a statute that enables employers to better protect their employees in the workplace by permitting employers to obtain an injunction or restraining order on behalf of their employees. This law was enacted to establish parallel provisions to the civil harassment statute set forth in California Code of Civil Procedure section 528.6to offer protection to “employees” of community associations in certain specific situations. “Employees” include association board members, community association managers, vendors and others for purposes of these restraining orders.

Purpose of the Statute

The purpose of the statute is to provide employers with a fast and relatively inexpensive means of protecting its employees from people who are violent or who threaten acts of violence against employees. In the association context, this protection allows employees to perform association business free of the fear of violence from those who seriously disrupt an otherwise peaceful community.

Often tempers will flare and disagreements will occur within an association when an unpopular decision is made. Residents sometimes show anger against board members, committee members, officers of the Association, management or maintenance people who are carrying out the decisions of the Board. These residents may try to stop a project or say inappropriate things to association employees. When these actions or comments consist of a violent act or a credible threat of violence, CCP Section 527.8 can be used to protect the employees. Unless the conduct escalates into violence or threats of violence, however, mere anger or inappropriate language do not constitute the type of conduct which calls for court action under this statute.

Who is Defined as an “employee” Under this Statute?

An association need not have traditional paid employ­ees to obtain the benefit of the statute. The following people qualify as “employees” under CCP Section 527.8:

  1. Board members, officers, committee members, and volunteers of an association;
  2. Paid employees of an association, such as maintenance workers and grounds keepers or other persons employed at the workplace;
  3. Most independent contractors and vendors, including Community Association Managers and those who work for association management companies;
  4. Anyone whose job it is to go onto association property to perform work of any kind, whether paid or on a volunteer basis; and
  5. All household members of an “employee.” There does not have to be a specific threat or act of violence toward each family member to obtain this additional protection.

Prerequisites to Obtaining the Injunction

  1. There must be: (1) an actual violent act; (2) a credible threat of violence; or (3) stalking of the “employee.” Mere harassment cannot be enjoined under this statute unless the harassment involves a course of conduct that serves no legitimate purpose and causes the employee to fear for his/her personal safety or the safety of his/her immediate family members. Often, the threatening conduct has gone on for months or years, but becomes increasingly more frequent and threatening over time. One extremely violent or threatening act or episode, however, may be sufficient for an injunction to be granted.
  2. The person to be protected must be an “employee” of the Association. Homeowners and tenants, who are not classified as employees under the statute, are not covered and must obtain their own restraining orders.

The Process for Obtaining the Temporary Restraining Order

Obtaining a permanent order protecting the employee is a two-step process. First, the association completes the necessary forms or paperwork and files it with the court to try to obtain a Temporary Restraining Order (“TRO”) from the local superior court. This order is what the name implies; it is temporary, is granted on very short notice if the association shows that the employees has suffered unlawful violence or a credible threat of violence, and provides almost immediate protection to the employee. Once the TRO is granted, it must be personally served on the respondent for the order to be enforceable. After the TRO is granted by the judge, the court will hold a future hearing to determine whether to make the order more permanent. This hearing is generally held within 25 days after the TRO is granted. At that time, the association must be prepared to prove with credible evidence including witness testimony that the order should be made permanent or for a specific period of time up to a maximum of three years.

What Can TROs and Injunctions do for an Association and its Employees?

The kinds of protection that can be included in these orders include the following:

  1. All TROs and injunctions under Section 527.8 include the following standard language:

Violation of this order is a misdemeanor, punishable by a $1,000 fine, one year in jail, or both, or may be punishable as a felony. This order shall be enforced by all law enforcement officers in the State of California. Any person subject to a restraining order is prohibited from obtaining or purchasing or attempting to obtain or purchase a firearm by Penal Code Section 12021. Such conduct may be a felony and punishable by a $1,000 fine and imprisonment.

  1. In addition to the automatic order above, the orders may prohibit the respondent from:
  1. assaulting, battering or stalking the employee and other protected persons;
  2. attending any board meetings or annual meetings of the Association;
  3. following or stalking the employee to or from their place of work;
  4. following the employee during hours of employment;
  5. telephoning or sending communications to the employee by any means including but not limited to the mail, interoffice mail, fax, e-mail; or entering the workplace of the employee.
  1. The orders will often require the respondent to “stay away” from the employee. For example, the order may require that the respondent stay 100 to 300 yards away from the association’s community (if a non-resident), the employee or the employee’s family members, the employee’s workplace, and/or the school and workplace of the employee’s family members.


This legal tool should be utilized in appropriate cases after consultation with counsel. It is an important tool that can be used by an association to stop violent and abusive people from harassing, intimidating and threatening employees within the Association that serves no legitimate purpose and causes the employee to fear for his/her personal safety or the safety of his/her immediate family members. Utilizing this statute in the appropriate manner can assist in trying to maintain a safe working environment for an association’s workers, community association managers, and board members.

Contracting Checklist

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In every contracting situation, from the smallest everyday project to the largest construction project, consider the following issues:

☐           Does the contractor have a valid California contractor’s license for the relevant specialty?

☐           Does the contractor have minimally acceptable levels of general liability insurance, automobile insurance and worker’s compensation insurance?

☐           Has the association been named as an additional insured on all of the contractor’s insurance policies?

☐           Have all the subcontractors submitted proof of their contractor’s licenses and insurance policies?

☐           Have all HOA and insured versus insured exclusion and contractor’s condition endorsements been deleted?

☐           Has the contractor complied with all of the association’s bidding requirements?

☐           Has the contractor supplied references and have the references been checked?

☐           Is there a written contract?

☐           Has the scope of the work to be performed been clearly defined?

☐           Does the association have to pay start-up costs to the contractor? Is the amount of the start-up costs reasonable (less than 10% of the total contract price)?

☐           Are progress payments required at reasonable intervals? Have payment obligations such as “upon delivery” been deleted?

☐           Have the payment provisions been written so that the association only pays for work that has been satisfactory completed?

☐           Is the contractor required to submit mechanics’ lien releases before each payment?

☐           Should the association write joint checks to the contractor and subcontractors if unconditional lien releases are not provided?

☐           Can the association hold retention from each progress payment until the end of the contract?

☐           Is final payment required after all mechanics’ lien rights have been expired?

☐           Are the starting and completion dates clearly specified?

☐           Is there a liquidated damages (predetermined monetary payment) provision in the contract?

☐           Would a performance bonus provision provide incentive to the contractor to finish earlier than required?

☐           Can the association terminate the contract “without cause?” If “cause” is required, is it clear under what condition the contract can be terminated?

☐           Has the contractor clearly indicated the warranties being given? Are there any materials manufacturer’s warranties?

☐           What exclusions are there in the warranties? Are these exclusions reasonable?

☐           Will the contractor be required to supply a performance bond or labor & materials bond?

☐           Is the contractor required to indemnify the association for its negligent acts and omissions?

☐           Have all obligations of the association to indemnify the other party been deleted from the contract?

☐           Have limitation of liability clauses been deleted?

☐           Does the contract require some form of Alternative Dispute Resolution mediation or arbitration) prior to or in lieu of litigation?

☐           Is there an attorneys’ fee provision in the contract?

☐           Has the contract been reviewed by legal counsel?


Client Advisory: Funding Options for Major Association Maintenance Obligations

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As common interest development housing stock ages, associations face decisions which will directly affect the market values in their communities, and the pocketbooks of their owners. Because reserve funding levels and deferred maintenance responsibilities have never been properly reflected in market values, current owners will increasingly become the deep pockets for funding major repair and renovation projects. Also, since many associations choose to keep their regular assessments low to avoid the negative market impact of high monthly charges, most will have inadequate reserves to fund the entire cost of a big project. A combination of increased assessments, special assessments, or a loan, may be necessary to supplement reserves so that the planned project may proceed.

After all statutes of limitations have run against builders and contractors, and all building material warranties have lapsed, there is no one to turn to but the owners themselves to fund necessary repairs. The Davis-Stirling Common Interest Development Act provides an association board with the power to raise assessments, while simultaneously protecting owners by limiting the extent of increases that may be made without approval. In the long term, a board is better off with advance planning of future increases so that it will have the ability to fund projects without calling a special meeting or obtaining owner approval by written ballot. Even if owner approval is not required, a board should still mount an active public relations campaign to provide owners with detailed information about the project. If the owners can be convinced that the project has been carefully planned with their best interests in mind, voluntary cooperation and prompt payments should be forthcoming.

A board will have to consider the political climate in the community, the finances of its members, and the nature of the project, to determine the preferred method for raising the funds. If quick completion of a project is critical, the Board may have no choice but to go to the owners. An association’s current fiscal year budget will dictate the limits for assessment increases that may be levied without asking for owner approvals. Pursuant to Civil Code section 5300(b)(1), the pro forma operating budget includes revenue and expenses on an accrual basis. The budget may include assessments sufficient to perform its obligations under its governing documents and the Davis- Stirling Act. The amount of expenses used to compute allowable increases includes amounts assessed to fund the reserves, in addition to operating expenses.

Civil Code section 5605 governs the ability of an association to levy and increase regular and special assessments to pay for major renovation and repairs or debt service for a loan. The need for owner approval at a special meeting or by a mail ballot depends on the amount by which the Board needs to increase assessments. Regular or special assessment increases may be made by a board as follows:

Increase of Regular Assessments over Prior Year of 20% or Less. This increase may be levied by the Board without owner approval only if the Board has previously complied with all the pro forma budget and financial disclosures required by Civil Code section 5300. For example, the current year’s budget could be increased to $600,000, if the prior budget was $500,000. If the Board has not complied with section 5300, owner approval is required for any increase. If the Board has complied with section 5300, no owner approval is required.

Increase of Regular Assessments over Prior Year of More than 20%. This increase may not be levied by the Board without owner approval. For example, if the prior budget was $500,000, the new budget may not exceed $600,000 without obtaining owner approval.

Special Assessment of 5% or Less of Current Fiscal Year Budget. This increase may be levied by the Board without owner approval only if the Board has previously complied with all the pro forma budget and financial disclosures required by Civil Code section 5300. If the current budget is $600,000, a special assessment of up to $30,000 may be passed in the same fiscal year without obtaining owner approval. If the Board has not complied with section 5300, owner approval is required for any increase.

Special Assessment of More than 5% of Current Fiscal Year Budget. This increase may not be levied by the Board without owner approval. For example, if the current budget is $600,000, a special assessment of more than $30,000 requires owner approval.

Owner approval is required for any of the above assessments or increases must be obtained by using the secret written ballot procedure called for in Civil Code section 5100. Regardless of the quorum or voting requirements in the Association’s governing documents, the quorum for the meeting is more than 50% of the owners, and the required approval is by a majority of votes. At a minimum, affirmative approval of the increase by 26% of the owners will be necessary to go forward.

If an association has different requirements for increases of regular and/or special assessments in its governing documents, it should be made aware that the Davis-Stirling Act provisions supersede any of its governing document provisions that are more restrictive. The notice of increase provisions of the Act also supersedes all notice of increase provisions found in an association’s governing documents. Notice of any increase in regular or special assessments must be provided to the owners by first-class mail, not less than 30 or more than 60 days prior to the due date of the increased assessment. Even if the declaration provides that the notice only has to be delivered to owners, it must be sent by first class mail.

Loans may also be considered to fund part of the project. Financial institutions are now aware of the market potential of common interest development lending. An association can be the ideal borrower since it has nowhere to go, and will likely not declare bankruptcy. Association loans are treated as commercial loans and future assessment payments may be pledged as collateral. The Association’s operating accounts may have to be moved to the bank making the loan. Carrying costs aside, loans are advantageous since they allow an association to spread the cost of a major project over more of its useful life, rather than burdening only current owners. However, even an aggressive bank will typically require that a portion of the project by funded through reserves or assessments. Owner approval may be required under the governing documents for the loan itself and for the increase in assessments necessary to service the debt.

Loans will be out of the question for some associations that are in poor financial condition and have failed to fund their reserves. As more complexes become dilapidated, and the need for affordable housing increases, some municipalities are considering making low and no interest long term loans to associations, providing that affordable housing goals are met through the cooperative effort. This type of financing is clearly a long shot, but something that politically connected owners should consider. These municipal loans have typically been made available only to single family homeowners.

A special category of emergency situation assessments was also created by the legislature to give a board the power to make certain assessment increases without the necessity of owners consent. Because voluntary payment of assessments is so important, a board should not be creative in relying on Civil Code section 5610 to levy emergency special assessments. Allowable purposes are:

(a)An extraordinary expense required by court order.
(b)An extraordinary expense necessary to repair or maintain a part of the common interest development for which it is responsible where a threat to personal safety on the property is discovered.
(c)An extraordinary expense necessary to make repairs that are the responsibility of the Board “that could not have been reasonably foreseen” when the last pro forma budget was prepared and distributed. [Caution: the Board must pass a resolution containing detailed findings regarding the necessity of the expense and why it was not, and could not have been, reasonably foreseen in the budget process, and distribute the resolution to the owners.]

Limits on associations power to assess in Civil Code section 5600(b) prohibit an association from imposing or collecting assessments or fees that exceed the amount necessary to defray the costs for which it is levied. A recent case where an owner tried to use this statute to avoid a special assessment, backed the decision of the Board. In Foothills Townhome Association v. Christiansen (1998) 65 Cal.App.4th 688; 76 Cal.Rptr.2d 516, the court upheld an association assessment to replenish the reserve fund after it used reserves to repair storm damage. The owner argued that because the reserve fund could have been replenished over a period of time, the assessment exceeded the amount necessary to defray the costs for which it was levied. The court found that the assessment was within the amount necessary to defray the costs for which it was levied – the cost of replenishing the reserve fund and that an assessment does not violate Civil Code section 5600(b) “merely because the costs could have been recouped incrementally. Nothing in the language of the statute suggests that is so.” Id.This decision provides guidance to a board as it determines not only how much the project cost per unit will be, but also how long an owner will be given to pay.

However an association raises funds to pay for major assessment obligations, it should consult with counsel before levying the assessment to ensure it abides by the association’s governing documents and the Davis-Stirling Act.

Insurance Code Upgrade Coverage

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We believe a number of community associations may have a gaping hole in their fire and casualty insurance about which they are unaware.  Virtually all condominium associations and most planned developments that have attached units require the association to carry fire and casualty coverage for the “full insurable replacement cost” of the common areas, association-maintained areas, and sometimes even the residences.  Many associations have policies that provide “full replacement cost” or “guaranteed replacement cost” coverage.  This terminology may give a board or community manager a false sense of security about the adequacy of the association’s insurance coverage.  The problem, from a legal standpoint, is that building codes are being strengthened constantly, as the years go by, to improve fire, earthquake and other safety standards.  Inevitably, these code changes also increase the cost of reconstruction.  Unfortunately, full replacement cost policies often provide for reconstruction of the building as originally constructed, but do not cover the extra costs needed to meet all the subsequent code changes since original construction.

When a building is partially damaged, the repairs may require some code upgrades in the area where the damage occurred.  The additional cost for complying with such code upgrades may not be significant, as long as the damage is confined to a relatively small area.  However, if the building sustains major damage, the local building department may require the entire building to be reconstructed to meet current building codes.  The cost to rebuild in compliance with current building codes could significantly add to the cost of reconstruction.  Obviously, the cost for code upgrades becomes increasingly larger as the development gets older and older, and as more and more building code changes become law.   After ten to twenty years, or longer, the cost of code upgrades in one building could be ten to twenty times the association’s deductible, or even more.  If significant damage were to occur in multiple buildings, the cost of necessary code upgrades could be astronomical.  Most standard fire and casualty policies for associations do not cover code upgrades and will not pay for the required upgrades.  Thus, unless the fire and casualty policy specifically includes “code upgrade coverage” or “increased cost of construction coverage,” or similar terminology, the board could learn too late that the association’s policy does not provide this coverage.  The additional cost of construction could be overwhelming.

Even for a relatively young association, a single major code change could have a sizable impact.  For example, around 1994, San Diego County was reclassified from a seismic Zone 3 to Zone 4 for purposes of meeting structural standards to withstand stronger earthquakes.  A building built to Zone 3 standards before 1994, if rebuilt, would now have to meet Zone 4 standards.  Other code changes have been implemented in recent years to make residential buildings more accessible to disabled individuals.  Certainly, many two or three-story multi-family buildings were built just with stairs leading to the upper floors.  If those buildings had to be rebuilt to current building codes, an elevator may be required.  It is not difficult to imagine the effect such changes might have on the cost of rebuilding, especially if they are not covered under the association’s insurance policy.

Typically, including code upgrade coverage in a fire and casualty policy requires the association to request it and pay an added premium.  Note, however, not all insurance companies offer code upgrade coverage as an option.  Thus, the board or community association manager certainly should ask the association’s insurance agent or broker whether the association’s policy covers code upgrades or not.  If the broker says that it does, ask for confirmation in writing including a citation and quote to the exact section of the policy in which code upgrade coverage is found (or a highlighted copy of the page(s) on which the code upgrade coverage is found).  Review the cited or highlighted section of the policy to confirm the provision the broker cited exists.

Brokers who deal regularly with associations know (or certainly should know), that most community association documents call for a master policy that provides coverage for the full insurable replacement cost of the buildings.  If, due to intervening building code changes, it is now legally impossible to rebuild your buildings exactly the way they currently exist, would that full insurable replacement cost policy provide full coverage? We think not – unless the association obtains building code upgrade coverage.   This is something the broker may or may not explain to you.  Always be sure to ask.

We trust this information will help you to avoid a costly error if your association experiences a major fire or other casualty loss.

Insurance: Tips for Reducing Property Insurance Claims

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Associations are feeling the effects of multiple factors that have hit the insurance industry. The 9/11 attacks unexpectedly depleted insurance company reserves, while the threat of terrorism has increased risks. Insurers of associations have seen increased claims, most often from water damage, as homeowner carriers have insisted that associations must process claims first, because owner policies are secondary to any coverage provided by the master policy.   More recently, drought-fueled wild fires followed by record-setting rains have changed the insurance landscape.  These factors, whenever they have occurred, or may occur in the future, result in higher premiums for all associations and difficulty in obtaining coverage for associations with histories of water damage or mold claims. This article provides suggestions to reduce insurance claims and to prevent costs from spiraling out of control when the current insurance climate is influenced by factors like these.

An association’s governing documents are the starting point. Associations must comply with these requirements, and the board cannot implement these suggestions if the documents provide otherwise. Document amendments are an option, but it is always difficult to meet the membership approval requirements for an amendment. Also, changing insurance language may require lender approval. In an extreme case, where the governing documents may require an association to comply with all requirements of federal guarantee programs like Federal National Mortgage Association (aka FNMA or “Fannie Mae”) such as: to obtain an all-risk policy, to pay all deductibles, to insure virtually all attached property in all units against virtually all types of loss and to obtain lender consent for all amendments, there may be little point in reading further. However, if there is flexibility in any of these areas, there may be hope for gaining some control.

An important point is that many governing documents require the association to insure not only the building structure but also the attached components inside individual units, such as carpeting, other floor and wall coverings, built-in appliances, cabinets, plumbing fixtures and other built-in components. The documents may not allow an association to exclude coverage for these components. The lenders, who have a significant influence on insurance requirements in governing documents, consider that these components represent part of the purchase price and want to ensure that the association insures everything that forms part of the security for their loans.

An association might contemplate an amendment that requires owners to insure these components and not require the Association to insure them. However, that type of amendment probably requires lender consent. Also, if it were adopted, and if there were a major casualty that destroyed the unit, the homeowner may not have individual coverage. Thus, the structure of the unit might be rebuilt, but the owner may lack the funds to install critical fixtures, like plumbing fixtures that are needed before the owner could obtain a certificate of occupancy. Under those circumstances, the owner may walk away from the unit causing the lender to foreclose. If an association adopted such an amendment improperly, the lender may seek to hold it liable for the cost of restoring the unit. Since many directors and officer’s liability (aka “D&O”) policies will not defend or indemnity directors on a claim that they failed to obtain the proper types of amounts of insurance, a lender claim like this may result in a denial of coverage.

Thus, if any of our suggestions may require an amendment and lender consent, or may cause an owner to walk away from a damaged unit, thereby dumping an expensive problem in a foreclosing lender’s lap, it is wise to formulate an insurance solution that will provide a safety net to deter owners from walking away, or will prevent lenders from inheriting a significant liability to restore a unit to a habitable condition. For example, an association could adopt a deductible policy that provides that once a certain number of units are damaged, or if the total damage exceeds a certain dollar amount, the association will pay the deductible.

Many older documents require associations to obtain a “fire and extended coverage” policy. This is also called a “named perils” policy because it covers only specifically named causes of loss. Typically, these are fire, lightning, wind, hail, aircraft, riot, vehicles, explosion, smoke, vandalism and malicious mischief. A named perils policy typically does not cover water damage. Thus, for an association that has high water damage claims that needs to gain control over those claims for a period of time to get coverage, it can purchase a named perils policy and eliminate all water damage claims.

The downside risk is that no water damage claims are covered. Not only are water damage claims in owner units not covered, but water damage claims in association clubhouses and common areas of residential buildings won’t be covered either. Unlike homeowners who can purchase a separate policy to insure against their individual water damage claims, the association will have to self-insure those claims. In our view, switching to a named perils policy should be reserved for an association with such high-water damage claims that it cannot obtain any other policy at a reasonable price.

If the declaration requires obtaining “broad form” coverage, that is essentially a named perils policy which expands the list of named perils to include water damage claims, so obtaining a broad form policy will not eliminate water damage claims. If the declaration requires an “all-risk” policy (now typically replaced by “special form” policies), those policies provide coverage for risks except those that are specifically excluded (such as earthquake, war, and many other specifically identified exclusions), but they do include coverage for water damage claims, so only a named perils policy is likely to exclude water damage claims.

Some association documents may require an all risk, special form or broad form policy, but mandate it only if it is commercially available, or if it is available only at a reasonable price. An exemption like this can empower the board to purchase a named perils policy, if a more comprehensive policy cannot be obtained, or it may be language the association can adopt by amendment, if its water damage claims are out of control.

Many associations are also increasing their deductibles to eliminate claims for lesser amounts, and $5,000 is now a common deductible. Some federally-guaranteed loan programs have been permitted to have up to a $10,000 deductible. However, this option makes sense, only if the association can shift the payment of deductibles onto the owners. It doesn’t help, if an association must pay the deductible on every claim. Logically, the chances of having a water damage claim increase in proportion to the number of units in the association. If owners don’t assume part of the risk by carrying their own insurance, associations may be unable to find or keep insurance.

Associations also need to implement some type of deductible “policy” before a claim occurs. Preferably this should be in the recorded declaration, since the courts give recorded covenants a presumption of validity. There are various options available for such policies, each having various pros and cons. They usually break down into variations of imposing the deductible either (1) on the person whose property was damaged in proportion to the dollar amount of the insured loss, or (2) on the owner who is at fault or whose component failed resulting in the damage.

Under the first option, if one owner (or the association) has 50% of the damage, that party would pay 50% of the deductible. The negative aspect of this option is that some owners may be forced to pay even if they had no responsibility for the component that failed. However, they can usually have it covered under their owner’s policy. Under the second option, someone has to find a way to collect the deductible from the owner whose component produced the damage. Assume a plumbing leak in a second-floor unit caused 80% of the insured loss in the unit below. That owner may get 80% of the insurance proceeds, but will be short in an amount equal to 80% of the deductible. It may require a lawsuit to force the second-floor owner to pay the shortfall, and who will file it? Thus, a general preference is the equitable apportionment, because the downstairs owner will have to pay 80% of the deductible, but most could be covered under that owner’s individual insurance. Even if the association’s policy provides for an equitable apportionment of the deductible, it could also provide that the damaged owner has the right to sue another party for the deductible the damaged owner had to pay.

Another option is to see if the carrier will exclude just water damage claims, but not other causes of loss. However, there are few carriers that will offer such an endorsement. Also, as indicated above, if there is no coverage for water damage claims in owners’ units, there is no coverage for water damage for any water damage claims in the common area either. A similar option is to exclude certain property from coverage. The property most often damaged is wall, floor and ceiling coverings and drywall. If the association’s carrier will write an endorsement to exclude these components from coverage, it would eliminate a large number of claims. However, many insurance carriers will not write this exclusion. Also, if the association excludes coverage for these components, it is essentially self-insuring them in recreational facilities, common hallways and other common areas. Thus, these last two options should be reserved for extreme cases where the alternative may be obtaining no coverage at all.

Through a document amendment, owners could be required to obtain individual coverage to insure all attached components. The difficulty is trying to verify that each owner has actually done so. For every 52 units in any association, the association must seek verification an average of once a week throughout the year. The more units there are in an association, the more time-consuming verification becomes. When most associations have difficulty getting a majority of owners just to send in a proxy or a ballot for the annual meeting, it could be a logistical nightmare to obtain verification from every owner.

While amendments to implement these options may require lender consent, a couple factors may help to overcome that requirement. Many newer documents require lender approval only by “eligible lenders.” This means lenders who have notified the association that they want to vote on such amendments.   Of course, lenders almost never provide such notification.

In conclusion, the association’s policies on insurance and deductibles really should make units fully habitable after catastrophic losses. However, providing coverage for every conceivable loss, regardless of amount, and for every owner’s interior damage, is a recipe for an undesirable claims history and an inability to find an affordable policy and perhaps any policy at all. Absent a disastrous claims history, the best options for most associations are probably increasing deductibles to reduce the number of claims, shifting the deductible burden to owners for smaller, non-catastrophic claims, and providing an association-paid deductible for larger or catastrophic claims. However, before implementing any policy, each association should consult with its insurance professional and its legal counsel to make sure it is not inviting an unreasonable risk.

Insurance: How to Pay D&O Premiums and Still Lose Coverage

Part 1

Explains how both a former and current directors and officers (D&O) insurance carrier may deny coverage when a potential claim doesn’t materialize until after the association changes carriers. Because of this risk, associations and managers must be extremely careful any time a prospective or existing D&O carrier sends an appli­cation asking if the board knows of any actual or potential claims. This is a time for extreme caution, not haste.

Recently we have seen some cases in which carriers denied coverage under directors and officers (D&O) liability policies on what normally should have been covered claims. The carrier’s denials arise out of a “Catch-22” that few people recognize. The nature of D&O insurance is such that associations actually can have D&O coverage in effect continuously from one carrier to the next and yet not have coverage when a claim arises. To avoid this outcome, it is essential (1) to tender a claim to the carrier whenever there is even a potential risk of a lawsuit and (2) to be extremely careful when completing an application for new insurance.

D&O insurance is almost always a “claims-made” policy. These policies, theoretically, cover any claim made during the policy period, sometimes even if the incident on which the claim is based occurred before the policy began. However, most D&O policies will not cover a claim, if the association knew of ANY facts or circumstances before the policy began that might give rise to that claim.

D&O insurance provides different coverage from the typical comprehensive general liability (or “CGL”) policy. CGL policies typically cover only those claims that result in bodily injury or property damage and sometimes non-bodily “personal injuries.” CGL policies are typically “occurrence” policies, so named because they protect the insured against claims arising from an “occurrence” during the policy period. They provide coverage even if a claim does not arise until after the policy period ends. It is fairly easy to identify an occurrence and when it occurred, because it usually produces bodily injury or property damage at that time. D&O insurance, on the other hand, usually covers only those claims made during the policy period. With a D&O incident, it is often easier to identify when the claim is made than when the occurrence happened that gave rise to the claim.

Some claims-made policies will cover claims that are made during the policy period even if the occurrence giving rise to the claim occurred prior to the start of the policy period. The catch is that a new carrier will accept such claims only if the insured party had no prior knowledge, when the policy period began, of any facts or circumstances giving rise to that particular claim.

What exactly is a “claim?” Certainly a lawsuit is a claim under any policy, but some policies define a claim as any written threat or demand or even a verbal threat or demand. Whatever the definition, it is easy to under­stand that no carrier wants to cover a lawsuit that arises out of any facts or circumstances about which the asso­ciation was aware before the policy began. Many carri­ers will cover it, if neither the carrier nor the association knew it existed at policy inception, but no carrier will cover what amounts to a known pre-existing liability.

What if facts or circumstances have occurred, but they don’t yet meet the policy definition of a “claim?” Maybe there was a verbal threat, but the policy defines a claim as a written threat. Some claims-made policies consider that a claim was made, if the insured party notifies the carrier during the policy period of the facts that may become a claim. Even if the policy does not provide for notifying the carrier of a potential claim, it is still wise to do so before the policy period ends. If the incident becomes a real claim after the policy period ends, the earlier notice may be enough to trigger coverage, but it will be impossible, if the former carrier’s first notice occurs after the policy ended, because the claim wasn’t made during the policy period, and the carrier will deny coverage.

This is how an association can lose coverage. Assume one owner objects verbally when the association approves a neighbor’s architectural modification. The complaining owner sends no written complaint or anything that the policy defines as a “claim.” Then, things calm down for a period of months, and the association either concludes that the complaint is minor or believes it resolved the problem. The association doesn’t notify the current D&O carrier of the owner’s complaint.

Three months later the association selects a new D&O carrier. The carrier sends an application to the manager to complete, or maybe the broker asks the association board or manager if there are any pending claims, completes the application, and the board or manager signs it. The signed application states that the association has no pending claims nor any knowledge of any facts or circumstances that may give rise to a claim. The board may have forgotten the prior threat, or the board may have changed, and the new board doesn’t know of the prior complaint. Either way, the old D&O carrier got no notice of the potential claim, and the new carrier is told that there are no potential claims.

The new D&O policy takes effect, and the complaining owner surfaces with written threats or litigation. The association tenders the claim to both the old and the new D&O carrier. The prior D&O carrier denies the claim, because it wasn’t made during the policy period. The new D&O carrier denies coverage, either because the association failed to disclose the potential claim on the application, or because the new policy states it will not cover a claim, if the association knew of any prior facts or circumstances that might give rise to a claim.

Part 2

Addresses what associations should do to avoid having both the old and new carrier deny coverage. Part 2 also discusses being alert to “burning balance” policies, in which the coverage limit available to pay claims is reduced by the amounts expended in defense costs.

Never complete or sign an application quickly

Before completing it, the board and manager should review the events of the past year or longer for any incidents or complaints that may become a lawsuit or other claim against the association. New directors should review the correspondence of the past year and ask any employees, the manager and legal counsel if they are aware of any incidents that might give rise to a future lawsuit or other claims. If such incidents exist, the prudent course of action is to notify the current carrier of the potential claims before the policy ends, or at the very latest, before the end of any grace period provided in the policy. Also give notice of any claim or potential claim to the proper party, at the address and in the manner called for in the policy, keep a copy, ask for an acknowledgment and follow up.

The safest course of action for providing notice in the manner required by the policy is to provide the actual policy to the association’s attorney with any information on the potential claims or claims, then ask the attorney to give notice to the carrier. While many insurance policies require that notice be sent to the carrier by certified mail, return receipt requested, this is advisable even if the policy does not require it, as the returned receipt may be the only proof the association may have that it mailed timely notice. If the association finds that it is really up against a deadline, use a fax that provides a confirmation sheet or even email, if you can find an email address for sending the notice. At least try to speak with someone at the claims department of the company, and use the person’s name in any notice of a claim you send to the company. While some carriers allow claims to be submitted through the agents, many times the policy provides that the carrier has not received notice until it is actually received by some employee of the insurance company. If you are anywhere close to a deadline, do not assume that notice to your insurance agent is the same as notice to the carrier.

It is essential that all boards treat the applications for new insurance and changes in D&O carriers with seriousness and great care. The failure to do so can result in paying for uninterrupted coverage and yet being denied coverage when it is needed.

How to end up with less coverage than what might be expected

A second issue that is often overlooked both in D&O and general liability policies is what is sometimes called a”burning balance.” Each association should know if defense costs are part of or paid in addition to the coverage limits. The former is what is called a “burning balance,” because the carrier will deduct any attorneys’ fees and costs incurred to defend a claim from the limits of liability. In other words, under a burning balance policy, the amount available to pay the claims or to settle the case is reduced by every dollar spent in defense. For example, if an association has a $1,000,000 policy, and a large potential claim (or perhaps multiple claims that could be significant in one policy period), and if the association expended $150,000 in defend­ing the claim or claims, it would have only $850,000 left to pay any and all judgments or settlements during that policy period.

If an association is evaluating insurance policies, it needs to be aware that two policies that are identically priced and identical in every respect except for the burning balance are not a comparable value, since the burning balance policy presumably will have less available to pay claims. So, if an association purchases a burning balance policy, it should seriously consider increasing its limits of liability to be sure that there will be enough coverage to pay out any claims that it may encounter.

Also recognize that the limits of liability are the maximum that the carrier will pay in any policy period. So if an association has a $1,000,000 policy and incurs a $300,000 claim early in the policy period, there will be only $700,000 left to pay all other claims that may occur for the remainder of that policy period. Fortunately, major liability claims are rare. However, if an association were to experience a large claim, or multiple injuries or claims arising out of the same incident in any given year, a burning balance could have a serious impact on the association’s ability to defend and pay liability claims.

Associations should evaluate their current policies for “burning balance” provisions and anytime they are comparing policies prior to a possible change in coverage.

Additional Insurance Information Available

For greater details about the issues to consider when evaluating insurance policies, please contact our office.


Insurance Claims: Proper Submission

By: Jon H. Epsten, Esq., and Anne L. Rauch, Esq.

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For those of you who have been involved in managing or sitting on a board of directors for a community association, you are aware that the association typically makes an insurance claim through its insurance agent. For many years, this has been an acceptable method for submission of insurance claims; however, there are pitfalls to making the claim directly to the insurance agent which could result in denial of an insurance claim or the insurance claim never being received by the insurance company. Here are some suggestions on how to properly tender an insurance claim to an insurance company.

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Construction Defects & SB 800

In 2002, the California legislature enacted SB 800, adding 10,000 words and a series of 46 new sections to the California Civil Code. SB 800 transformed the law of construction defects in California, both procedurally and substantively. Homeowners associations plagued by known or suspected construction defects need to be aware of the numerous new rules and potential pitfalls found in what has become “Title 7” to the Civil Code.

Substantive Changes in the Law

Prior to SB 800 developers complained that California law was too vague. They argued for a specific definition of what a “construction defect” is so they could design and build to a certain known standard and avoid liability. Thus, Civil Code section 896 sets forth numerous defini­tions of “construction defects.” The definitions are set forth on a building component-by-building component basis. For every building component listed a perfor­mance standard is attached. (For example, “Roofs . . . shall not allow water to enter the structure,” or “Windows . . . shall not allow water to pass beyond . . . the moisture barriers,” or “Decks . . . shall not allow water to pass into the adjacent structure.”) Such performance based definitions exist for almost every imaginable building component or system.

The statutorily-defined defects carry both benefits and dangers for homeowners associations. On the beneficial side, proving liability for most construction defects is easier for associations. Once a violation of the performance standard is proven, the developer’s liability is established. The requirement to prove consequential property damage caused by the cons­truction defect is eliminated. But, on the detrimental side, each defined defect carries its own distinct statute of limitations (1 year, 2 years, 4 years, 10 years). Some specified defects allow an association up to 10 years to bring a claim while other defined defects allow as little as 1 year. This arbitrary patchwork of various and sundry statutory deadlines for bringing construction defect claims is a pernicious trap for the unwary.

Procedural Changes in the Law

Prior to the enactment of SB 800, pursuant to the Calderon Act enacted in 1995, homeowner associations were required to follow certain procedures and engage in certain communications with the developer before filing suit in court against the developer. Much of those pre-litigation procedures, or their concepts, is carried forward in SB 800 (e.g., written notice to the builder, right of both parties to obtain relevant documents, right of builder to inspect claimed defects, right of builder to make an offer, etc.). But SB 800 added a significant new feature: The builder’s right to repair the claimed defects. When first enacted SB 800 was known in the construction industry as the “fix it law.” Several code sections specify the manner in which the builder may propose repairs, how the association may respond, and the consequences of the repairs on claims following their implementation. In practice, however, very few builders have ever exercised their right to implement repairs. Rather, as has been the case for many years, builders’ insurance companies prefer to pay money (as little as they can get away with) to resolve construction defect disputes.

Necessity of Involving Attorneys

No homeowner association should endeavor to negotiate construction defect claims with a developer without assistance from attorneys experienced in construction defect litigation. As noted above, a dangerous patchwork of differing statutes of limitations exists for different components and systems. Worse, the statute of limitations can run out even as the association and developer are following the SB 800 procedures.

There are numerous other nuances and complica­tions to SB 800 which are too complex to describe in detail. For example, SB 800 does not apply to condominium conversions. The SB 800 procedures may be affected or revised by arbitration or alternative dis­pute resolution provisions. And, where sales of homes in the community occurred both before and after January 1, 2003, a portion of an association’s claims may be covered by SB 800 while another portion is governed by pre-existing law. Depending on the circumstances, an association’s construction defect claims may be benefited by the statutory construction defect definitions yet not burdened by the statutory procedures.

Consult your attorney!

Condominium Plan: Understanding This Often Overlooked Governing Document

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By: Susan Hawks McClintic, Esq.

There are many documents used or referred to in the management of a condominium project. The least understood and consulted is undoubtedly the condominium plan, even though it is referenced in every single deed to a condominium. Virtually every board member, association manager and attorney has read or analyzed the association’s Declaration of Covenants, Conditions and Restrictions, Bylaws and Articles of Incorporation a number of times. These documents are frequently consulted for answers to a multitude of questions regarding the rights and responsibilities of the association and its members. The condominium plan, however, is frequently overlooked. Although the contents and purpose of a condominium plan are limited, it has an important role to play in condominium management.

The term “condominium plan” is defined in Civil Code section 4120 and described in section 4285. It has three elements. First, it contains a description or “map” of the condominium project in reference to ground monuments. This means the location of the project is identified with respect to reference points on the ground, such as streets. The dimensions of the project will also be shown.

Second, the plan contains a three-dimensional description of the project in sufficient detail to identify the common areas and each unit. This means the plan will contain a description of the location, size and boundaries of each unit, the exclusive use common areas, and the common area. For example, the boundaries of each unit might be described as the unfinished interior surfaces of the perimeter walls, floors, ceilings, windows and doors. The location and dimensions of patios, balconies, parking spaces, and storage spaces may also be described in the plan.

Third, the condominium plan contains the consent of the record owner of the property and any lender to recordation of the plan. The original plan only requires the consent of the developer, who at the time the plan is prepared owns all of the property. However, once the project is built and sold, 100% of the members who collectively own the common area and 100% of all lenders on any unit must consent to any modification of the plan.

In terms of its use as a management tool, the condominium plan has two primary functions. The first primary function is the description of units versus common area. This is extremely important in the identification of maintenance responsibilities, which are often assigned according to whether a particular feature is common area, or part of a unit. The plan usually describes the boundaries of the unit (air space), and then lists those physical features which are either exclusive use common area or common area, and not part of the unit. Frequently, such items as bearing walls, pipes, wiring, and other utility installations (except the outlets within the unit) are identified as part of the common area. Garages, parking spaces, balconies, patios and other similar features are often identified on the condominium plan as either part of the unit or exclusive use common areas.

The second primary function of a condominium plan is the identification of exclusive use common areas. Often, parking or storage spaces, not physically connected to a unit, are identified in the plan on a plat map by location and identifying numbers. Then, when their identifying numbers are located on a deed, the plat map can be consulted to determine their exact location. Other condominium plans utilize a list format where each unit is matched up with its respective exclusive use common area, such as a patio, balcony, parking space, or storage space. The list can be consulted to identify the numbers of the exclusive use common areas belonging to any given unit, and then the plat map can be used to find their location. Though a variety of condominium plan formats can be used, the results are usually the same: fixing and identifying the location of units and their assigned exclusive use common areas.

One problem we have encountered is the “reassignment” by either boards of directors or owners themselves, of certain exclusive use common areas. For a variety of reasons, some associations have “rearranged” parking or storage space assignments, and owners are no longer using spaces originally assigned to their units on the condominium plan. Exclusive use common areas which are assigned pursuant to a condominium plan (and appear on the deed as well) are real property interests which cannot be changed without the property owner’s consent and appropriate documentation. Remember, changing the scheme set forth in the condominium plan in any way requires the written consent of 100% of the owners and 100% of the lenders on the units. If a board of directors or group of owners is contemplating action which will result in any deviation from the condominium plan, legal counsel should be consulted before taking that action.

It is likely the condominium plan will remain the least utilized of all the association’s documents. Yet, when maintenance, repair, location, or boundary issues arise, it may well be the document that should be consulted first. A copy should be kept with every association’s governing documents.

Electronic Discovery: Preserving Electronically Stored Information

By: Carrie M. Timko, Esq.

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Advances in technology have caused significant changes in the way civil discovery is conducted. Before the advent of the computer age, most documentation was easily identified as paper. Today, however, documentation is more likely to take the form of an email, text message, or computer file. Just as society’s method of communication has evolved, so has the law. California’s Electronic Discovery Act (Code of Civ. Pro. § 2016.010 et seq.) allows litigants to obtain electronically stored information (“ESI”) through the discovery process. As a result, when a party reasonably anticipates litigation (whether by filing a lawsuit or by being sued) there is a duty to preserve all ESI that may be discoverable.

What is “ESI”?

ESI should be defined as broadly as possible. ESI includes any information stored electronically, magnetically, digitally, or optically, such as email, voicemail, instant messages, text messages, sound or video recordings, word processed documents, spreadsheets, and other similar electronic media. Devices used to store, produce, and transmit ESI include computers, laptops, servers, cellular phones, handheld wireless devices, and the like. ESI also includes information about electronic data called “metadata.” Metadata is a hidden recorded history about an electronic file’s creation, modification, location, and size, which can be vital to a document’s significance in litigation.

When does the duty to preserve ESI arise?  

The duty to preserve ESI arises when a party reasonably anticipates litigation. Since there is no bright-line rule as to when litigation can be “reasonably” anticipated, it is best to preserve ESI at the time a dispute arises, whether a lawsuit has been threatened or not.

Who does the duty to preserve ESI extend to? 

In the case of a common interest development (homeowners associations, planned developments, condominium projects, community associations, maintenance associations, etc.), directors, officers, committee members, managers, agents, and employees all have a duty to preserve ESI once litigation is anticipated. Additionally, any vendor, consultant, or other third party who may have ESI related to the dispute has a duty to preserve that ESI. For example, if the dispute is over financial expenditures, the association should notify its accountant in writing to preserve ESI in his or her posses­sion that is related to the dispute. The same applies to other vendors, depending on the nature of the dispute. If a director utilizes his work email account, computer, or cellular phone to conduct association business, his employer would also be subject to the duty to preserve ESI under its control. Extending this preservation duty to the director’s employer as a result of communications outside the scope of the director’s employ­ment can have negative implications for the director as well as the association if the ESI is not properly preserved. Therefore, directors and committee members should be careful from where they send and receive email, and from what account. Directors should consider setting up a separate email account solely for association business. Associations may also consider creating their own domain name and supplying email addresses to its directors and committee members.

What do I need to do to preserve ESI? 

Once litigation is anticipated, refrain from deleting or destroying any ESI that exists. Enact procedures to prevent future deletion or destruction of ESI and ensure that all automatic computer operations that delete ESI by age, capacity, or other criteria are turned off. Do not overwrite or erase any back-up media and do not use any defragmenting or compression programs, or metadata scrubbers. Note that when ESI is “deleted” it can still be recovered. Therefore, be careful to preserve all ESI at the appropriate time. The penalties for failing to preserve ESI can be significant, and the penalties for purposely deleting or destroying ESI can be even worse.

How do I properly dispose of ESI when litigation is not anticipated? 

The association should implement a policy on ESI destruc­tion and deletion for use during times when litigation is not anticipated. If the association has such a policy in place (for example, ESI will be purged after five years if no litigation is anticipated), it will be harder for a challenging party to claim that evidence has been improperly destroyed than if ESI is randomly deleted.

In a time where email and text messages are often a more common means of communication than speaking face-to-face, associations must be aware where the duty to preserve ESI arises and to whom it extends. Every time you push the send button, you are creating a potentially discoverable document. Protect your association from potential discovery challenges and penalties by enacting proper policies on the use and storage of electronic information.