Epsten, APC

How should a director perform his or her duties in order to minimize the risk of personal liability?

Corporations Code section 7231, commonly known as the “Business Judgment Rule,” requires a director to perform his or her duties as follows:

(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

(b) In performing the duties of director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by:

1. One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matter presented;
2. Counsel, independent accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence; or
3. A committee upon which the director does not serve that is composed exclusively of any or any combination of directors, persons described in paragraph (1), or persons described in paragraph (2), as to matters within the committee’s designated authority, which committee the director believes to merit confidence, so long as, in any case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.

(c) A person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat a public or charitable purpose to which assets held by a corporation are dedicated.

Does a director of a community association owe a fiduciary duty to the membership?

Yes.  Having a fiduciary duty to another involves being in a position of confidence and trust.  A director owes a fiduciary responsibility to the association and to all of its members.  The director’s personal needs and desires must be put aside in favor of the director acting in good faith and in the best interests of the association and the entire membership.

Is a director responsible for the actions of the other board members if the director is not at a meeting where the action was taken?

Failing to attend a meeting will not shield a director from liability.  A director has a duty to participate in the affairs of the association, including attending meetings.  A director can only protect himself or herself by attending the meetings and voting against actions which he or she cannot support.

How can a director fulfill his or her responsibility as a director if he or she is not an expert in all of the issues being considered?

No director can be knowledgeable about every subject which confronts the board.  Frequently, the best directors are those people with good general knowledge.  Directors must often rely on advice and information provided by experts or other professionals in the field being considered.  The board need not always accept the advice given by the chosen expert.  However, if professional advice is not going to be followed, the board should have good reasons for rejecting the advice, and should carefully document its decision.

How much time should a director spend on association business?

Enough to do the job properly.  A director should attend all meetings of the board, should prepare for the meetings in advance and be knowledgeable on the issues to be discussed and decided.  An association is not a social organization; it is a business, often involving assets in excess of several million dollars, and annual budgets that exceed hundreds of thousands of dollars.  Protecting these assets and fulfilling a director’s fiduciary duties requires spending sufficient time to enable the director to make informed decisions on the issues being decided.

Is a director individually liable for his or her acts as a director?

Provided a director does not intentionally act wrongfully, the acts of a director will be considered the acts of the association, and not the personal acts of the individual director.  Under such circumstances, only the association can incur liability, if any, for the director’s actions.  Acting in good faith and with the interests of the association in mind will protect a director from individual liability.  In addition, Civil Code section 5800 provides that a director will not be personally liable for any personal injury or property damage in excess of the association’s insurance, if:

(a) the association has at least $1,000,000 in general liability and directors & officers insurance ($500,000 if there are 100 or less units in the development);

(b) the director is a volunteer;

(c) the act or omission performed by the director was within the scope of the director’s duties;

(d) the act or omission was performed in good faith;

(e) the act or omission was not willful, wanton or grossly negligent

Can a director also perform services to the association for which he or she is paid?

Although it is not necessarily improper for a volunteer director to agree to provide paid services to the association, such a relationship is unwise.  The protection against liability afforded by section 5800 of the Civil Code, discussed above, could be lost.  The director will often be accused of having a conflict of interest and the homeowners may never be satisfied that the director is not taking unfair advantage of his or her position as a director in order to improve his or her financial situation.  If a director does offer a compensable service to the association, the association should endeavor to comply with Corporations Code section 7233.  That section states that a transaction may be valid even if a director has a financial interest in the transaction, if there is full disclosure of all material facts and if the transaction is approved by either the membership of the association or the board, excluding the vote of the interested director. Also, many governing documents expressly preclude compensation to directors without a vote of the members.

How does a director avoid personal liability if he or she disagrees with a decision made by the other board members?

A director will not incur responsibility for an erroneous decision made by the majority of the board if the director is in attendance at the meeting when the vote is held and votes “No” on the resolution.  The director should also request that his or her opposition to the motion be recorded in the minutes of the meeting.

Does the board need to maintain minutes of its board meetings, and what should they contain?

Yes, Corporations Code section 8320 requires corporations to keep board meeting minutes.  The minutes are an excellent source of protection for a board, as they provide a written record of the actions taken. Over time, the minutes become the association’s historical record.  Minutes should not be lengthy dissertations of everything that was said at the meeting, but they should contain all motions made at the meeting, and the results of the vote on each motion.  It is not necessary to indicate how each individual voted, although a director may ask that his or her specific objection to the motion be recorded.  The minutes should also include a summary of the factors considered by the board in passing or rejecting each motion.

What sort of protection should the association provide its individual directors?

The members of the board are volunteers.  Every association should provide the board with broad indemnification rights in the governing documents, and should also provide adequate directors and officers insurance coverage.  No director should be asked to place his or her personal assets in jeopardy for performing a volunteer service.

Should our association adopt formal parliamentary rules for conducting its membership meetings?

Yes, Civil Code section 5000(a) requires it for membership meetings, but not for board or committee meetings. The purpose of having such rules is (1) to provide order so meetings can proceed in a business like manner, and (2) to provide a fair opportunity for everyone to participate. In addition, Civil Code section 5105 requires associations to adopt written rules governing the association’s election and voting procedures.

Should we always have a written agenda for membership meetings, and what should it contain?

You should provide a written agenda to show the order in which the business of the meeting will be conducted. A typical agenda would include the following items:

(1) call to order and verification of a quorum by the Chair;

(2) introduction of the Chair, board members, inspectors of election, special guests, and speakers, if any;

(3) election of directors with the counting and tabulation of the secret ballots by the inspectors of election;

(4) presentation of reports by directors, officers, and committees;

(5) adoption of any resolutions regarding tax and accounting issues;

(6) member comments or member forum;

(7) unfinished business from the previous meeting, if any;

(8) new business (which must be business members have a right to vote on);

(9) announcement of election and other voting results;

(10) adjournment.

In developing a procedure for holding our membership meetings, where should we start?

Start by reviewing your bylaws. Most contain rules on giving notice of meetings, proxies, quorums, voting rights, and electing directors. In some cases, the Corporations Code and the Davis-Stirling Act have rules which supersede your bylaws and in other cases the rules in the law are to be followed when the bylaws are silent. Following the require­ments in these documents and the parliamentary rules your association adopts, should enable you to conduct your meetings successfully.

Should the notice of the membership meeting contain anything more than the date, time, and place of the meeting?

Yes. The notice should be in writing, and should identify all matters the Board plans to present to the members for a vote. For special meetings, only the business identified in the notice of a special meeting may be brought up at the special meeting for a vote. Always consult your bylaws, the Davis-Stirling Act (Civil Code section 4000 et seq.) and the Corporations Code to verify notice requirements.

Must all voting use secret ballots?

Civil Code section 5100 requires associations to utilize a secret balloting method defined by the statute for all votes concerning assessments legally requiring a vote, election and removal of members of the Association Board of Directors, amendments to the governing documents, or the grant of exclusive use of common area property pursuant to Section 4600. These types of votes must be cast on a totally anonymous ballot inserted into a sealed envelope which is then inserted into another envelope and returned to the inspectors of election. Ballots pursuant to Civil Code section 5115 must be mailed by first-class mail or delivered to the association members, together with the double envelopes for the members to return their ballot, at least 30 days prior to the deadline for voting. For most other types of votes, ballots are required only if the bylaws make them mandatory.

For more routine matters, other less formal methods are appropriate. These include a voice vote (all say “aye”), a show of hands, a roll call vote (owners names are read from the list of owners), and unanimous consent (if there are no objections, the matter is approved).

We have previously appointed inspectors during our membership meetings to count votes. When is the best time to do this, and how do they know what to do with an improperly marked ballot or proxy?

Inspectors of election have broad powers under Civil Code sections 5110 and 5120, and Corp. Code 7614, including the power to determine who can vote, whether proxies are valid, and how a particular vote is cast. In addition, inspectors of election are vested with the responsibility to receive and maintain the ballots submitted by the members. Because inspectors must designate the location where the ballots are to be returned and maintained (Civil Code section 5125), associations should appoint inspectors prior to mailing a ballot to the owners and well in advance of the meeting or pending vote.

Inspectors of election use the requirements of Civil Code section 5100 et seq., other laws, and the association’s governing documents in reaching a determination concerning an election. For example, an outer envelope containing a secret ballot must legibly indicate the required identifying information. If the inspectors receive a ballot envelope that does not, the inspectors must decide whether to accept the ballot. For this reason, it is advisable for the inspectors to consider possible balloting defects prior to receiving the ballots and determine how to treat such defects uniformly, such as: “If the voting member can still be reasonably ascertained, then, the ballot should be counted even though not all of the identifying information is legible.” All rulings or decisions of the inspectors should be in writing and kept with the voting records, including reasons for invalidating a proxy or ballot.

Some of our members actually go door to door soliciting proxies from other members. Can they do this?

A proxy is a written authorization signed by a member which gives another member the power to vote on behalf of that member. The proxy is not to be used in lieu of a ballot. An association may accept these proxies if permitted or required by the bylaws of the association and if the proxies meet the requirements of Civil Code section 5130, other laws, and the association’s governing documents. However, associations are not required to prepare or distribute proxies pursuant to Civil Code section 5130. For this reason, the member wishing to authorize a proxy must ensure the proxy complies with all requirements to be valid. The inspectors of election will verify the proxies received by the association.

How do owners bring matters before the membership for voting or approval?

First, the matter must be one the members are entitled to decide. Then, unless the matter is one which requires the use of a secret ballot pursuant to Civil Code section 5100 et seq., parliamentary procedures provide four basic motions by which a member may bring an issue before the meeting. The first is called a “main motion.” It brings new business before the members for discussion and a vote. For example, “I move we adopt the tax resolution to allocate any excess association funds left over at the end of this fiscal year to next year’s budget.” The second is a “subsidiary motion” which changes or amends the pending main motion. For example, “I move we amend the motion to return excess association funds to the members.” The third is an “incidental motion,” one involving a procedural issue that concerns another pending motion or item of business. For example, “Point of Order. Did the notice of this special meeting state that a tax resolution would be presented for a vote?” The fourth is a “privileged motion,” one not concerning a pending motion but so important that it may interrupt anything else without debate. For example, “I move we recess until the Chair’s microphone is repaired.”

The election of directors is usually the most important business at our meetings. Are there any special rules regarding elections?

Civil Code section 5115 requires votes on the election or removal of directors to be conducted using a secret mailed ballot system modeled after the procedures used by California counties for ensuring confidentiality of absentee voter ballots. Most other requirements are found in the bylaws, such as whether to allow nominations from the floor, provide for cumulative voting, allow for proxies, and the like. If cumulative voting applies, you should explain it to avoid member confusion when filling out ballots. Counting of ballots must be conducted by inspectors of election in public at a properly noticed meeting of the members, or open meeting of the directors as permitted in the bylaws. The results of the election are reported to the board by inspectors of election and then recorded in the minutes of next board meeting. The tabulated results must also be publicized to all members within 15 days of the election.

Our membership meetings are often disrupted by owners who disregard the rules and want to vent their anger at the board of directors. How can we stop this behavior?

Associations face this periodically. First, to help alleviate the problem, consider appointing a committee to develop written rules for member behavior. Second, require persons who are going to speak in the homeowners forum to complete a form stating what topic they will address and limit the time each member can speak. Third, develop a written policy for handling disruptive members so the Chair knows exactly what to do. This would include warnings, recesses, speaking to the person in private, and even monetary penalties for disrupting the association’s business. Fourth, consider appointing a sergeant-at-arms if you have a member who has a special talent for dealing with unruly individuals. Fifth, the Chair can always threaten to or actually adjourn with the hope of bringing peer pressure on the disruptive member. Sixth and finally, being courteous, respectful, and professional can often be disarming, and a good method for enlisting the support of other members to assist in dealing with the disruptive individual.

What are the requirements at present for a community to be 55+?

For “stick built” housing (traditional, non-mobilehome housing) the community must satisfy both state and federal law on senior housing. Federal law requires three things: (1) that at least 80% of the occupied units be occupied by at least one person 55 years of age or older; (2) that the community publish and adhere to policies and procedures designed to effectuate the intent to provide housing for seniors; and, (3) that the community verify the ages of its occupants in accordance with regulations published by the Department of Housing and Urban Development (HUD). State law requires the community satisfy both a design element and a resident profile. The design element specifies the community must have a certain minimum number of units (depending on where the community is located), and that the development has been developed for, or substantially rehabilitated or renovated for senior use. The resident profile requires that residents be either seniors (55 or older), “qualified permanent residents,” permitted health care providers, or persons who were lawfully in residence on January 1, 1985. These requirements are slightly milder for communities located in Riverside County, and mobilehome communities of any description, wherever located in California, need only satisfy federal law.

Our 55+ community CC&Rs say residents must be “45 or older” and that persons under 18 may only visit for a limited period of time. Are these documents satisfactory?

These documents are not satisfactory. The CC&Rs must be amended to specify that all residents must be either 55, or qualified permanent residents, permitted health care providers, or those lawfully in residence on January 1, 1985. Sometimes it is extremely difficult to obtain the votes necessary to procure this type of amendment; HUD regulations indicate that the government, in investigating claims of familial status discrimination, will take into account any unsuccessful attempts to amend the governing documents, but some type of attempt must have been made. If the community simply enforces the existing documents to the extent permitted by state law, it would not satisfy federal law. The documents must be changed. Sometimes older communities have the habit of referring to themselves as “adult” communities. This practice must be discouraged, because federal regulations indicate that an “adult” community is not a senior community. It is appropriate to refer to the community as “senior,” “55+,” or “housing for older persons,” for example, but it is not appropriate to identify the community as “adult” in either the governing documents or signage.

One of our residents refuses to provide age verification. We are fairly sure she is over 55, but she won’t provide us with a copy of any document and she won’t sign anything attesting to her age. What can we do?

Federal regulations currently require age verification every two years. Residents should be required to provide copies of some proof of age, such as a driver’s license, birth certificate, passport, immigration documents, and so on. If a resident refuses to provide such proof, a member of the household over the age of 18 may certify on behalf of the resident who refuses, or in the alternative, another member of the community who has knowledge of the age of the resident may provide the proof. If none of these alternatives is possible, the association may have to resort to fining the resident in order to secure the proof.

Once the proof is obtained, the association need not force the applicant to produce the same proof thereafter (although incoming residents must provide proof). The evidence of residents’ ages may be kept in confidence, and is required to be produced only when HUD or a qualified fair housing organization undertakes an investigation of alleged discrimination.

Recently, a family with children under 18 moved into our senior community. We approached them and told them about our CC&Rs and they moved out. Their attorney told us we had violated their civil rights and that they could have sued. What can we do to protect ourselves in the future?

The most important protection is to assure that the community does indeed qualify for the senior housing exemptions provided in state and federal law. If so, the community would be insulated from liability for age or familial status discrimination. However, even if the community actually is entitled to enforce its age restrictions, that is no guarantee that the association and its board will not be sued in a misguided attempt to prove the association was wrong. In a case such as this, the best protection is full and adequate insurance coverage. You should check your “directors and officers liability” insurance policy to make sure it will provide a defense if the association and/or its directors are accused of age/familial status discrimination. Also, the federal law provides a “good faith” defense for individuals who seek to enforce a senior community’s age restrictions. In order to qualify for the defense, the association’s board needs to execute a statement under oath that the community qualifies for the defense, and the individual directors must be aware that the board has done so.

A family with children wants to move into our senior community. They claim that senior communities must “set aside” the 20% of the units which do not need to be occupied by seniors under federal law, for families with children. Are they right?

They are not right. First, the 20% is a “safe harbor”: under federal law, a senior community can have up to 20% of its units occupied by non-seniors and still not lose the federal exemption. But, to set aside 20% of the units for non-seniors would not demonstrate the intent to provide housing for seniors. Thus, according to federal regulations, the 20% may not be set aside for family housing. Furthermore, if the housing in question is also subject to state law (as is all senior housing except for mobilehomes), then 100% of its residents must satisfy the resident profile contained in the senior exemption.

One of our senior residents has a disabled child who is not yet 55. Our CC&Rs require non-senior residents to be 45 or a spouse or cohabitant of a senior, or to provide primary economic or physical support to a senior resident. This child doesn’t satisfy any of these requirements. Is the child entitled to stay?

The short answer is “yes.” Your CC&Rs reflect California law prior to 2001. In that year, the law was changed to provide that the disabled child or grandchild of a senior or other qualified permanent resident, who needs to reside with the senior or qualified permanent resident because of the disabling condition, illness or injury, is also a qualified permanent resident. If the disabling condition or illness ends, the senior community may force the removal of the child or grandchild on six months’ notice (provided the child/grandchild has not become 45 or otherwise qualified as a permanent resident in the interim).

We used to be senior, but we sort of abandoned our senior status when the laws changed. However, we believe we are still about 80% senior occupied. Can we convert back to senior?

This is a very difficult question. The 1999 federal regulations specifically permitted associations to discriminate until May 2000, to obtain the correct percentage of 55+ occupied homes; until May, 2000 that date, communities desiring to be senior could require that incoming residents be senior households. If by that date, however, the community had not achieved the requisite 80%, the community was required thereafter to abandon its attempts to become senior.

Recently, however, in Balvage et al. v. Ryderwood Improvement and Service Association, Inc., a federal court held that a Washington state residential community that had continuously operated as a retirement community for persons age 55 or older could qualify for federal 55+ status by establishing that it currently satisfies the exemption’s three statutory and regulatory criteria at the time of the alleged violation. The problem for California 55+ communities is that there are additional requirements, and that may limit the right of such communities to convert (or reconvert.) If you are considering the possibility of a transition to senior status, contact your attorney, since the circumstances permitting transition are specific to the location and history of the community.

Why do we need written contracts?

Contracts set forth the rights and duties of the parties to the contract, and help to reduce or eliminate misunderstandings regarding the work to be completed and the money to be paid. In resolving any dispute or problem under the contract, such as whether a payment is due, a reviewing court will look to the language of the contract to determine which party will prevail. Thus, the contract provisions should be carefully considered in every contracting situation.

Should we sign the contract prepared by our contractor?

Most “standard form” contracts are written to favor the party who wrote it. Thus, most pre-printed contractual forms will provide little or no protection to the association if a contractual problem develops. Whereas any contract may be acceptable if there are no problems with the contractor’s performance, only an association-prepared or reviewed contract offers the protections necessary in case of serious disputes.

What are the most important issues to address in a contract?

There are many, many important issues to be considered in every contract. Those that most frequently lead to problems or disputes include: an inadequate description of the work the contractor is to perform, poorly drafted payment provisions (when payments are due, when they can be withheld, and retentions), how change orders are approved, indemnification and mechanic’s lien issues.

What types of insurance should the contractor have?

This can vary depending upon the type of job, but all contractors should have at least a comprehensive general liability policy, an owned, non-owned and hired automobile policy and workers’ compensation coverage. The amount of insurance may vary, but should never be less than $1 million in comprehensive general liability and $500,000 in automobile coverage. The association should be named as an “additional insured” on the contractor’s insurance policies. Some contractor’s insurance policies contain an exclusion for all work performed on a community association. Contractors who are not insured to work on community associations should not be hired.

How should payment provisions be written?

The Association’s best protection against financial loss resulting from a contract problem is to not allow the contractor to receive more money than the percentage of work that has been completed. In regular maintenance contracts such as landscaping and pool service, payment should be made after the service has been provided. In construction projects, the contract should provide that progress payments can be submitted only for work actually completed, and should also provide for the association to retain a percentage of each progress payment until the job is completed. Avoid provisions that require payment “upon delivery” or “upon completion,” as few associations are set up to have a check waiting for the contractor immediately after the job is completed.

What are “indemnification” clauses?

Indemnification is the contractual obligation of a party to a contract that requires the party to pay the expenses of the other party under certain conditions, such as when the party being indemnified is named in a dispute or lawsuit. The indemnification clause defines when this obligation arises. Most often, the obligation arises when the party being indemnified is not legally liable for the alleged damage, loss or injury, while the party providing the indemnification is legally liable. Many “standard form” contracts contain clauses that require the owner/association to indemnify the contractor unless the contractor is negligent. Boards of directors should be aware that most association insurance policies contain an exclusion for “contractual obligations” such as indemnification. As a result, whenever possible, provisions requiring the association to indemnify the contractor should be stricken from the contract before it is signed.

Are provisions requiring mediation or arbitration a good idea?

Provisions requiring mediation or arbitration to resolve disputes can save the association significant time and money, especially if these forms of “Alternative Dispute Resolution” succeed in avoiding litigation. Mediation is the voluntary attempt by the parties to discuss and negotiate the dispute with the help of a neutral third party in an effort to reach an agreement or settlement.  Arbitration is similar to litigation in that the facts of the dispute are presented to an arbitrator who will decide which party is right. Arbitration can be binding or non-binding. If non-binding, the losing party still has the option of filing a lawsuit. In binding arbitration, the parties agree to waive their rights to a jury trial and appeal. The arbitrator’s decision is final.

What is a mechanic’s lien?

A mechanic’s lien is a constitutionally-established procedure that helps ensure that a contractor gets paid for the work that has been completed. If the contractor is not paid, he or she can record a lien against the property where the work was performed. If payment is not timely made, the property can be foreclosed by the contractor to satisfy the debt. If the association is not vigilant, a lien can be recorded by a design professional, subcontractor, material supplier or wage earner even if the general contractor has been paid!

How does the Association protect itself against the contractor recording a mechanic’s lien?

Except for a party with a direct contractual relationship with the association (such as a general contractor or design professional), a “lien claimant” (party desiring to record a mechanic’s lien) must provide the association with a Preliminary Notice (which is sent by registered or certified mail, return receipt requested). Before payment is made to the general contractor, the association has the right to insist that every company or individual who has filed a Preliminary Notice submit a lien release with every request for payment. If the lien claimant has not been paid, the association can then write joint checks to the general contractor and the potential lien claimant.

What are liquidated damages?

Liquidated damages are the amount of money that the contractor and the association agree in advance is a reasonable sum that the contractor will be charged if the work is not completed on time. The amount is usually charged on a daily basis until the work has been completed, and is intended to eliminate the need to prove the actual damages suffered by the association because the work was not completed on time.

Does our Directors and Officers “D&O” insurance cover only those who are actually directors and officers?

You must check the policy.  Better policies have broader coverage that includes former directors, committee members, and even volunteers who work for the association. Some carriers now provide coverage to association managers under the association’s D&O policy.  Make sure that everyone working on the association’s behalf is defined as an “insured” under the policy.

Who pays the deductible when an owner makes a claim covered under the association’s property and casualty insurance policy?

When property belonging to an individual owner is damaged, the loss may be covered under a property insurance policy purchased by the association. When this occurs, the association will typically make the claim for damage to such property; and the association will be named as a payee on the proceeds check because the association is the party to the insurance contract.  The association will receive a check for the amount of the claim less the deductible.  Before the association can require an individual owner to absorb the loss of the deductible on the claim, the policy designating who is responsible for the deductible should be set forth in the association’s governing documents, preferably in the recorded covenants (“CC&Rs”).

Will the association’s insurance cover damage to an owner’s personal property?

An association’s property insurance generally will not cover an owner’s moveable personal property, although some association property policies may cover unit fixtures such as carpeting, cabinets and installed appliances. Owners should be notified annually that they should procure coverage for their own property. A general liability policy protects the association where it is legally obligated to pay for physical damage to an owner’s personal property.  The issue usually arises when an item the association must maintain (e.g., the roof) fails and results in damage to an owner’s property (e.g., furniture, carpeting). Although some courts have ruled that an association would not be liable to the owner absent negligence in maintaining the roof, other courts have held that the association’s obligation under the governing documents to maintain the roof would render it liable for any damage caused by its failure, even if the association were not negligent.

How does the board know what to insure?

First, read the governing documents, since they may make certain insurance mandatory.  Second, read the statutes for the insurance required to qualify for limitations on the association’s and owner’s liability.  Third, itemize everything the association owns or must repair or maintain (called insurable interests).  Fourth, consider all available types of insurance and evaluate whether they are appropriate for your Association as part of a prudent insurance package (e.g., fidelity bond, workers’ compensation, D&O, earthquake, flood, etc.)  Finally, look at all available options under your current property and liability coverage and evaluate them in light of your association’s particular needs. Talk to an experienced community association insurance agent.

What is the individual owner’s responsibility for insurance?

Look first in the association’s governing documents to determine what responsibilities individual owners have for procuring insurance, if any, as the individual owner’s responsibility for insurance will vary depending upon the type of community association involved. In associations where individual owners are responsible for maintenance and repair of the building structure, the governing documents may require each owner to obtain specific types of property and casualty insurance. If the association maintains and repairs unit structures, however, there may be no insurance requirement for individual owners. Moveable personal property (contents) is typically never covered by the association, although, as indicated above, some association policies may provide coverage for certain fixtures such as carpeting and built-in appliances. Individual owners should procure liability insurance to protect them against their own negligence and other conduct, and for injuries to others which may occur within their own unit or exclusive use areas. Owners also need their own coverage for alternate housing, if the unit is not habitable after a casualty loss, as this is usually not covered by an association’s master policy.

Our property is insured for its “cash value.” Is this good coverage?

No.  Coverage for “full replacement cost” offers better protection.  It provides the cost of actually replacing what is damaged or destroyed. “Cash value” is the purchase price less depreciation. When older property is destroyed, you receive only its depreciated value, which is almost always less than the actual cost of replacing it.

Our association signed a contract, agreeing to indemnify our landscaper if he is sued. Will our insurance cover this?

Probably not.  If the landscaper is sued for something due to the landscaper’s conduct, the association’s liability policy might defend and indemnify the landscaper. Most policies, however, exclude “contractually assumed liabilities;” i.e., liabilities you have voluntarily assumed in a contract. You should consider an “endorsement” (a supplement to the policy) providing such coverage, especially if such a clause appears in the contracts with several of your vendors. The insurance carrier may be unwilling to issue this endorsement, so check with the carrier before signing any contract containing an indemnification obligation.

Is the association required to disseminate information about its policies to the membership?

Yes. Civil Code section 5300 requires a community association to distribute information annually to the members about its property, general liability, earthquake, flood and fidelity policies. Included must be policy information on the name of the insurer, type of insurance, policy limits of the insurance and amounts of the deductible. The association must also notify members of any cancellation or significant changes in its policies. (Civil Code §5810)

When an owner makes a claim that involves an actual or potential lawsuit against the association, must the association always tender it to the insurance carrier?

Unless the governing documents require otherwise, the association has the discretion to decide which claims to tender.  However, unless the claim is relatively small, or less than the deductible, the decision must be made carefully. The better practice is to tender all claims, even if the claim is small or less than the deductible.  First, small amounts can become large amounts if, for example, additional damage is discovered, or repair estimates are revised, or costs of defending are considerable. Second, do not withhold tendering under the assumption you can do so later. Insurance companies can reject late claims, especially if the delay has prejudiced the carrier. An owner request for alternative dispute resolution (e.g., mediation) might seem of little consequence at the time it is made but could later result in an expensive lawsuit.  Do not withhold tendering just because a small claims case is involved, as you may have to pay the claim yourself and/or incur legal fees to appeal an adverse small claims judgment.  The result of any court proceeding is uncertain, so never expose the association to financial risk by withholding or delaying a tender just to save a few dollars on next year’s premium.  Consider adopting a policy of tendering all claims, whether or not a lawsuit has been filed, unless there are substantial and compelling reasons not to do so.  Finally, tender claims to your D&O carriers if you know of any facts and circumstances that may give rise to a claim.  Most D&O policies are “claims made,” and if you wait until there is an actual lawsuit, it may result in no coverage, especially if the association has changed carriers before the actual lawsuit is filed.

What is alternative dispute resolution?

Alternative Dispute Resolution or “ADR” is a process for resolving disputes other than in court. It involves either mediation or arbitration.

What is mediation?

Mediation is a form of dispute resolution that uses a neutral third party whose role is to assist the parties in reaching an agreement between themselves. The mediator does not decide the dispute for the parties. The mediator acts as a moderator or facilitator who helps the parties resolve their dispute by mutual agreement. Mediation is non-binding on the parties, unless the parties come to an enforceable agreement as a result of the mediation process.

How is a mediation conducted?

Mediation is an informal process. The mediator helps the parties to reach an agreement between themselves. The mediator will not decide who is right or wrong. Sometimes both parties will be in the room together with the mediator, and sometimes the mediator will speak privately with each party. If the parties agree on a resolution of their dispute, the mediator will help them prepare a written agreement. The parties will then be bound by their agreement.

What is arbitration?

Arbitration is similar to a court proceeding in that the arbitrator will listen to the evidence presented by both sides, and then decide the outcome of the case. The setting is less formal than a courtroom since there is no jury, and the arbitrator is not a judge. Because the arbitrator decides who wins and who loses, he or she acts like a judge.

How is an arbitration conducted?

An arbitration is conducted like a trial, only somewhat less formal. Each side is given an equal opportunity to present its case. Witnesses can be called and cross examined. The parties will be allowed to argue their case to the arbitrator. The rules of evidence are usually less strict than in a trial. At the conclusion of all the evidence, the arbitrator will decide who wins and who loses.

Is arbitration binding or non-binding?

Unless the parties have previously agreed in a contract that any arbitration will be either binding or non-binding, the parties have the option of deciding the form of arbitration. If the arbitration is binding, the ruling of the arbitrator can be enforced just as if a judgment had been entered after a trial in court.

What are our rights if we are unhappy with an arbitration award?

If the arbitration is “non-binding,” you can reject the award, and even file a lawsuit if you so desire. The arbitration will have no effect on the rights of the parties. However, if the arbitration is “binding,” your options are limited. You may not reject the award and file a lawsuit. Unlike a lawsuit decided by a judge or jury, your rights of appeal are extremely limited. These disadvantages must be balanced against a relative speedy and final result.

Are we required to mediate or arbitrate?

For certain types of cases, yes. Civil Code section 5930 requires that an attempt must be made to mediate or arbitrate certain types of disputes before a community association or individual owner will be allowed to file a lawsuit against the other. Generally, this applies to all cases in which the association is seeking injunctive or declaratory relief, and the amount in question is under $5,000. An injunction is a court order to one of the parties to do something or to refrain from doing something. Declaratory relief asks the court to make a binding interpretation or declaration of the rights of the parties. With respect to assessment collection cases, if an owner requests ADR pursuant to Civil Code section 5925 et seq., the association must participate before initiating nonjudicial foreclosure. Similarly, if an owner requests IDR (Internal Dispute Resolution) pursuant to Civil Code section 5900 et seq., the association must participate before recording a lien. Small claims cases are excluded from the requirement to mediate or arbitrate.

Why consider mediation or arbitration to resolve a dispute?

In some cases, the law requires you to utilize alternative dispute resolution before litigating. Litigation of a dispute also can be very expensive and can be very lengthy. Mediation and arbitration can usually be accomplished more quickly and at less cost than litigation. Instead of the dispute lasting over a year before it is resolved, the dispute may be resolved in only a few weeks or months. Because the time frame is shorter, and because mediation and arbitration are more informal than litigation, the attorney’s fees are usually much less than if litigation is used to resolve disputes.

Can we mediate or arbitrate other kinds of disputes?

Civil Code section 5930 requires alternative dispute resolution in only certain defined situations. However, any dispute may be resolved through mediation or arbitration if both parties agree to do so. All that is required is the desire for both sides to resolve their disagreement quickly and inexpensively as compared to the cost and time necessary for litigation. The parties can agree to both the form of alternative dispute resolution and the individual who will conduct it unless by prior agreement they have already made these decisions.

How much does it cost to mediate or arbitrate a dispute?

Because mediation is a more informal process, there are local mediation services that will mediate a dispute between an association and a homeowner for a few hundred dollars. Private mediators can be more expensive, often as much as several hundred dollars per hour. Unless the parties agree to some different division of the cost, each party will pay an equal share of the total cost. Arbitration is a more formal process and, as a result, is usually more expensive. There are usually more options in an arbitration proceeding, such as taking depositions, and the use of expert testimony at the hearing. Although more expensive than mediation, arbitration is usually less expensive than litigation through the court.

Are attorneys involved in mediation and arbitration?

Because the mediation process is informal, the parties may decide to proceed without their attorneys. Attorneys can be present during the mediation, although their role is less involved than in an arbitration or in a trial. In cases where significant legal issues are involved, such as in interpreting provisions of the CC&Rs, it is frequently a good idea to have an attorney present at the mediation. Because the rights of the parties will be decided in an arbitration, it is preferable to have an attorney present during an arbitration, even if the arbitration is non-binding. It is common for attorneys to conduct their client’s case in an arbitration proceeding.