Three Steps to Minimizing Insurance Premium Hikes

As a follow up to our last article, this entry details a few things that homeowner associations can do to manage their insurance policy premiums -- especially as annual policy premiums continue to spiral upward.

(1) Consider taking a higher deductible. One way to manage fluctuations in premium is to request a higher deductible from your insurance carrier. Generally, there is an inverse relationship between the premium paid versus the deductible paid on any given policy (since the association is basically taking on more liability via the deductible for any claim made against it under the policy). One caution though: before you start raising the deductible on your polic(ies), make sure to review any claims made against them in the past few years (a 5-year period should be sufficient) and compare the savings resulting from the lower premium versus the chance that if a new claim is made, the association will have more exposure based on the higher deductible. More often than not, the association will save money by raising the deductible if the association’s incident rate for claims can justify the move.

(2) Review your coverage limits. Many associations are “overinsured.” From a practical perspective, the more coverage the association has, the bigger the target for a plaintiff to attack. While it is equally undesirable to “underinsure” an association, review your association’s coverage(s) and make sure they are commensurate with replacement cost for all insurable property held by the association.

(3) Don’t be afraid to shop around. Loyalty to one company or agent is fine provided that the association is getting a good value for the money spent. But don’t be afraid to shop around and rate-check from time to time, especially if you haven’t had any claims against the policy lately – you just might find that the competition for your business from reputable agencies will lower the total cost of owning that insurance by just placing a few phone calls. Above all though, make sure that whatever carrier you choose to do business with possesses a high rating or grade, which indicates, among other things, the financial health or stability of any given insurance company.

*Thanks to Community Association Management Insider, June 2002 edition, from which excerpts of this article originated.

Bad Weather Can Wreak Havoc on Association Insurance Policy Deductibles

As I sit here and stare out the window at the large droplets of rain pelting my office window, I am reminded of the critical role that insurance policies play in community association operations.

Of course, here in the Gulf Coast region of the United States weather is always a topic of discussion - regardless of the season - since we are never more than an hour or two away from a massive deluge from the skies above. Pity the weather forecasters.

Even though this year’s “hurricane season” is all but over and, thankfully, our region avoided any major storms, it’s always a good time to review your Association’s insurance policies before the next major storm season to make sure that you (1) have enough coverage, and that (2) the deductibles are commensurate with the coverage. This two-part article will cover these important issues in the context of what I call “weather-specific” deductibles.

Many associations’ insurance policies may include “weather-specific” deductibles, like for hurricanes, that trigger higher payments in order to claim damage suffered from a severe weather strike. There are currently over 17 states that allow for these specific deductibles to be applied in lieu of the standard deductible in case disaster strikes in the form of a hurricane, windstorm , hail storm, etc.

These weather-specific deductibles usually are calculated as a percentage of the total property value covered, and can range from two (2%) and five (5%) percent , but can go as high as ten (10%) percent in some cases based on state and jurisdiction. For example, a typical insurance policy with a “hurricane” deductible that has a $10,000 deductible to cover most other types of damage won’t cover the damage covered if a hurricane hits, because the “hurricane” deductible would apply instead. Let’s say the property value covered is a $10 million development, then the deductible to replace the hurricane damage could cost the association between $200,000 and $500,000! The objective here is to educate board members to review their association’s policy for these deductibles which could cost the association a multiple far greater than the original deductible contemplated when the policy was purchased.

Some types of weather-specific deductibles include:

1. Hurricane deductible.
2. Wind and Hail deductible.
3. Storm Surge, mud flow.
4. Mechanical breakdown, life cycle wear-and-tear replacement.
5. Plate Glass replacement.

Of course, you should always check with your Association’s insurance provider/carrier to determine if/when these coverages are applicable and/or available as the case may be.

Next week we will discuss how to manage your association’s insurance policy premiums in the wake of all this talk about bad weather and its effects on the association’s operations.

*Thanks to Community Association Management Insider from which excerpts of this article were provided, June 2005 edition.

Do's and Don'ts for Association Fining Systems

I dusted off this article from June 2002, but the information is as timely as ever. Especially with the sagging economy, more homeowners now more than ever might be letting their maintenance accounts slip or the conditions of their properties slide (because we all know that upkeep costs money, something that's in short supply these days). When standard deed restriction enforcement fails to get the required response from the offending homeowner, then an Association can consider implementing a fining system to incentivize these homeowners to correct the violation or other misconduct.

Of course, whether or not an Association implements a fining system can be a touchy subject, but a fining system is sometimes needed for those times when homeowners’ conduct violates the use restrictions or restrictive covenants within a community and standard demand-letter correspondence fails to elicit a positive response to cure the misconduct or other violation.

If your Association is considering implementing a fining system to enforce the restrictive covenants within your neighborhood, then there are six (6) key points to consider:

1. Make the fining system as broad as possible. The Association needs to be able to assess fines for a broad range of violative conduct, including actions that violate the Declaration, the By-Laws, and any rules and regulations set forth by the Association by and through its Board of Directors. You can certainly maintain a list of specific activities that constitute fines under the policy, so as to give the membership notice of same, but make sure that this list is inclusive rather than exclusive of any other non-specified, violative conduct.

2. Make the fining system a FAIR system. Make sure that your fining system has built into its mechanisms “due process” – notice to the offending homeowner as well as an opportunity to “cure” the violative conduct before any fines accrue. Also include a procedure for allowing the homeowner to air his/her grievance or reasons for the offending conduct directly to the Board at the next regularly-scheduled Board of Directors meeting. If applicable, the homeowner can even bring its legal counsel if one is hired by the homeowner. Now due process and leniency has its limits: the notice and opportunity to cure should only be applicable for those “first-time” offenders who don’t necessarily know that their conduct has run afoul of the deed restrictions.

3. Each occurrence of a violation equals a SEPARATE violation. This “multiple” violation feature of the fining system helps to create a mounting fee accrual that can incentivize otherwise “laissez-faire” or slow-acting homeowners that would ordinarily ignore the initial fine amount, which can be nominal in most cases. By multiplying the fine amount commensurate with the length of time or frequency by which the violation exists, this can be the necessary “lever” to motivate the homeowner to correct the violation. One caveat: the Board needs to make sure that fine amounts don’t get out of hand; in other words, Courts are loathe to assess homeowners with outrageous fine amounts that operate more like a penalty than a fine. Make sure the fine is proportionate to the violation. For this reason, consider putting some kind of cap on the fine, if possible.

4. Avoid using the word “penalty” in your fining system. As a general rule, Courts don’t like enforcing penalties because most legal claims provide their own economic or equitable remedy without assessing a monetary penalty. Instead, make sure that fines correspond to the severity of the violation.

5. Don't Skimp on the Notice. Make sure the fining system gives notice that the Association has the power to collect ALL expenses incurred in enforcing the fining policy and collecting the fine. Sometimes these costs escalate rapidly, including attorney’s fees and court costs, so make sure that the membership is put on notice of the Association’s ability to collect these sums.

6. Apply payments to fines before assessments. Typically, and unless the homeowner indicates otherwise on the payment instrument, the order of application of payment by a homeowner is: attorney’s fees and costs, late fees and interest, then to fines, special assessments, and regular assessments. With this hierarchy of payment, the homeowner has a greater incentive to pay off the debt.

*special thanks to the Community Association Management Insider, June 2002, from which excerpts of this article were originated.

$100-Million Condo for One?

Amidst the bevy of economic horror stories in the news assaulting our daily lives, comes a strange tale of the $100-million condominium project in Fort Myers, Florida where one solitary family lives in a 32-story, 220-unit highrise. The original link to the story can be found here, from a story by the Associated Press that originally appeared over the weekend in Yahoo News.

Evidently, this Fort Myers condominium (the Oasis Tower One) had been ravaged by a trinity of recessionary forces -- foreclosures, soaring unemployment and rising bankruptcies -- and saw all but one of its tenant contracts get cancelled or otherwise go unfulfilled. The Fort Myers area, like many counties across the country during this prolonged economic nosedive, is mired in a recession of historic proportions. The Associated Press monitors the "Economic Stress Index" of some 3100 counties nationwide, assigning each county a value in a range from 1 to 100 to indicate the relative level of economic hardship in any one region. A value of 11 or more on the index indicates that a particular county is in economic distress. The Fort Myers area rated a value in excess of 20 on the AP's index.

Fort Myers was supposed to be blossoming into Florida's next high-profile center for economic development until the brakes were put on the economy, that is. Now, the Oasis Tower One stands proud, but deserted, with scant few lights left on, utility services restricted, and most amenities either locked up or plans to build them long-abandoned. And what of that lone brave family that still lives there? They remain, with hopes for a better future, along with getting a neighbor or twenty.

*the original Yahoo News/Associated Press article can be read in its entirety by following the link above or by clicking on the link here, http://news.yahoo.com/s/ap/20090801/ap_on_re_us/us_lonely_highrise

One Part "Sigh of Relief" Mixed with One Part "Caution Ahead"

That's what you call the recipe for the Texas 2009 Legislative (regular) Session (although the folks who tracked, lobbied and arm-wrestled with State senators and reps over the record number of POA-legislation might invoke some more colorful metaphors to describe this session!).

Even though the vast majority of Property Owners Association-related legislation died on the floor of either chamber, or languished in sub-committees to be dusted off in another two years, this session was anything but ordinary. Of course, for those of us with vested interests in maintaining the sanctity of the Texas Property Code chapter 201, et. seq. relating to POA powers and governance, which should include all proponents of POAs, Boards of Directors, attorneys and the like, the conclusion of the legislative session was a welcomed sigh of relief.

However, the session did produce some new laws that POAs still need to be wary of, lest they let down their guards in the wake of the twin Property-Code-omnibus bills' failure to complete the legislative gauntlet. These comprehensive bills will be back, you can bet on that. One law in particular that I want to focus on is exactly one of those "housekeeping" type laws that could catch many unsuspecting POAs napping (and be costly in the form of lost assessment collections). Read on.

Senate Bill 1919 ("SB 1919"), relates to that most mundane of Association documents, the Management Certificate. SB 1919 modifies Section 209.004 of the Texas Property Code to add some "biteback" against those Associations that fail to file a proper Management Certificate in each county where a portion of the subdivision is located. The Management Certificate must list certain items of data, including the subdivision's name, the association's name, recording data for the subdivision and association dedicatory instruments, the name and mailing address of the association as well as its manager or other designated representative. See Tex. Prop. Code Ann. § 209.004(a) (2009).

Now under SB 1919, if a POA fails to file a Management Certificate, Section 209.004(d) states that "the purchaser, lender, or title insurance company or its agent in a transaction involving property in the property owners' association is not liable to the property owners' association for ... any amount due to the association on the date of a transfer to a bona fide purchaser, and any debt to or claim of the association that accrued before the date of a transfer to a bona fide purchaser" (emphasis added). Moreover, Section 209.004(e) states that the lien securing any amounts due on the date of transfer to a bona fide purchaser are enforceable only to the extent that amounts accrue AFTER the effective date of sale. OUCH.

Why such harsh legislation? It may have something to do with NOTICE and the logic makes sense. A Management Certificate is, after all, just another way of letting people know that a particular subdivision is deed-restricted, governed by a POA, and subject to terms and provisions contained within whatever dedicatory instruments are on file with the county of residence. In addition, these certificates provide a point of contact for those prospective and current homeowners who always whine that "they cannot contact their POAs" whenever issues of delinquent maintenance assessments and/or deed-restriction enforcement surface.

So is this new law, SB 1919, a procedural pitfall? You betcha. Ignore it at your own peril if you are a POA (or its Board of Directors, manager, agent or attorney). The ramification of non-compliance means that past-due indebtedness is effectively "wiped out" when a delinquent homeowner sells its property to a third-party buyer if that management certificate isn't on file with the county. But, when you look at the costs of compliance with SB 1919, e.g. creating and filing that darn management certificate, then the reasons for not doing so are NIL. Even if you have an attorney draft and file this (usually) 1-page document, you are only looking at a few hundred bucks versus thousands of dollars potentially lost in past-due assessments and collections costs. So the decision becomes a simple one when you look at the dollars-and-cents exposure to the POA.

*Special thanks goes out to Sharon Reuler, who maintained constant vigil over this year's legislative session and provided many timely updates and bill interpretations/amendments, as well as insight into the effects of these bills on POAs across the State. Ms. Reuler practices in Dallas, Texas and can be reached at www.txlandlaw.com. Kudos, Ms. Reuler!

Baked Alaskans

Forgive the play on words in the title, but this article originates from an Alaska Supreme Court case and highlights the notion that Associations shouldn't necessarily interfere in "neighbor v. neighbor" disputes, nor do they have the duty to do so under the deed restrictions in most cases.

The Court in this case held that there is no actionable claim against the Association for "insufficient vigilance."

Actually, and for the very reasons outlined in this case study, the deed restrictions for a community oftentimes include an "anti-waiver" provision for Associations to invoke so that the Association isn't forced to litigate every single nuisance-like occurrence or event reported by disgruntled homeowners. Sometimes these incidents are between neighbors who may have a beef with one another -- and not the Association -- but will do anything to drag the Association into their personal vendettas as the "hired muscle" to bend the offending neighbor to their will or punish them.

Speaking from personal experience, Association involvement in arguments that can be more appropriately characterized as neighborly disputes only ends in needless (and escalating) legal fees for the Association (which affects ALL the members when it comes time to planning for annual budgets and possible assessment increases) and hurt feelings by one or more of the warring parties.

In the Alaska case, the homeowner had a series of complaints against the Association and her neighbors for various items of conduct including: failure to repair a leaky roof, failure to sand the unit's porch, failure to remove snow from the unit's porch and driveway, installing a fence to prohibit parking in the courtyard, verbal harassment and assault by neighbors, theft of the homeowner's plants, mail and mailbox tampering, vandalism of the homeowner's vehicle by the residents, and intentional infliction of emotional stress. Conversely, the Association also held legitimate claims against the homeowner for violative conduct against the deed restrictions including parking a vehicle in the Condominium's courtyard and walking a dog without a leash.

At trial, the Court ruled that the homeowner had no actionable claim against the Association for "insufficient vigilance" in enforcing the deed restrictions, but instead should have sued her fellow condominium owners to whom she attributed the offensive conduct against her. The Association was also successful on its claims against the homeowner for the violations of the deed restrictions. On appeal, the Alaska Supreme Court sided with the Association, ultimately, because the evidence tendered by the homeowner was deficient and the Trial Court had not abused its discretion when issuing its ruling(s) based on that evidence and the lack of an actionable claim against the Association.

*To read the full saga of the "Baked Alaskan (neighbors)", see Gilbert v. Simonka, Nos. S-11470, S-11841, 1282, Alas. Supreme Ct., July 25, 2007.

Covenants Survive the Developer's Demise

I came across this Washington state appellate court case and felt that the message, while off-jurisdiction, was nonetheless still worthy of repeating here.

The dispute in this case centered around a denied ACC application for the subdivision of two residential lots. The deed restrictions prohibited the subdivision of lots "without the written consent of the developer," but the developer in this case had already filed articles of dissolution and ceased operation several years prior to the ACC denial. The aggrieved homeowner challenged the covenant in court because he reasoned that the "developer" was the only one who could enforce the covenant against him. The homeowner reasoned that, if the developer was out of the picture, then he was free to subdivide the lots as he saw fit. The homeowner ultimately lost on appeal. Why was this?

It seems that the developer had granted specific authority to the Association to enforce the covenants against the membership. The Association, as both successor in fact and by implication, "stepped into the shoes of the developer" and was able to assume certain powers and duties that may have been labeled "for developer" only explicitly in the covenants' provisions. Courts will liberally construe covenants to give effect to their intended purposes, and so the result reached in this case was not unreasonable. The Court also found that while the developer was still viable, the Association was the entity enforcing the covenants (which demonstrates implicit, if not express, agent authority to do so) and the homeowner even submitted his ACC application directly to the Association and not to the developer.

Finally, the Court reasoned that such covenants benefit the owners of property within the subdivision and so the goal for interpreting these covenants must be to protect those collective homeowners' property interests. Any ambiguity in covenant interpretation would be resolved in favor of the interpretation that avoids frustrating the reasonable expectations of those individuals affected by the covenant. In this case, requiring a checks-and-balances on the further subdivision of individual lots protected the character of the community. Likewise, the homeowners relied on this provision and others when they purchased their properties which act as safeguards to the collective property values in the subdivision.

*This particular case can be found at Jensen v. Lake Estates, No. 36094-2-II, Wash. App. Ct., May 13, 2008. Thank you CAI Law Reporter!