By Jeff Kerrane, Kerrane Storz, P.C.
An HOA receives an engineer’s report warning that a retaining wall on the property is on the brink of failure. The board, focused on other issues and keeping dues low, decides to put the report on the back burner. After all, the wall looks fine from a distance, right? Fast forward a few months, and a heavy rainstorm triggers a collapse, flooding several units. The HOA now faces costly damage claims, lawsuits, and increased insurance premiums. The expert report, neglected due to budget concerns, becomes a major liability.
The Role of Third-Party Reports and Recommendations
Expert reports and recommendations may come from a variety of sources, including engineers, architects, community association managers, accountants, attorneys, and even committees and board members. These recommendations can address a wide variety of issues, including maintenance, fiscal management, legal issues, or safety concerns.
Expert reports can be valuable tools for HOA boards, offering professional insights and helping them make informed decisions. However, these reports also introduce potential liabilities if not handled with due diligence.
Legal Liability of HOAs and Board Members
The Colorado Common Interest Ownership Act (CCIOA) offers legal protections for HOA board members. Under C.R.S. § 38-33.3-303(2)(b), board members are generally not liable for decisions made in good faith, with due care, and within their authority—unless the actions are willfully negligent. This “Business Judgment Rule” safeguards decisions made by the board, provided those decisions are made on an informed basis, in good faith, with due care, and within the scope of their authority. To invoke the protections of the business judgment rule, board members must inform themselves of all material information reasonably available to them before making a business decision and act with due care. If the board ignores an expert report without a reasonable basis, it could be argued that they did not act with due care, potentially exposing both the HOA and individual board members to liability.
Conflicting Expert Recommendations
Even the most diligent board can face trouble when it receives conflicting advice from its experts. For example, an HOA’s roof maintenance contractor advises the board that unless an expensive repair is performed, a portion of the roof could collapse. The board hires a structural engineer to investigate, and the structural engineer tells the board there is no significant structural problem, and that only an inexpensive repair is necessary.
If the board decides to make only the inexpensive repair, could the board be subject to liability if the roof collapses? In this case, a court would consider whether the board’s decision was reasonable under the circumstances, fully informed, and in good faith. To avoid second-guessing, the HOA may consider seeking clarification or a third opinion from a neutral expert.
Proper Implementation of Expert Recommendations
Another potential area of liability arises when an HOA relies on a third-party recommendation but implements it poorly or incorrectly. Even though the recommendation comes from a qualified expert, the HOA still bears responsibility to ensure that the work is done correctly.
For example, an HOA receiving a recommendation to replace roofing, might hire an unqualified contractor to do the work. If the contractor installs the new roof improperly, leading to further damage, the HOA could face liability due to its failure to ensure proper oversight and execution of the third-party recommendation.
To avoid poor implementation, HOA boards should ensure that contractors are qualified and reputable and should require periodic inspections during the project. If possible, they should hire an experienced project manager or owner’s representative to oversee the work and ensure it meets the expert's recommendations.
The Impact of Colorado's Two-Year Statute of Limitations
Neglecting expert recommendations can also trigger issues with Colorado’s Two-year statute of limitations for construction-related claims.
Under Colorado law, construction defect claims generally must be brought within two years of the date the physical manifestation of the defect is discovered or should have been discovered. If the HOA board delays acting on expert recommendations or does not address potential issues promptly, they may inadvertently jeopardize their ability to seek legal recourse within the allowed timeframe.
For instance, if the board ignores an engineer’s recommended foundation repairs, and the foundation fails years later, the HOA may miss the opportunity to file a claim for damages. This could leave the HOA with no legal remedy, further compounding the financial burden.
Insurance Considerations
HOAs should also consider their insurance coverage. Many HOAs carry liability insurance to protect against claims related to property damage, personal injury, or negligence. It is important for HOA boards to review their insurance policies regularly to ensure that they are adequately covered in case a third-party recommendation is not implemented correctly or if something goes wrong.
In some cases, the HOA’s insurance policy may also include coverage for errors and omissions, which could protect board members in the event that a decision based on a third-party report leads to a lawsuit.
Conclusion
In Colorado, as in other states, homeowners’ associations have a fiduciary duty to protect and manage their communities responsibly. To mitigate risk, HOA boards should thoroughly review and act upon expert advice with due diligence. By taking expert advice seriously, HOA boards can not only avoid immediate financial pitfalls but also safeguard the community's future.
Jeff Kerrane is a shareholder with the construction defect law firm Kerrane Storz, P.C. and can be contacted at 720-898-9680 or jkerrane@kerranestorz.com.
