By Jake Brooks, AGS Construction Inc.
Everyone wants their community to be the absolute best it can be especially when it comes to safety, security, and appearance. Some boards will do everything possible to keep their reserves robust, dues stable and special assessments from occurring. In this environment many managers find themselves being asked to delay scheduled maintenance and capital improvement projects even when it comes to life safety issues. Kicking this proverbial can down the road proves to be exponentially more costly in the future in more cases than not.
As professional managers part of your responsibility is to educate board members, provide them with expert opinions on defects, options for repair and judiciously execute actions on your community’s behalf. It is the job of a good restoration contractor to not only provide an estimate on cost of repair but to also act as a consultant and find solutions that strike a balance between maintaining a budget and addressing life safety issues and improperly constructed assemblies that may be present and need of repair in a community.
In the past few years, we have all dealt with personal increases in cost of living, food, fuel and more. The same can be said for our industry. Much of the increase in construction cost is driven by a combination of the availability of skilled labor and the materials needed to make the necessary repairs. In the past year major suppliers of coatings have had to increase prices five times, siding has increased nine times, and roofing materials have increased by more than thirty percent! Every building component has experienced the same increase and to add to that have become harder to obtain in some cases. Unfortunately, today this trend is the “rule” rather than the “exception” and right now the forecast is that this trend will continue going forward.
To control job related costs, part of planning for any capital improvement project should include partnering with a reputable contractor that is aware of the above-mentioned supply chain issues, has access to available skilled labor, can meet the desired start/end dates, and has the experience to provide viable solutions for any type of project. The reality of what is requested and what can be provided are, in some cases, not the same. A knowledgeable contractor should be able to provide the insight it takes to produce viable solutions to overcome all these obstacles all while acting as a trusted consultant.
For most contractors there can be a lengthy delay in scheduling quality crews between the authorization of work to the actual mobilization of resources. Additionally, depending on materials selected, this length of time could be even longer. Most companies will not commit resources to a project with out a fair degree of certainty that materials will be available for work to begin. Depending on the type of restoration and time of year this could potentially extend project start dates by months due to weather patterns and conditions needed for application of certain products such as stucco, roofing, sealants, and coatings.
The good news is by choosing a contractor that also acts as your project consultant there is a solution when moving forward with capital improvement and restoration projects. These contractors typically have in-house tradespeople, solid working relationships with design professionals, long term relationships with material suppliers, storage yards and warehousing capabilities. Having in-house tradespeople allows for better control of not only quality but also scheduling of resources to any given project. Having good relationships with design professionals allows for timely resolutions to the “known unknowns” we all encounter due to poor existing conditions. Long term relationships with material suppliers results in preferential treatment during product procurement. Having the ability to store and warehouse materials helps mitigate potential price increases and price fluctuation by being able to buy in bulk. This also ensures there will be no lag in production due to delivery delays. Combine all these qualities and you have a contractor that can preform the repairs necessary to any community with little to no setbacks from the supply chain.
So, avoid kicking that can down the road any longer by partnering with a contractor that can educate your boards on expected price increases for the foreseeable future and help them maintain their reserves, preserve the stability of their dues, and keep special assessments to a minimum.
Jake Brooks is the Business Development Manager at AGS Construction, Inc (2022 CAI-RMC Titanium Sponsor). Jake has over 21 years of construction experience focusing on large scale HOA complexes and commercial and residential projects. Jake is experienced in building envelope, structural, civil and concrete repairs. He has an extensive knowledge of and experience with building materials. Jake is known for the creative solutions he offers for complex solutions. Jake can be reached at jbrooks@agsconstructioninc.com.
By Gene T. West, RBC Wealth Management
When we discuss the best practices for investing association reserve funds in today’s world, it is probably best to review a bit of history with this topic. Community Associations began to take hold during the 1970s. During the 1980s, association reserve accounts began to grow. At the time, interest rates were substantially higher than today. The 10-year US Treasury Note was yielding 9.04% on January 2, 1986, compared to about 3% +/- today. Virtually all the reserve assets of HOAs in the 1980s were sitting in bank savings accounts or money market accounts when the 10-year US Treasury Note was as high as 12.02%. Since ‘real’ rates were so high, no one cared about ‘investing’ the funds. The 1990s brought lower rates and slightly more sophisticated investing by community associations. In 1996, the 10-year treasury had declined to 5.58%. Laddering, or staggering maturities became popular. This was, and still is, a great way to provide liquidity and may guard against the risks associated with dramatic moves in interest rates. Making use of other US government securities like GNMA mortgage bonds also came into play. By 2005, the 10-year treasury yield had dropped further to 3.89%. Using a financial advisor specializing in HOAs was becoming more popular, and a small percentage of communities were using mutual funds. On 7/8/2016, the 10-year treasury closed at a then record low yield of 1.36%. Association boards were patiently waiting for rates to go higher. But they didn’t. From 2016—2021 associations struggled with the concept that inflation was outpacing the earnings of the reserve account, and most all associations were losing purchasing power on their reserve fund assets (inflation being higher than the rates earned) every day. Most association boards are now discussing this concern. The fact is, if earnings in a reserve account do not keep up with inflation, there is generally only one way of making up this difference. That is by raising assessments. Remember, every dollar you earn in a reserve account is one less dollar that needs to be assessed to owners.
Today, we spend a lot of time discussing the definition of ‘risk.’ Is risk defined as the possibility you could lose money on an investment? Or is risk defined as the possibility that you could lose purchasing power because of inflation? Each board must prioritize its concerns on this topic.
When it comes to ‘best practices’ in today’s world, we see boards taking one of two avenues. Those boards who define risk as the chance you could lose money, will continue to invest reserve funds as we have done in the past: laddering CDs, treasuries, and making use of other government securities like GNMA’s. The boards that view risk as not keeping up with inflation will invest a portion of their reserve funds in non-US Government instruments in order to obtain a higher return.
The bottom line on reserve accounts is that this money is being put aside to spend at a future date. Associations must always have cash available when assets need to be repaired or replaced. Laddering CDs or treasuries can be essential in any investment strategy. Using a financial advisor specializing in Community Associations may assist in improving the chances of the association having a strategy. It may also help fulfill any obligation that each board member has to their community and can assist with a more proactively maintained community.
Gene T West
Senior Vice President - Financial Advisor
Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor.
Interest rates sourced from FactSet web application.
By Kiki N. Dillie, Esq, Altitude Community Law
When a management company or board becomes aware of a homeowner being foreclosed on by their mortgage company and/or being in bankruptcy, often the first question is “What does this mean for the Association?” With reports that the economy may be taking down turn in the near future, foreclosures and bankruptcies are likely to increase and impact more and more associations.
Foreclosure: When a homeowner’s mortgage company is foreclosing, the homeowner legally remains the owner of the property until approximately the 9th business day after the foreclosure sale. (The exact date depends upon whether there are junior lienholders that want to redeem the property after the sale.) The homeowner remains personally responsible for any assessments that come due while they are the owner, so they are obligated to pay whatever comes due up until the sale actually happens, even if the sale is continued several times and/or if the homeowner moves out of the property before the sale.
Even after the sale, the homeowner remains legally responsible for any assessments due while they were the owner, minus the superlien amount. The foreclosure sale does not end that responsibility and the homeowner can be collected against for that amount, even after the sale is completed. Practically speaking, if the homeowner moves out of the property and can’t be located, it might not be a good use of the Association’s funds to continue to try to pursue the homeowner and it might be a good idea to consider writing off the balance to bad debt, but that depends on the individual circumstances.
In Colorado, the superlien also takes effect in these situations. When a foreclosure is initiated, the superlien comes into existence. This lien is valid for any assessments that came due in the 6 months prior to the foreclosure being initiated and remains against the property even after the foreclosure, if not paid sooner. Sometimes the foreclosing mortgage company will pay the superlien during the foreclosure process, but if not, the superlien will have to be paid at the time the post-foreclosure owner attempts to sell to a new owner.
Bankruptcy: Whether or not the homeowner is personally responsible for assessments in bankruptcy is more complicated and depends on the type of bankruptcy filed, as well as other factors.
Chapter 7 Bankruptcy: This type of bankruptcy is most common when the economy is bad and people are either unemployed or severely under employed. In a Chapter 7, after the bankruptcy is filed, the Association can no longer contact the homeowner about the balance due. This includes sending letters regarding the balance. Once the homeowner receives a discharge, they are no longer personally responsible for the balance due as of the date the bankruptcy was filed. They remain personally responsible for any assessments that come due after the date the bankruptcy was filed through the date that they no longer owner the property. Additionally, the lien remains against the property for the full balance due, so if the homeowner retains the property through the bankruptcy and later sells to a new homeowner or refinances, the full balance due, including any pre-bankruptcy balance, can be collected at closing.
Chapter 13 Bankruptcy: This type of bankruptcy is more common in good economies when people are employed, but just have too many debts and need time to repay their creditors. When a homeowner files a Chapter 13 bankruptcy, the Association can no longer contact the homeowner or any other co-debtors about the balance due. Whether or not the Association will be repaid the pre-bankruptcy balance will depend on if the homeowner retains the property or surrenders it, so this varies case to case. Also, even if the homeowner intends to retain the property, the Association will have to file documents with the Bankruptcy Court very quickly after the bankruptcy is filed in order to validate their claim and actually get paid. If the documents are not filed timely, the Association likely won’t receive payment, even if they otherwise would have been entitled to payment.
In either a Chapter 7 or 13, it is very important to contact the Association’s attorney right away after being notified of the bankruptcy filing, so the attorney can get the required documents filed timely and protect the Association as much as possible through the bankruptcy.
If you have any questions about the impacts of a foreclosure or bankruptcy on an association, it is best to contact the Association’s attorney to get the best advice on how to handle that particular situation.
Kiki is a partner with Altitude Community Law and runs the debt recovery department. She has an extensive understanding of all areas of association debt recovery, but also has experience with foreclosure, covenant enforcement, and transactional issues. Kiki has taught dozens of classes for managers and board members in a variety of association-related subjects.
By Cylinda Mobley, Westwind Management Group
I’m a budget nerd, and I freely admit it. Putting together an HOA budget and seeing each month how accurately the projections and actuals fall into place gives me a sense of satisfaction and downright gleefulness. In the coming weeks, this process begins again as I start the budgets for the communities I manage. With so much in the news recently about inflation and its effect on so many of us in our daily lives, how do we factor that into the budgeting process for 2023 and beyond?
Dictionary.com defines a budget as “an estimate of income and expenditure for a set period of time .” I start the budget by projecting the expenses. Only then (IMHO) can the income be projected because you need to know how much money you need to cover the expenses. Let’s roll up our sleeves, put on some good tunes, print out the past years’ reports for actuals vs. budget, and get to work!
The economy is cyclical, and the way I like to factor that in is by using a five-year history of expenses to determine an average and then modify where needed, but in our current market, that may not be enough. We are still being affected by COVID supply chain and labor shortage issues. Many of our industry business partners are struggling to keep staff while still providing the services needed to keep our HOAs going. Before you throw your hands up in despair, channel your energies into the below recommendations:
Putting together a budget shouldn’t cause you grief, but rather provide some relief that you have as accurately as possible created a road map for the association for another year! If you need a good playlist to jam to while you are number-crunching, Sister Hazel is always my go-to! Check them out here: https://open.spotify.com/artist/7m60UAnbgFFNuJbmS6OxTk?si=b5243e8c60d544d3
By Gary Deck, CAIS, LLC
Why Every Community Associations Needs a Workers Comp Policy
PROTECTING THE MANAGER AND THE ASSOCIATION
Even though all Community Associations should only hire licensed insured contractors, we know this does not always happen. By hiring uninsured venders or contractors the Management Company and the Association can be held liable for workers comp claims submitted by their vendors.
To protect the Management Company and the Community Association against unwanted workers comp claims the association should purchase a 0 payroll (referred to as an “if any”) workers comp policy. Many managers and association board members think that since their association does not have employees, they do not need workers comp coverage. California Court of Appeals case, Heiman v. Workers Compensation Appeals Board proves that associations and Management Companies can be held liable for vendors that are injured working for a community association. A workers comp policy provides a “backstop” should a contractor's policy fail. Both the Management Company and the Association are protected with a workers comp policy.
Management Companies should amend your contract
Because of the potential “shield” this “if any” backstop provides for you as the manager, you might seriously consider rewriting your contract to require your clients to carry this coverage. Most management contracts that I’ve seen require the association to carry Directors and Officers (D&O) and General Liability (GL) insurance. Because of the far-reaching consequences of this case, Workers’ Compensation should be a required coverage in your management contract.
Coverage for volunteers
In addition to the "if any” exposure addressed in this case, the Association and the Management Company are at risk of owing workers’ compensation benefits to injured volunteers who perform “work” on behalf of the Association. Imagine these scenarios: An association member volunteering at a “Saturday Community Clean-up Day” is injured, or a Board Member slips and falls during a site inspection. While the General Liability policy provides “bodily injury” coverage, bodily injury to an “employee” is specifically excluded so the exposure can be pushed to a workers’ compensation policy. A volunteer performing work on behalf of the Association could easily be construed as an "employee” by the GL carrier, especially if the injuries are significant. To cover volunteers, board members and committee members the association must purchase a workers comp policy that extends coverage by endorsement to volunteers. Without volunteer coverage the associations volunteers are NOT covered.
If they refuse to buy
Sometimes, good Boards make bad decisions. All they see is someone else (this time the insurance guy) sticking it to them for another $352 to insure for some highly unlikely incident. Sadly, that will be the perception of some of your clients. The best thing you can do is present the details of this case California Court of Appeals case Heiman v. Workers Compensation Appeals Board (available at Davis-Stirling.com website), explain the coverage opportunity for the exposure, and recommend that they buy coverage. If all that fails to inspire them to buy coverage, all you can do is protect yourself if they say “no” is to have the association board sign a “refusal/rejection of coverage” letter. The associations broker/agent should keep a copy for if and when a workers comp claim arises.
COVERAGE AVAILABILITY
Until recently, this type of complete workers’ compensation policy for common interest developments has been tough to come by. While some carriers offer coverage for the “if any” exposure, they do not offer coverage for volunteers. Other policies provide “if any” coverage and only offer coverage for Board Members, recommending that you simply extend the definition of “board” via appointed committee. It is important that the policy obtained offer coverage for both the “if any” exposure and ALL volunteers working at the direction of the Board.
SUMMARY
All Management Companies and Associations should follow these recommendations:
Insurance agents who insure Community Associations should offer their clients a workers comp policy that includes coverage for volunteers every year at renewal and keep a signed rejection letter on file incase the Association decides not to purchase this policy.
Gary Deck is the Director of Sales and Distribution at CAIS, LLC. CAIS is a specialty wholesale Broker and national wholesale Managing General Agent and is the National Program Administrator for the PMA Association Workers’ Compensation program. For additional information regarding this article, he can reached at 916-212-8310 or at gary@mgalive.com.
By Alyssa Chirlin, Smith Jadin Johnson, PLLC
Inflation is noticeable everywhere today and HOAs are not immune to the pressures caused by higher relative costs. One common remedy to these pressures is cutting costs and one area where it is always tempting to do so is in insurance premiums. However, skimping on insurance coverage now can generate significant costs down the road. For HOAs specifically, it is imperative to have comprehensive directors and officers (D&O) insurance in place. Unlike an HOA’s general liability policy, which protects the HOA, D&O insurance, as its name suggests, protects its board members.
As anyone who has lived in an HOA knows, keeping all members happy all the time is impossible. It is inevitable that some homeowners will be unhappy and some of those unhappy homeowners may file lawsuits. D&O insurance kicks in when those lawsuits name individual board members. Defending a lawsuit is expensive and even when the case is dismissed or settles, the costs can still be substantial. Should a homeowner’s lawsuit be successful and judgment be entered against a board member, the costs could be astronomical. Without a D&O policy in place, these costs can fall to the HOA, if it indemnifies its board members, or even to the board members themselves, if the HOA does not indemnify its board members or does not have the funds to fulfill its duty to indemnify them. HOA board members are often volunteers, committing their time, energy and talents to their community, and, in order to attract and retain qualified, valuable board members, HOAs need to offer them protection from expenses that, even when claims are completely unjustified, can be potentially ruinous.
HOAs need to protect not only their board members, but also themselves. Many HOAs already indemnify their board members in their governing documents and even without specific authority therein, the Colorado Revised Nonprofit Corporation Act permits HOAs to provide such indemnification. By doing so, HOAs assume responsibility for the costs that may arise when a board member is sued for his or her HOA work. This can be an expensive assumption and an HOA can face depleting its reserves or, if it does not have the funds in place, assessing the costs to its members. HOAs should not take on this responsibility without D&O insurance in place.
D&O insurance coverage can vary widely, but typically covers the attorney fees and costs associated with defending board members against legal claims that are related to their work for the HOA as well as any settlement or judgment amount. Some D&O policies may limit coverage to only board members, while others include an HOA’s employees, committee members, and management. Some policies cover lawsuits, but not arbitration (which may be required by an HOA’s governing documents) or mediation. Some policies may only cover claims for monetary damages, but many lawsuits brought by homeowners against their HOAs do not seek financial compensation at all and instead seek an order from the court that the HOA perform a certain action. Failure to enforce the governing documents or adhere to the bylaws, challenges to assessments or architectural review decisions, improper removal of a board member, and failure to maintain common areas are all examples of non-monetary claims that may be brought by a homeowner and would not be covered under a D&O policy that limits its coverage to monetary claims.
HOAs that are subject to the Colorado Common Interest Ownership Act (CCIOA) are required by law to carry D&O insurance, so it is likely your HOA has a policy in place. Instead of selecting the least expensive policy in order to meet this requirement, however, boards should discuss their HOA’s specific needs with their insurance agent and ensure that their D&O policy covers them. Although it may be difficult to fund a comprehensive D&O policy now, it can save the HOA, and its board members, large sums of money later on.
Smith Jadin Johnson, PLLC aims to provide comprehensive legal services for HOAs, from daily governance issues, including collections, covenant enforcement, and governing document drafting, to representation on insurance and construction defect claims. Our experienced team of attorneys can handle all of your HOA’s legal needs in house, eliminating the need to hire multiple firms to handle its legal affairs. Call us to discuss your HOA today at 720-550-7280.
By Devon Schad, The Schad Agency
Growing up in Louisville, Colorado, I like many others, could have never imagined the scene that unfolded on December 30, 2021. Early in the day a staff member mentioned a small brushfire had started in Boulder. Miles away we went on with our day only to see what looked like dust in the air around 11am. By 1pm the fire was roaring, coming up the hill towards Superior. As the winds shifted, the devastation that unfolded was nothing short of unimaginable. What seemed like only a matter of minutes, more than 1,000 structures were lost along with decades of memories and only charred remains littering the landscape.
This is what insurance is designed to do. To help when the unthinkable happens. To come to the rescue on the brink of financial ruin. With this fire just behind us and years of rebuilding still to come, what can we learn and do to help if the unthinkable happens again?
The biggest asset for most associations is the buildings themselves. Many people found, during the fires, that they were significantly underinsured. It is critical that associations review their current building coverage amount and work with their agent in determining a value that the association is comfortable with. The agent should be able to help provide input and explain how they arrived at the suggested limit. With the ever changing cost and rising inflation this is not a perfect science. If an association is underinsured at the time of the loss, they have a few options to cover the shortfall such as using reserve funds, taking out loans or assessing owners. This is never ideal and hopefully by reviewing the limit you can reduce this exposure from happening to your association.
When looking at building coverages it is common to see policies come in three main coverage options.
Reserve studies can also help the association and their agent account for items that are owned by the association and give some ideas on their replacement cost. This helps provide a greater roadmap for coverage requirements but should not be the only thing utilized. Many items may fall outside a traditional reserve study such as trees, plants and shrubs, roadways, etc.
After a loss, monthly assessments may need to stay the same or close to since often most of the cost associated with the association do not go away. Owners should purchase loss of use coverage that would keep their total cost before the fire the same after the fire. Business income or loss of dues may be added to policies to help collect for uncollectable assessments and/or loss of income if parts are rented to others.
Knowing who is responsible for what prior to a loss will help alleviate conflict at the time of a loss. Having a maintenance and insurance chart that clearly defines responsibilities between owners and the association should help accomplish this.
Lastly, every policy is different, and insurance is nowhere near perfect. Many policies today exclude or limit coverage for foundation, underground pipes, roadways, outdoor property and others. Be sure to spend the time with an educated, experienced agent that can uncover the pitfalls and recommend coverage options.
Devon Schad is the current Chair of Marketing and Membership for CAI Rocky Mountain Chapter, an Educated Business Partner, and owner of the Schad Agency. The Schad Agency specializes in insuring association and has been since the family founded the agency in 1976.
By Nicole Stone, LMI Landscapes
Natural disasters typically announce their arrival by uprooting trees, roaring tornados, or blazing wildfires wiping out entire landscaped communities. Geophysical, hydrological, meteorological, and climatological factors all create severe disruptions to the functioning of communities and exceed their capacity to cope with them using their own resources. Climatological disasters are becoming a much more standard part of everyday life; examples include extreme temperatures, fire, and drought. Drought, unlike most disasters, does not make a grand entrance. Most of the time, many believe it is just a dry spell, while the drought itself continues to build and grow in complete silence. Droughts happen naturally; however, human activity can exacerbate the conditions. Has your community created an action plan to continue beautification efforts while protecting a potential natural disaster again?
We do not have a crystal ball, and mother nature does not share her forecasts with us, but we need to be mindful of current climate situations. According to the National Weather Service, the drought forecast for the next six months does not look good for Colorado.
Drought is not an uncommon term for Colorado, highlighting the necessity of using water-wise landscape practices. It is hard to believe that almost 75% of summer water is consumed by exterior landscape vegetation. When using water-wise landscape practices, significant reductions can be gained through minor changes in the arrangement of plantings, alternative plant selection, and soil preparation.
Xeriscape is one item that can be achieved to help reduce water use and keep a community looking beautiful. However, this term seems to confuse many individuals. Xeriscape does not mean a specific look or even grouping of plant material. It is a combination of several commonsense principles that save water while creating a tremendous colorful landscape pallet. The big question is how to accomplish this without breaking the bank.
While xeriscape can assist in water usage during droughts, we next look at protecting communities from wildfires during droughts. As building increases, we begin creeping closer and closer to wilderness areas raising the urban wildfire danger. We have seen fires rip through Colorado neighborhoods creating overwhelming devastation and overstretching community resources. Even though wildfires are natural occurrences, climatological conditions such as windy, dry, and hot can ignite vegetation quickly and spread, leaving widespread devastation.
For communities that live near areas susceptible to wildfires, steps can be taken to protect your property and properties around you.
Climatological change is ever shifting but can have considerable impacts on communities. The best solution is to address the risks, create a solution, and start implementation to reduce your risk while keeping your community looking beautiful. While natural disasters have unfortunately become far more frequent, planning for the unknown should as well. Through planning and preparation, communities can remain beautiful while keeping the community safe for years to come.
Nicole Stone is the Director of Maintenance Operations with LMI Landscapes. A Nebraskan native but Coloradan at heart, Nicole Stone has over 17 years of experience in the Green Industry ranging from construction, estimating, irrigation, and maintenance. Nicole is inspired by the opportunity to create an environment where clients know their value. Nicole’s experience and qualifications have allowed her a solid understanding of business visioning, establishment, consolidation, and expansion – she continues developing and refining her innate talent for developing strong client alliances and partnerships.
By Lindsay Smith, Winzenburg, Leff, Purvis & Payne, LLP
Many communities choose to undertake self-management in an attempt to minimize costs and assessment levels. This structure can make a lot of sense for certain communities, but if you’re new to the Board, or unfamiliar with your obligations to your community as a Board member, you may quickly find yourself in over your head. Communities that are currently self-managed, and communities that are exploring self-management, should consider the following when making the decision to go it alone.
Is it Permitted?
Your governing documents may actually require that you retain professional management. Particularly for condominiums, the Declaration might require you to provide notice to lenders before establishing self-management if you’ve been professionally managed in the past. If your community has historically been professionally managed, review your documents and check with legal counsel to make sure you don’t run afoul of any management or notification requirements. If you are obligated to provide notice of this change to all the lenders in the community, your lawyer can help you navigate the process.
Who’s in Charge?
The Board typically acts as the executive branch of the community, and management implements the Board’s policy decisions. When you undertake self-management, you need to decide who is responsible for actually completing the work. If the Board decides to retain a snow removal vendor, who reaches out to vendors to request proposals? Who reviews and communicates with the vendors? Who calls the vendor when a problem occurs? And when that person is on vacation? Your vendors don’t want to hear from a dozen different people. Keep your lines of communication and chain of command clear.
While the President typically acts as the chief executive officer, you can’t expect the President to do all the leg work. Clearly allocate responsibility amongst other Board members, or where appropriate, to a duly-designated committee. If you have a committee in charge of vendors, make sure you have clear boundaries for what the committee can, and cannot do. A thorough committee charter will help set expectations. Similarly, if your liaison is a Board member, make sure the Board member understands their boundaries. Major decisions, such as selecting a vendor and approving a contract, need to be made by the Board to protect individuals from personal liability. However, day-to-day decisions, such as approving the landscaper’s reduction of irrigation in a location that is receiving too much water, are appropriately delegated to the representative.
Dollars and Sense
Financial management and transparency are crucial for community associations. If you do not have competent financial management, don’t undertake self-management. Your treasurer needs to be experienced and able to account for Association funds using generally accepted accounting principles. The treasurer should know the numbers forwards and backwards and be able to explain everything to curious homeowners at a moment’s notice. In addition, your financials need to be properly maintained to ensure your legal counsel can take necessary steps to collect. Keep in mind that if your ledgers are wrong, and the attorneys take action on those incorrect ledgers, the attorneys and the Association can face legal liability.
Many communities will retain professionals for “accounting-only” services. This is a good balance between the financial risks of self-management and the financial costs of full-service management. If you’re considering self-management but are worried about accounting, ask your management company if they provide different service levels.
Insurance
When you are self-managed, you need to rely more on the professionals who advise your community. Make sure you have a good insurance agent who truly understands your community’s needs, risks, and how insurance works in your HOA. If your community was formed on or after July 1, 1992, or if it is required by the governing documents, you will have to carry property and liability coverage for the common elements and in most condominiums, on the units themselves. Even if your governing documents are silent on insurance, you should still talk to a broker and protect yourselves. Not all insurance is the same!
Don’t look solely to the bottom line when selecting an insurance policy. Ask your broker whether the property policy will actually cover everything that needs to be covered if the community is destroyed. As we are seeing with the Marshall Fire, many homeowners are underinsured, whether due to a general misunderstanding of actual replacement cost, or due to a failure to carry sufficient coverage to address building code changes and the costs of removing debris.
Similarly, the cheapest Directors and Officers Liability policy isn’t necessarily the one you want in place when the Association is sued. Ask your broker whether the policy covers all prior acts, what is included and what is excluded, and how much the insurer will pay in a worst-case scenario lawsuit. Will the policy cover discrimination? What about a judgment if you lose? Your policy will include a date for “prior and pending litigation.” Make sure this date stays the same across new policies to avoid a gap related to when a claim is filed. You want to make sure your D&O policy will cover all prior acts.
Finally, management companies can do a lot of good when it comes to vetting vendors and avoiding unscrupulous contractors. Many management companies require vendors submit proof of insurance before the manager will even entertain work by the vendor. When you’re self-managed, you may miss this step or not think about it until problems crop up. If a bad vendor has forged a certificate of insurance or allowed a policy to lapse (and this can happen regardless of management’s diligence), the Association can be left holding the bag. Carry worker’s compensation insurance to protect against the risk of an injured worker, and consider checking on the Colorado Department of Labor and Employment website to verify the vendor’s worker’s compensation policy is not lapsed.
Reliance, Business Judgment, and Blame
The Colorado Revised Nonprofit Corporation Act provides the general standards of conduct for directors. These standards apply whether you are self-managed or professionally managed. Directors need to discharge their duties in good faith, with the care an ordinarily prudent person in similar circumstances would exercise, and in a manner the director reasonably believes to be in the best interests of the corporation. Directors are entitled to rely on the advice and opinions of professionals in discharging their duties, so relying on the advice of a seasoned manager can help a Board that finds itself in litigation establish its reasonable business judgment. Of course, managers cannot provide you with legal advice and are not engineers, but they can help spot issues that you might not even recognize – such as changes in the law – which can help you avoid unseen dangers.
If you are self-managed, you may find yourselves reaching out to your accountants, engineers, and attorneys more often for advice to help ensure you are acting reasonably and prudently. Make sure you consider these additional needs as you budget your time and money. You should also plan to take educational classes that may be offered by CAI or other industry partners.
One underappreciated aspect of professional management is that a manager’s actions help to insulate a Board from angry neighbors. No one likes being towed, or receiving a violation letter, and if a Board member has to tow someone from a fire lane, that Board member might receive a knock on the door late at night. Management can help redirect this improper anger (don’t park in fire lanes!), and protect the Board member from personal conflict. Board members have to wear multiple hats when a community is self-managed, and when one of those hats is labeled “Enforcement,” heavy is the head that wears the crown. While no one has the right to abuse or make personal attacks as a result of proper enforcement activities, angry homeowners may still act irrationally. If you’re considering self-management, ask yourselves whether you are likely to face this kind of interaction, and whether you and your community would be better off with the homeowner leaving a message for a professional who is trained in this sort of interaction – and who isn’t a next-door neighbor.
Is it Worth It?
If your community has minimal maintenance obligations, is reasonably harmonious, and has owners who are willing to follow the rules, you can probably undertake self-management. At the end of the day, however, Boards are full of volunteers who have other obligations that are almost certainly more compelling than comparing different insurance policies and preparing letters to owners with pink houses. Legal requirements for community association governance require more sophistication every year. While you may be able to undertake self-management with your current Board and existing challenges, it’s common for the additional workload to burn out volunteers more frequently. If something goes wrong – a major insurance claim, a lawsuit, an unexpected move – you may find yourselves scrambling to retain professional assistance. Be realistic in evaluating your capabilities and your community’s needs, both now and in the future. While everyone wants to save money, the costs associated with self-management may exceed the dollars saved.
Lindsay Smith is a partner at Winzenburg, Leff, Purvis & Payne, LLP, where she focuses on general community association law, enforcement, and governance. She is also a volunteer for and the current Chair of the CAI – Colorado Legislative Action Committee. Many thanks to Wendy Weigler, Brad Henderson, and Marci Achenbach for their assistance in this article.
By Tressa Bishop, MBA, CIC, CIRMS, USI Insurance Services LLC
A manager or Board member’s role within the community association requires many, many hats be worn at various times. One of the more stressful parts of working within a common interest community is assisting in times of crisis, whether it be involving one owner/member or the entire community association. If you’ve managed or volunteered within a community for any length of time, chances are you’ve encountered a situation where the insurance carrier has had to be notified of a claim or a situation that may give rise to a claim. Here, we’ll discuss the best way to handle various claims situations with the goal being the most positive outcome possible for the association.
Property claims, such as when a fire or large water loss occurs, are the most common type of claim and, for the most part, are more ‘cut and dried’ as far as when to notify the carrier. If the loss originates within a unit, that owner should immediately notify their personal insurance carrier of the loss and begin the mitigation process (cleaning up the damage and preventing additional damage from occurring). Unless there is a specific property form stating otherwise, most commercial property policies follow the governing documents in place at the time of loss as far as coverage on the interior of the units. Many Board members assume that the association’s policy does not cover interior unit damage which leads to confusion and unnecessary delays following a property loss. Occasionally, this can ultimately lead to a liability claim as the owner assumes the association is trying to skirt their responsibility, yet the Board truly doesn’t think the association has any responsibility for the interior of the unit following a loss. Any time there is a loss, we recommend reaching out to the insurance broker immediately for assistance and to clarify the responsibilities of all parties.
As soon as it is known that the property loss, including mitigation and estimated repairs to get the property to pre-loss condition, will exceed the policy deductible but before the repairs are made, the property carrier should be notified. The association’s insurance adjuster and the owner’s insurance adjuster will work together to ensure each policy is covering the appropriate parts of the claim. Both parties have a right to inspect the damage before repairs are made, so it’s important to allow this to occur before any repairs are made. Typically, the association’s adjuster will issue an Actual Cash Value (ACV) payment early in the claim process (this is calculated as the agreed upon claim amount/scope, less the policy deductible and less the holdback depreciation amount for the damaged property – don’t’ worry, they will pay this amount once proof of all repairs is provided). The unit owner’s carrier, if required by the governing documents, will pay the association’s policy deductible (less the owner’s personal policy deductible) and for any part of the damaged real property that is required by the governing documents. Once all repairs are made by the owner’s contractors and final invoices are received, the association’s adjuster will release the holdback depreciation amount and the claim should be paid in full. The unit owner will expect that the association forward both the initial ACV payment amount and the holdback depreciation payment amount so they can pay their contractor(s) for the agreed upon claim amount/scope.
Liability claims can be a bit more confusing and have increased significantly over the past few years within common interest communities. General liability (GL) claims occur when there is bodily injury or third-party property damage (property not owned by the association). The most common type of claim we see filed under the GL policy is due to a slip and fall or trip and fall. When the manager or Board is notified that someone has been injured on association property, there is a possibility of a GL claim forthcoming. Sometimes, the injured person simply reaches out to notify the association so they can correct a problem and ensure that no one else is injured but they aren’t actually making a claim (not asking for medical bills to be covered nor monetary damages from their injury). Even in this situation when a claim is not being made, we recommend an injury report be taken with as many specific details as possible (exact location, weather conditions, witness information, and other pertinent details). If a claim is made at a later time, all of this information will be needed. We recommend notifying your insurance broker when you first become aware of the accident even if a claim is not immediately being filed.
There are times when an injured party sends a small medical bill for payment. As tempting as it may be to simply pay the bill to get it to ‘go away’ and avoid a claim being filed on the association’s GL policy, please do not do this. The association’s GL policy has certain reporting requirements and, while you believe that it is just a small amount and will quickly go away, if the association makes the payment they may be jeopardizing coverage altogether should a larger claim or lawsuit rear its ugly head down the road. Reach out to your insurance broker or agent right away so the carrier can be notified.
Occasionally, a letter of representation is received and the manager or Board has no idea who the person is nor were they previously notified of the accident being reported. Again, reach out to your insurance broker or agent right away so the carrier can be notified and respond on the association’s behalf. The policy which was in place at the time of the accident/occurrence will be the one to respond.
For allegations of wrongful acts by the Board, manager, committee members or other volunteers, the professional liability policy carrier (also referred to as Directors & Officers liability policy) will need to be notified right away. Since most professional liability policies are written on a ‘claims made’ policy form, the carrier that is in place at the time the claim is made or that there is reason to believe that a situation may give rise to a claim must be notified to ensure defense and coverage (if applicable based on the policy exclusions and limitations). Reach out to your insurance broker or agent right away so the carrier can be notified. Unlike the property and GL carriers, unless a claim is being made by the party alleging the wrongful act, professional liability adjusters will generally note their file and follow up with the insured to see if a claim develops over the coming weeks.
There is no getting around the fact that insurance claims are tricky, policies respond differently depending upon coverages, exclusions and limitations, and no two claims are exactly alike. Even if one association’s claim appears to be similar to another’s on the surface, they may be handled very differently by the two different carriers depending upon the policy’s insuring agreements and the facts at hand. One thing is for certain, do not go it alone. Work closely with your insurance broker or agent right away to ensure the association doesn’t inadvertently jeopardize coverage by assuming anything.
Tressa Bishop is an Executive Vice President with USI Insurance Services LLC and specializes in assisting community associations with their insurance needs. She holds the Community Insurance Risk Management Specialist (CIRMS) designation through CAI, demonstrating her commitment and expertise in this insurance niche. Tressa is the immediate past President of the Southern Colorado chapter of CAI, is the current Chair of the Activities committee and is a member of the Programs & Education committee for the Rocky Mountain chapter.
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