By Devon Schad, Schad Agency
Every year, an association must renew or select a new insurance policy for the association. Often boards struggle with choosing one of the most expensive line items on the budget. Here are some quick tips associations can use for some basic guidelines in selecting a policy.
It may sound cliché to use someone with experience, but this is the most critical place to start. Does the agent or agency have experience writing associations? Check if they are a member of CAI by selecting FIND A SERVICE PROVIDER on our chapter website. Inexperienced agents often lack the knowledge to effectively diagnose the coverage requirements or miss critical coverage components which may leave the association and manager compromised. An experienced agent should be able to read the association Covenants, Conditions & Restrictions and make sure all proposed coverage complies, as well as recommending coverage to meet DORA, FHA, mortgage companies, and the secondary mortgage market. Don’t be caught with your Decs down.
The most expensive part of any association policy is the property coverage. The limit chosen is in direct correlation with the cost of that portion of the policy. Associations should ask if the limit proposed is adequate, how was the rebuild calculated, and are all the buildings and property covered? Most policies today are replacement cost, but policies with extended replacement cost or guaranteed may have clauses that require the association be first insured to value before those coverage extensions apply or the policy may have a co-insurance clause that causes a penalty if the insured value is below that required amount. If the value is too low, or not shown be sure to ask more questions. Coming up with the value of rebuild is not a perfect science, but care and thought should be used when evaluating the rebuild amount the association selects, and the parameters of the policy being considered.
As insurance has matured, so has the coverage forms. A basic form policy will only cover a loss if one of the named perils such as fire, windstorm, hail, or vandalism. Broad form includes all of the basic perils plus weight of snow, ice, or sleet and sudden and accidental water damage. In reality both forms leave associations exposed to losses not named and should only be used in the rarest of cases such as when a special form is simply impossible to purchase. Most policies today are Special-form that cover all losses unless excluded.
Replacement cost (RC) is the cost to replace the damaged property with materials of like kind and quality without any deduction for depreciation. Actual cash value (ACV) is the cost to repair or replace minus depreciation. Most mortgage companies and FHA loans require a replacement cost policy although exceptions may be made for roofs to use ACV. If considering an ACV policy for the roof, the association should consider the actual cost to replace the roof, the deductible, and the potential exposure.
A scheduled policy will list a limit that is specifically assigned to that building or structure. That limit is the most the insurer will pay for the item listed. A blanket policy will have a single limit listed, rather than assigned, and could be used for one or all structures/buildings reducing the exposure. Generally, a blanket policy will cost more than a scheduled policy.
As most homeowners still wish for a hailstorm to cover the cost to replace their roof, associations now cringe at the thought as carriers continue to increase the wind/hail deductible and the potential exposure to the association and the homeowners. Generally, policies come with a straight deductible (one deductible that is applied to the entire loss), a per building set limit, or a percentage which is either based on the total insured value (total of all property and business income limits) or per building (based on the rebuild value of that building). Regardless of the deductible selected the association should have a plan in place in which they will handle a loss, balancing the likelihood of the loss versus the actual cost of the loss itself.
Admitted carriers must comply with state regulations, be approved by the state’s insurance department including its rates, and be backed by the Colorado Insurance Guaranty Association (CIGA) (A fund to help pay claims of insolvent carriers). A non-admitted carrier does not have to comply with state regulations. Mishandled cases cannot be appealed to the state insurance department, and they do not participate in the CIGA. However, non-admitted carriers may provide options for harder to place associations, lower wind/hail deductibles or unique coverages not afforded by the admitted market. If using a non-admitted market, make sure they have a high AM as to reduce the risk of insolvency.
Understanding what the total will be is an important factor but is often overlooked. Some companies allow for payments over time and may charge for doing so and others require the payment in full which may require the association to use premium financing. Also, agencies may charge additional fees over and above the insurance costs such as for certificates.
When going to bid it is important to utilize not only the new agent, but also the incumbent. Often the new agent will have the prior insurance information and can utilize that to craft a policy that they believe will win the account. Allowing the incumbent agent to see what is being proposed can provide an additional perspective and the agent may adjust coverage options for comparison. Be sure to bring in both agents to speak as insurance is generally not apples-to- apples. This will ensure the association can see all points of view and select what is best for their circumstances.
Selecting a policy does not end the relationship, rather it is the beginning. Understanding how the agency will help during claims, help answer an owner’s questions, and help with creating information for owners to know what coverage they should have is critical in understanding when the relationship begins.
Devon Schad took over the helm of the Schad Agency six years ago. This family owned & operated agency began in 1976 and today insures hundreds of associations across Colorado. Outside of insurance you can find Devon spending time with his family, skiing or snowboarding, coaching his daughters in soccer or serving as a volunteer for CAI, Highlands Metro District #1, and the ZBT Foundation.
By Azra Taslimi, Altitude Community Law
The good news is that there is a COVID vaccine, the bad news is that COVID is still around and it will take time before we as a community vaccinate enough people to the point where herd immunity kicks in. While information changes daily, at this point in Colorado, all people who want a vaccine are able to register and get one. Which leads to questions from Associations about whether facilities can be opened, and how to treat people who have received the vaccine versus those who have not, especially as it relates to residents making use of the common elements like the gym and pool. While definitive answers are hard to come by, we can offer guidelines as to what the Associations should and should not do as the country surges forward to vaccinate the population.
The first question is whether Associations can now open their facilities safely and without the risk of litigation. While there are legal arguments in favor of opening up and returning to the norm, we advise against doing so. The main reason is that there are concerns about the effectiveness of the vaccine and its limited availability those under 16 years of age.
While we know that the vaccine can help prevent serious symptoms of the virus, studies do not yet support that the vaccine prevents the spread of transmission. We also do not know how long the vaccine lasts. Pfizer’s ongoing trial indicates that the company’s vaccine remains effective for at least six months - leading to the idea that the vaccine is not good forever and it’s quite possible that additional shots may be required to maintain the protection. If that wasn’t enough, there are new strains of COVID and it remains unclear/unknown whether the current vaccine is fully effective against the new strain.
In early January of 2021, the United Kingdom went into another lockdown based on the new, and what scientists are calling the more contagious strain of COVID-19. Germany, as of April 26, 2021, implemented a lockdown to curb a third wave of infections based on the new strain of COVID. Earlier this month, a member of President Biden’s coronavirus advisory board warned that the new strain of COVID infects children more easily than previous strains. Given that a vaccine is not yet available to children, the prospect of a new strain spreading through children remains a serious concern.
Despite the continued unknowns pertaining to the virus and the vaccine, Associations are facing extreme pressure from homeowners to open up the facilities. For homeowners, the virus scare seems to have dissipated and they want to see life return back to normal, especially as more and more of them become vaccinated. As a result, it is expected that more Associations will be opening up the facilities this year than last year. However, the general consensus amongst HOA counsel is that it is safest for Associations to keep their facilities closed for now. From a legal standpoint, the litigation consequences of opening facilities are the same as they were last year.
The biggest reason that attorneys are advising Associations to keep their facilities closed is due to the lack of insurance coverage for claims based on transmission of a disease. This means that if a resident was to bring a claim against an Association for having contracted COVID as a result of using an Association maintained facility, the Association would be looking at an out-of-pocket cost to the tune of hundreds of thousands of dollars to defend against the claim. Even if the court was to find no liability on part of the Association – simply to defend against the claim would be a huge cost for the Association. This is different than other suits where Associations can simply submit the claim to insurance, pay their deductible and have insurance bear the remaining cost of the litigation.
On the other side, Boards have advised that homeowners have threatened to bring claims against the Board members for breach of fiduciary duty should they keep the facilities closed. Therefore, Boards feel like they are facing litigation from both directions. While that may be the case, claims for breach of fiduciary duty by board members would generally be covered by insurance. Therefore, if Boards had to make a choice as to which litigation to take on, the preference would be for claims that are covered by insurance as opposed to the ones that are not.
Earlier this year, HB21-1074 was introduced by Mary Bradford(R) to provide immunity for entities such as restaurants, stores, or homeowners from Covid-19 claims so long as they are following public health guidelines. In essence this bill would have protected associations from legal claims if they were to open their amenities to the homeowners. Unfortunately, as of March 11, 2021, the bill had been postponed indefinitely.
Should Associations decide to move forward and open the facilities, the next concern is whether Associations can make vaccines contingent upon use. Since Associations would be legally obligated to have exceptions for certain unvaccinated individuals and must allow them access to the facilities, the “vaccinated-only” rule would simply be rendered ineffective.
Vaccines are not available to anyone 16 years old and younger. Therefore, an Association’s attempt to keep children from using the pool could lead to claims against the Association for familial discrimination under the Fair Housing Act. Associations would then need to have exceptions for all individuals for whom a vaccine is not available. Associations would also have to create exceptions for individuals who are prevented from getting the vaccine due to medical reasons as well as provide an exemption for those requesting it for religious reasons. Therefore, unvaccinated people would have to be allowed into the pool.
This creates concerns about giving residents a false sense of security - that using the facilities with only vaccinated people will keep them safe from contracting the virus. However, given that unvaccinated people must be allowed into the facilities and studies do not show that the vaccine prevents the transmission of the virus, the risk of spread remains just as much a concern.
An elderly person who has been quarantining since last year and is unable to get the vaccine due to medical reasons, finally decides to use the pool because they believe it will be safe since everyone who is using the pool is vaccinated. Yet, the number of exceptions means that the threat of a spread remains just as likely as before. The false sense of security may lead some to use the pool that would not do so otherwise. As a result of using the pool, should there be an outbreak and this elderly person without a vaccine ends up in the hospital or worse, the Association could find itself in serious litigation. Therefore, Associations should not adopt rules making the vaccine a condition of use of the facilities.
While all of us are eager for life to return to normal and to be able to relax at the pool this summer, the fact is that too many unknowns remain. The legal considerations of whether the facilities should be opened are not much different than what they were last year. Vaccines have changed the game quite a bit and many people feel safe enough to return to their pre-COVID lifestyle. However, from a legal standpoint, we are not there yet, and we advise Boards to continue with caution.
Azra Taslimi is a lawyer with Altitude Community Law.
By Pat Wilderotter, CIRMS, Executive VP, CCIG
Welcome to Colorado with our 300 annual days of sunshine (okay, one hour of sun on a cloudy day counts as a sunny day). However, along with all our sunshine, Colorado is also known as “Hail Alley.” We flip back and forth with Texas as the hail capital of the country (Texas beat us in 2017 and 2019 but we won #1 in 2018). The hailstorm of May 8th, 2017 was Colorado’s most severe storm coming in at $2.4 billion. Consequently, following 2017 and 2018 we saw many standard markets’ carriers non-renewing coverages and exiting the habitational marketplace altogether. Those that remained generally went to a wind/hail percentage deductible anywhere from 10% to 1% of the building limit with a few offering a dollar deductible.
Whether under your personal auto insurance, your homeowner’s insurance, or your association’s insurance, you have probably seen higher deductibles on your policies for wind/hail coverage. If living in an association, these deductibles probably translate as a percentage deductible of the building limit.
For example, if your association buildings are worth $20,000,000 and you have a percentage deductible of 5%, then the association’s deductible is $1,000,000. Since most associations are not 100% funded under their reserves for items like roof replacement, and since buildings and roofs get hit by hailstorms long before they are due to be replaced, how do associations cover these wind/hail deductibles?
In a situation where the entire community is assessed for a deductible, coverage is generally available under the loss assessment portion of the HO6 policy. Loss assessment coverage is triggered when everyone in the community is assessed for an association’s deductible. In the example above, if there were 80 units in the community, each owner could be assessed up to $12,500. When assessed, each owner would submit their invoice to their personal HO6 agent for reimbursement. Do confirm with your personal agent that there is not a sub-limit if going to pay for an association’s deductible or that the coverage needs to be offered under a special endorsement. Adding adequate loss assessment coverage is relatively inexpensive under your HO6 policy, so just make sure your limit is adequate to cover your potential assessment. Also, most personal lines carriers go by the date of the storm, but a few go by the date of the assessment. If you are new to a community since a hailstorm went through, having a policy that is triggered by the date of the assessment is important or you are “out of pocket.”
There are some policies, generally through Lloyds of London, that offer a buy down product that will cover the wind/hail deductible down to a deductible like $100,000. These policies, however, are very expensive, have gone up significantly in cost over the past several years, and often cost as much or more as the package policy for the association. If the association does not want to have to raise monthly assessments to cover these buy down policies, the board and manager need to make sure each member is informed of their potential liability for the wind/hail deductible so that they can buy adequate loss assessment coverage.
Finally, remember that loss assessment coverage is not the same as special assessments. If an association does not keep up on maintenance and has to replace/repair common elements they are responsible to maintain, there is no insurance to cover that.
CCIG is a Denver-Based insurance brokerage firm. Pat Wilderotter, past president of the Rocky Mountain Chapter of CAI and one of approximately one hundred in the country to hold the designation of CIRMS (Community Insurance and Risk Management Specialist) heads their HOA team.
By Ella Washington & Kelly Hart, Ella Washington Agency, Inc., and American Family Insurance
Party wall agreements, from an insurance perspective, can be confusing for any homeowner. Many things can go wrong behind the walls of our home. So, what happens from an insurance perspective if something does go wrong and there is an insurance claim? Are you covered under your insurance policy or would you be covered under the Association’s insurance policy? Below, I will use water damage claim scenarios as examples of how insurance carriers handle claims differently based on the unique situation.
Association declarations (also known as the CC&Rs: Covenants, Conditions and Restrictions), discuss homeowner’s responsibilities to maintain components within the party walls of their PUD (planned unit development). These legal documents should also have a clear-cut explanation of what the Association should insure versus what a homeowner should insure in terms of the structure of the building and common areas of an association. All insurance carriers use these declarations to determine how claims are paid. Interpretation of these agreements and obligations can be challenging to understand, therefore, it’s important for a homeowner to get clarification from their association manager and/or their board of directors. In many situations, a legal opinion from the association’s attorney is recommended.
Scenario 1: A slow water leak in the shower wall of a homeowner’s bathroom. What if a homeowner ignores a maintenance problem and damage occurs? An insurance carrier could deny a claim due to an on-going leak that causes damage over a long period of time. Most insurance carriers have language in their insurance policy that covers claims that occur “sudden and unforeseen.” In this case, it’s most likely the homeowner would have to pay out of pocket for his/her damages. It is always important to get advice from your insurance agent or open a claim to have a licensed insurance adjuster investigate the claim to assure the best chance of getting a claim covered.
Scenario 2: Now let’s say that a homeowner was hanging a picture and punctured a hole into a plumbing pipe that causes water damage in their unit, along with damage to the home below. This is an example of a sudden and unforeseen water loss. However, this is also an example of negligence or liability. Insurance claims like this are usually covered by the homeowner’s personal home policy (in accordance with the Associations CC&Rs). Furthermore, if water damages in between the walls (party walls or common areas) and to the homeowner’s unit below, this too should be covered under the homeowner’s personal home policy. Liability coverage is usually built into every admitted home policy filed with the State.
Scenario 3: A washing machine hose deteriorated causing water damage inside of a unit, the adjacent party wall and to the homeowner’s unit below. Because there is no negligence on the homeowner that owned the washing machine, their insurance will only cover damages to their home (no liability exists). Unfortunately, the Association would have to file a claim under the Homeowners Association’s insurance policy to get the common wall or party wall damage fixed. As for the homeowner below, they too would have to file a claim under their personal home policy for their damages. Situations like this always seem to cause frustration for all parties involved because everyone is out their deductible, and everyone needs to file their own claim or absorb their own damages. As you can imagine, this results in bad feelings and sometime litigation between homeowners (as the public believes that insurance should cover all damages, from the unit the water originated from). Unfortunately, this is just not the case.
Our recommendation is to be active in your Association’s meetings. Suggest for legal interpretation of your Association’s CC&Rs if the language is unclear or ambiguous. Request annual insurance reviews with both your personal insurance agent and the Association’s insurance agent. And lastly, ask the HOA’s insurance agent to write annual educations for the homeowners (education on changes within the insurance industry could benefit everyone).
Ella Washington is an insurance agent specializing in homeowners associations. She has been representing associations nationally for over 25 years. Being an advocate for her Association Managers and Board of Directors is her passion.
Kelly Hart is a licensed claims manager with over 40 years’ experience in HOA claims and interpreting Association Declaration language.
By Bryan Farley, Association Reserves
Reserve contributions are typically the single largest budget item for an association, (anywhere from 15%-45%). Therefore, if a community member asks, “Why are our dues so high?” pointing to the reserve contributions would be a great place to start.
Why is this?
Reserve funds are allocated to offset the ongoing deterioration of the common area assets. Have you ever seen water staining in your condo after a storm? Your reserve contributions will pay for repairs and the eventual replacement of the leaky roof. Is the exterior wood trim warped and faded? Again, your reserve contributions are hard at work compensating for the natural deterioration of the wood and paint.
How will a board member know whether or not his association is adequately prepared to pay for the ongoing deterioration of the building’s assets?
The best way to do this is to hire a firm that specializes in preparing reserves studies per the National Reserve Study Standards. The National Reserve Study Standards provide guidance to accomplish this. A reserve study professional’s goal is to give client association boards the tools to anticipate and prepare for the repair and replacement of their communities’ common elements. A stable and reliable reserve component list is necessary from year to year, association to association, and provider to provider. The National Reserve Study Standards ensure consistent application and interpretation when preparing reserve studies.
There are many firms that a board member can choose from, but due to the number of firms vying for business, a board member may be overwhelmed by the high number of choices. Regardless of which firm the board chooses, make sure that whoever is completing your reserve study is a qualified professional that has earned proper credentialing.
It is important for a board member to know that a reserve study is most effective when it is prepared by a non-biased, third-party consultant. A credentialed reserve study preparer has the freedom to address potential and current component issues with fairness and objectivity.
For example, if the reserve account is poorly funded and the building suffers from a dilapidated roof, the association will need to either increase the reserve contributions and/or utilize outside sources of income like a special assessment or a loan to fund the replacement. If a reserve study preparer is beholden to the board’s urgent demand to maintain low monthly dues, then the reserve study preparer’s recommendation will be tainted. This is an obvious conflict of interest that should be avoided.
What if your board knows how to use a spreadsheet and would like to update their reserve study internally? This could also include a manager that was hired under the promise to keep dues low, or a company that desires to consolidate clients’ budgetary matters.
All of this is legal, per section 8 of the CACM Code of Professional Ethics:
“The (Manager), who has contracted with a client to perform community association management services, and who is also engaged in the practice of another profession, may perform other professional services provided there is full disclosure to the client.”
However, the Community Association Institute – Best Practices (Report #1 Reserve Studies/Management) recommends that reserve studies should be completed by independent third-party consultants.
A community’s board has a fiduciary responsibility to run a (potentially) multi-million-dollar not-for-profit real estate corporation. Board members may feel obligated to potentially influence reserve recommendations or percent-funded calculations in order to avoid disappointing the neighbors that voted them in. Opportunities may present themselves for the board when they can avoid "rocking the boat" for their association by potentially changing a few remaining useful lives of a component or lowering a cost. This may temporarily solve a potential budgeting issue for the association, but over time, future owners will have to pay up for past failures or inaccuracies.
In our experience, the data shows that 70% of associations are underfunded. In other words, the majority of associations are unprepared to pay for the ongoing deterioration of the common area assets. These numbers cannot be sugar coated, and failure to address these issues can result in a massive drop in home value due to deferred maintenance.
It is best practice to hire a credentialed and professional Reserve Specialist to perform your association’s reserve studies. Your community will benefit from the peace of mind and long-term financial preparedness that a professional reserve study will provide.
Bryan Farley, RS is the president of Association Reserves, CO/UT/WY. Bryan has completed over 2,000 Reserve Studies and earned the Community Associations Institute (CAI) designation of Reserve Specialist (RS #260). His experience includes all types of condominium and HOAs throughout the Rocky Mountains.
By Lauren C. Holmes, Orten Cavanagh Holmes & Hunt, LLC
Board members come from all walks of life and have a variety of connections or expertise that may overlap with the needs of their associations. Sometimes this works to the association’s benefit. It may also work to the board member’s benefit. Any board member who will or may receive a financial benefit or interest from an association transaction needs to proceed with caution.
Every board member has a fiduciary duty to the association. In short, this means that each board member is required to act in good faith, with the care an ordinarily prudent person in a similar situation would exercise, and in a manner the board member reasonably believes to be in the association’s best interests. The moment a person begins serving as a board member, that person must set aside his personal interests, including his financial interests, in favor of the association’s interests. In addition, Colorado law states that all board members must have available to them information related to the association’s responsibilities and operations that is obtained by another board member. No board member is allowed to hold information back from the rest of the board.
Colorado law defines a conflicting interest transaction as a contract, transaction, or other financial relationship between:
Spouses, children, grandchildren, parents, grandparents, siblings, nieces and nephews, brothers-in-law, and sisters-in-law are all considered parties related to a board member for these purposes. The definition also extends to any entity in which any of these relatives is a director, officer or has a financial interest. Most recognize that there is a conflicting interest transaction if the board member’s company, or the board member himself, is considered for a contract with the association. It is important to recognize that the same conflicting interest transaction exists when a relative or a relative’s company is considered for a contract.
A conflicting interest transaction is not illegal. However, if not handled properly, it may lead to legal liability as well as political fallout. A transaction will not be set aside if:
It is likely that the most important material fact is the benefit (usually financial) the board member, his family member, or his company will receive if the association enters into the transaction. If a contract is with the board member or family member directly, the interest is generally known and obvious. If the contract is with a company, the benefit may not be as obvious. Is the board member an employee of the company who receives a bonus or additional compensation for referring business? Even if the board member is not an employee of that company, does the company pay him or his company a referral fee if it is awarded a contract? If the company is awarded the contract, does it have a side arrangement to return a portion of the funds it receives from the association to that board member (commonly called a kickback)?
If the decision-makers have all the facts as to the interested board member’s financial interest in a transaction, it can determine whether that transaction is still in the association’s best interests and fair to the association. If the interested board member does not make his interest known in a transaction, he may be violation of his fiduciary duty, duty of good faith, and duty to provide the rest of the board with information. This may be the case even if the transaction is fair to the association. Board members would be well-advised to err on the side of caution and fully advise the rest of the board (or the members, if the members are voting) if they, their families, or their businesses have any financial interest or relationship with an association contract.
Lauren C. Holmes is co-managing partner at, and one of the founders of, Orten Cavanagh Holmes & Hunt, LLC. She has provided general counsel and transactional services to community associations throughout Colorado for over 20 years.
By Ashley Nichols, Cornerstone Law
As a Community Associations Institute’s Business Partners Council member, one of my responsibilities is to teach the Business Partner Essentials course to both new and seasoned professionals who support common-interest communities. One of the course topics is ethics, and while CAI doesn’t have a model code of ethics for business partners like it does for Community Managers and Board Members, it does provide guidance for our members (and many local chapters have adapted each of these other model codes to adopt a Code of Ethics for Business Partners in their chapters).
Two examples of business partner ethics provisions from another chapter are as follows:
Likewise, CAI developed the Model Code of Ethics for Community Association Board Members to encourage thoughtful consideration of ethical standards for community leaders.
Provisions related to the topic of potential conflicts of interest in the Code state that:
And lastly, a community manager works on behalf of the association and is the association’s agent. As such, the community manager should be taking action that is in the best interest of the association. Similar provisions are provided for in CAI’s Professional Manager Code of Ethics:
Lauren Holmes’ article in this issue, which discusses a board’s (or board member’s, and by extension, its community manager, as its agent) conflicting interest transactions, is a great place to start when reviewing the duty of the board and its agent regarding potential contract issues, preventing corruption, and promoting candor.
But when we think about business partners and marketing our businesses, we have to be careful not to cross the line with our industry relationships. Having great relationships with community managers is fantastic, but be mindful that the connections aren’t too close. For example, suppose your decking company is a “preferred vendor” for a management company, and you are building a deck for one of its managers at no, or significantly reduced, cost. In that case, that relationship might be too close.
And let’s be clear, the point is not to prevent community managers, board members, and business partners from having great relationships (that’s the cornerstone of our business) or even obtaining contacts that can help in your personal life. The point is that you must be candid about those relationships and be open to being vetted by our boards. Management companies should be asking their boards on an annual basis if they would like to rebid service agreements. It is not an attack on you or your services as the business partner – it’s good practice by the management company and the responsibility of a board to ensure it satisfies its fiduciary duty to the association. After all, the board’s responsibility is to ensure that its relationships with vendors are in the association’s best interests.
As another example*, Management Company X charges $35 per hour for basic maintenance performed by their “in-house” maintenance team. Management Company Y hires an outside vendor to perform the same work for $30 per hour and bills the association $35. Is this an acceptable practice if the management contract specifies that the work will be billed at $35 per hour?
What if, in the same scenario, Management Company Y gets a refund from the vendor instead of a markup? The vendor would bill $35 per hour directly to the association and then pay back $5 per hour to the management company.
In either situation, you are playing with fire. Many factors go into the answer, including, you guessed it, your candor in the situation (and whether the situation is appropriately disclosed). Additionally, typical contracts have language, providing any “discounts” accrue to the client, not the management company. The community manager’s relationship with the vendor is great but should be a benefit of lower prices to the client and not to pad the manager’s pocketbook.
Your reputation for integrity is the most important asset of your company. Is what is being done in the best interest of the association? It’s easy to weigh (and should be weighed) whether it’s in the manager’s, individual board member’s, or your own self-interest before you act. Also, presume that everything that happens will be made public, then proceed accordingly. If it doesn’t pass the “smell test,” then you should probably pass. Nothing you do should be considered an act designed to influence business decisions.
*Question posed recently in CAI’s Exchange online forum.
Ashley Nichols is the principal and founder of Cornerstone Law Firm, P.C. and is a member of CAI’s Business Partners Council at the national level. She has been in the community association industry for over thirteen years, providing associations with debt recovery solutions for their communities. You may find out more at www.yourcornerstoneteam.com. To find out more about CAI’s Business Partners program and the tools available to you as a business partner member, visit CAI at https://www.caionline.org/BusinessPartners/Pages/default.aspx.
By Joel W. Meskin, Esq., CIRMS, CCAL Fellow, MLIS, EBP, McGowan Program Administrators
The procurement and maintenance of Insurance in the community association industry is shrouded in unique ethical considerations that do not apply to individual insurance consumers. Enter the Community Association Board’s (“Board”) “fiduciary Duty.” This process is imbued with inherent ethical considerations for not only Boards, but also Community Association Managers (“CAMs”), Community Association Attorneys, Community Association Insurance Professionals and other business partners.
A fiduciary duty is the legal responsibility to act solely in the best interest of another party (i.e. “the community association”). Fiduciary duties include duties of undivided loyalty, due diligence and reasonable care, full disclosure of any conflicts of interest, and confidentiality. While a fiduciary duty may be violated accidentally, it is still a breach of ethics. Emphasis added. Ethics Unwrapped: https://ethicsunwrapped.utexas.edu/glossary/fiduciary-duty
A Board’s fiduciary duty in the insurance procurement process differs from an individual insurance consumer. For example, a board president may want to use his insurance agent brother-in-law who does not have experience in community, the board president may not fully disclose his potential conflict of interest here. Whether the president perceives this as a conflict or not, failure to disclose is a breach of fiduciary duty and therefor an ethical violation. On the other hand, if an individual insurance consumer selects his brother in law, it would not be a breach of a fiduciary duty or ethics, but it could be a bad decision. As Forrest Gump says, “stupid is as stupid does.”
A board’s fiduciary duty requires the board to protect, preserve and enhance the assets of the association. These assets are the common elements of the association, both tangible and intangible. The keystone to this duty is that the board members must put the interest of the association above his or her own personal interests. This can be counterintuitive for many board members. In fact, many board members seek to join the board for the primary purpose of protecting their personal assets or pursuing their own agenda. As we know, perception is reality. The president above may see this as a no harm no foul situation. On the other hand, others may very well perceive the act as a breach of its fiduciary duty. This misunderstanding by board members regarding their duty is directly or indirectly the genesis of many Director and Officer Liability Claims.
The duty to place the association’s interests above the personal interests of each board member can be subtle, obvious, or anywhere in between. The key reason that unit owners elect multiple board members to manage the association, at least theoretically, is as a check and balance insuring the various interests of the membership have a voice.
The By-Laws (the association’s operating manual) and other applicable laws are in place to facilitate board fiduciary duties and ethical considerations. This is why it is generally required that board business be conducted during a properly noticed board meeting. Furthermore, most states, including Colorado, have Open Meeting Laws. This is a check and balance on the board’s fiduciary duty avoiding decisions being made in smoky back rooms.
So what do fiduciary duties and ethics have to do with community association insurance? The board is the association’s Risk Manager elected to protect, preserve and enhance the assets of the association. The fiduciary duty does not require that the board make the best decisions, or even a good decision. Rather, the board is required to act with a duty of loyalty by putting the association’s interest above their own, act with due diligence and reasonable care, and to fully disclose any conflicts of interest.
The board is not expected to be professionals or experts that require special training. For these matters, the board is authorized to seek professionals and experts. Keep in mind that a directors and officers liability policy only provides coverage for board members in their capacity as a “board member” and not as professionals or experts.
For over 20 years I have asked Boards, CAMs and Insurance professionals what is the first question board members ask when considering insurance options? Without exception they all ask “how much?” The only time this is an acceptable as the first question is if all insurance, insurance companies, and insurance professionals were the same. It never is! I have never seen any governing documents that requires a board save money when procuring insurance, yet that would appear to be the case based on decision makers’ conduct. Yes, a board must be vigilant. The fiduciary duty, however, is to purchase the best insurance to protect the assets. Once the board has done its due diligence by listening to Community Association Insurance Professional presentations, then a cost benefit analysis can be done. Knowledge of price up front will influence your decision process and be a distraction.
Boards must understand that the association is fully insured for every risk! The question is: are they covered by an insurance policy, or will they be self-insured having to look to association assets, a special assessment or a bank loan to fund a claim or loss. At the end of the day, someone must pay.
Another problematic practice by many boards is to defer its due diligence to its independent CAM to procure and maintain insurance. This practice is inherently a breach of the fiduciary duty by the board as well as an unwitting professional error or omission by the CAM. What boards must understand is that no matter the CAM’s insurance acumen, she or he is not covered for that E&O under their E&O as it is excluded and not under the D&O as they are not covered when the association sues the CAM.
The board must also keep in mind that if the board sues the CAM, the D&O policy will not defend or indemnify the CAM. To make this an even greater breach of fiduciary duty and ethical dilemma, is that the management agreement more likely than not includes an indemnification provision that would require the association to defend the CAM when the association sues the CAM for not procuring or maintaining the proper and sufficient insurance. Therefore not covered under the policy, but for all intents and purposes, covered pursuant to the indemnification agreement. This latter consequence is another reason the CAM should bring in the insurance professional.
Tip: Insurance professionals do not charge the association for his or her time to present a proposal and answer all questions the board may have. I am also often baffled why a CAM would not mandate that the insurance professional present the proposal(s) and answer all board questions. This is a win-win for a CAM’s insurance dread and transfers the CAMs risk of E&O to the insurance professional.
Joel Meskin, Esq., CIRMS, CCAL Fellow, MLIS, EBP is the Managing Director of Community Association Products at McGowan Program Administrators. He has been a community association insurance expert for over 20 years, and is a prolific speaker and author nationwide.
By Christine "Chris" Herron, Westwind Management Group, LLC
The term “Ethics” can sometimes generate different feelings and meanings for different people. However, we usually count on people of high moral character to act virtuously both in public and private. They seek the greatest amount of good for themselves and others. In this way, they are seen as moral decision-makers.
Moral philosophy has many schools of thought; some that are more ‘black and white’ and others which are shades of gray. For example, if you are more aligned with the philosopher Kant (sometimes referred to as deontological), you might reflect on the rightness or wrongness of a particular action without consideration of the outcome, while other moral philosophies such as the utilitarianism view, looks at morals as more of an ‘ends justify the means’ scenario. And, of course, there are numerous others. Regardless of your approach or belief system, most of us can agree that ethics and ethical standards are an important consideration in the governance and management of community associations.
We believe it is so important because we are entrusted with care for people’s most substantial lifetime investment and the place that they call ‘home.’ It is our responsibility as professionals or volunteer leaders in the industry (whether board or committee members, business partners, community managers or management company leadership) to uphold a high standard and assure those we are serving of our integrity and trustworthiness. This is a hallmark of our character. Character reflects who we are. There is no separating a person’s character from their actions, ultimately. Character is a choice. There is a lot which is generally out of our control in life. But we can control and create our character every time we make choices.
How do we know the “right” choice? The Community Associations Institute has established codes of conduct and ethical standards for industry practitioners. This is a good resource and place to start when considering ethical questions. You can find the CAI Code of Conduct, and CAMICB Professional Standards for credentialed members easily on the CAI website. Most community organizations have adopted codes of ethics or codes of conduct for their Board operations, as well. Some other resources to consult if you are unsure about a particular issue, might include reaching out to a friend or a trusted colleague and posing the situation to them. Their feedback could help you to reach the best conclusion. Be sure to seek the support of others who share your same purpose, and who have been known to act consistently within the framework of their core values. Additionally, our human intuition is a very powerful thing, so if something does not feel right, you can usually trust your gut. Doing good work in the right way feels good.
Ethical dilemmas are not new. Some of the ethical dilemmas we are faced with are ‘easy’ to answer – don’t take bribes, kickbacks, or other similar remuneration or consideration in exchange for influence in any business activity, for example. Others can be harder to address. For instance, ask yourself under what condition would receiving a gift cross the line? Often, business partners express gratitude for their ongoing business relationships by offering various networking opportunities which may constitute a meal, a coffee break, or participation in a social event. This gives them an opportunity for some ‘face time’ (pandemic notwithstanding!) to share their valuable services and products with you, which may be of significant use or benefit to your community or clients. And sometimes, Boards of Directors may give gifts of appreciation to their service providers at the holidays. Some good questions to ponder in these situations are: By receipt of the gratuity or gift, will I be compromising my integrity, objectivity, or standards? Will I be falsely setting up an expectation of special services or opportunity here, making me obligated to this person in any way? If the answer to either of these questions or similar ones is ‘Yes,’ you likely should reconsider acceptance, regardless of the value of the gift or nature of the activity.
I, for one, want to be known not only for doing ‘good work’ but for working responsibly and ethically. I am the only one who can be ultimately responsible for this; not only with respect to myself, but to my family, friends, and colleagues, as well. Knowing what should be done and having the means to do it are useless without personal commitment. So, bottom line, ethics starts with me.
Christine (Chris) Herron, CMCA®, AMS®, PCAM® is a 20+ year industry veteran, and Chief Operating Officer with Westwind Management Group, LLC. She is pleased and proud to be part of an organization and team which values integrity and ethics very highly, and whose purpose is to help people live better lives.
By Mary Harris, Architectural Signs
Your HOA Board has asked you to get quotes for “updating the signage” but no other instruction. Where do you go from here? What exactly do they mean by “update?” Here is some basic information that will help you look like a knowledgeable rock star.
First and foremost, enlist the help of a professional sign person. This person needs to be someone that has experience in all types of signs, not just banners from a quick sign shop. If you do not have a good sign resource, ask your co-workers or companions in the management industry for referrals. On the first contact with the sign professional, do not hesitate to interview them as you would an assistant. Ask for years of experience and projects that they have worked on. Take a look at their website. This can save you from headaches in the future.
Once you have chosen your sign professional, provide them with a budget. You do not want to waste your time or theirs, so knowing the budget is key. Now that a budget has been established, ask to do a walkthrough of the property with them. This allows you the opportunity to see what they see, affording you better insight to the sign needs of the community.
The common types of signs in a community are monuments, street signs, stop signs, building signs, pedestrian crossing, community information kiosks, miscellaneous pools signs, and clubhouse signs. Of course, each community is unique and may have other types of signs. In this article, we’ll discuss a few of these.
Monument signs are typically at the entrance of the community and create the first impression of the neighborhood. Although a monument can last upwards of 30 years, it may look dated. This type of signage will typically use the bulk of your budget. An update to the monument sign can be as little as cleaning off dirt and graffiti, all the way to full replacement. Monument signs are most often constructed of some form of masonry, such as brick or stone, and metal faces or individual letters and/or logos. Some less costly, and less permanent are merely constructed of posts and panels. Ways you can update a monument are panel and letter replacement, adding lighting (currently, solar is particularly popular), re-painting the lettering/panels, and of course full replacement.
If the community’s streets are privately owned and maintained, the street signs will need to be evaluated. Are they faded, missing street names, leaning, or just plain ugly? The MUTCD (The Manual on Uniform Traffic Control Devices) requires the sign faces to be fabricated in high intensity reflective material; are yours? In my opinion, although private communities are not required to comply with the MUTCD regulations, it is wise to do so. It could reduce the community’s liability in the event of an accident. From an aesthetics standpoint, replacing the typical u-channel post and aluminum blades with decorative posts and sign blades can really improve the look of the community as a whole.
Community information kiosks can be custom built to meet the specific needs of the neighborhood. They can be free standing structures or mounted to the outside of a building such as a clubhouse. They can be as simple as a glass front box with a cork board interior for posting flyers about a missing kitty- cat, or as sophisticated as an electronic LED display that can be controlled by one of the Board members. You will need to have your sign professional check with your local governing entity and establish what types of kiosks are permitted in your area.
Regulatory signs, and more specifically, pool rule signs are extremely important to keep clean, readable, and up to date. These signs need to be legible from a distance. Pool rules can change yearly. New legislation is the most common reason to review your sign annually. You will need to check with your insurance carrier as well to find out what verbiage they require on the sign. While we are on the subject of pool signage, you’ll need to make sure that the water depth markings surrounding the pool are in good, readable shape and accurate, as well as any other markings, such as “No Diving,” etc.
Those are just a few thoughts on community signage. Your sign professional should be able to educate you and your Board on all of your sign needs. I will leave you with one final piece of information: Do not feel compelled to purchase all of your signs at the same time if your community needs to spread out the expense over time. The only difference in price should be additional trip charges and possible increases in material and labor costs (which in most cases, should be nominal).
Mary Harris, Managing Member of Architectural Signs, has been a professional in the sign industry for more than 30 years. Architectural Signs offers custom dimensional signage locally and nationwide. Contact Mary with questions at mary@architecturalsigns.com or visit the website at http://ArchitecturalSigns.com.
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