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  • 08/01/2019 10:29 AM | CAI Rocky Mountain Chapter (Administrator)

    By Joel Yust AMS, CAM, CMCA, All Property Services, Inc.

    As fall approaches, many directors find the topic of budgets haunting them. Some community association managers can find this a bit of a laborious task as well. As long as proper preparation takes place, it doesn't have to be that difficult. If associations have a good reserve study done that fulfills the requirements of the Reserve Study Policy written up by the association’s attorneys, it lays the groundwork for the budget to fall into place. While some of the items on the study may not be annual budgetary items, it does allow the directors to formulate a plan for items outside of the annual needs. 

    The first step I usually take is meeting with the board of directors, and their association accountant that sees all of the regular bills that come to the association. This offers a great resource for unexpected things that the board of directors may not always be aware of. As managers advise the directors of the process set forth in CCIOA (make sure directors are aware of HB 18-1342) and the association’s governing documents, it can be helpful to figure in the increases to utilities, services, insurance and other annual costs that have escalating fees, hence having the association’s accountant present for the budget meeting. It is a common question as to why items such as asphalt, landscaping improvements, monuments, roofing, concrete work, and other large expensive repairs are not listed in the budget line items. The simplest answer to this is those expenses don't normally happen each year, therefore, they should not be on an annual budget. I usually let the directors know that it is a good practice to list the large expenditures (capital expenses) under the budget so that the membership is aware of exactly what is happening with their money. 

    Eliminating the question of transparency can be a huge deal with some associations. If the board of directors can stop the question of "where does my money go" before it is asked, it could allow the budget ratification and annual meeting to be much more productive. Once the budget items have been reviewed, the directors can adopt the budget and the notice to the membership can be sent within the 90 days of adoption.  

    I would imagine that all managers in the industry have a few associations that like to create their own budgets without the outside influence of a third party. That's okay to do, but never hesitate to help them review it to see if there are any additions or changes that they may be interested in, or other legislative changes that they may not be aware of. 

    When possible, I normally try to schedule the budget ratification meeting and annual meeting at the same time. This seems to be more efficient to me, and let's face it, not every member finds all the HOA meetings as enjoyable as I do. Often times directors and members feel that it is necessary for the membership to approve the budget. Unless the governing documents state otherwise, the board approves the budget and the membership has the ability to veto it. With appropriate budgeting practices, there is not normally a need or desire for the membership to veto a budget. If there is a need for a veto, according to the CCIOA budget ratification process, the membership is able to reject the proposed budget if the majority of all owners in good standing veto the proposed budget. To date, I have not had this happen. 

    If you plan ahead and help directors follow the process, things don't need to be so scary. Keep it simple, follow the guidelines set forth in the documents and statutes, and let Halloween do the haunting!

    Joel Yust has been in business ownership/management for the last 24 years, but in the last 6 years, he has really enjoyed managing communities and helping memberships with their needs. Most people find it bizarre, but he can't seem to get enough HOA edification. Although it's normally a thankless job, Joel LOVES what he does.

  • 08/01/2019 10:25 AM | CAI Rocky Mountain Chapter (Administrator)

    By Bryan Farley, RS, Association Reserves

    What makes a board successful? Is it keeping the dues low? Is it based on the total number of complaints on the neighborhood Facebook page? How does a board know whether they are on track, or falling behind? After completing over 45,000 Reserve Studies, our firm has seen the successes and failures of many properties in regard to funding their Reserves. There are a few common themes that we see over and over, and this article will present a simple ‘How To’ Guide on helping your property avoid the common pitfalls that clients make as well as highlight the simple solutions to these issues. 


    Common Mistake #1 – Not Having a Professionally Completed Reserve Study

    While I admire the Do-It-Yourself attitude when it comes to building a bookshelf from beetle-kill pine (I sometimes struggle with assembling Ikea furniture), there is too much at stake for a board member to prepare a Reserve Study. Yes, your board member may be a retired engineer who knows his way around a spreadsheet, but that is not the point. A professional Reserve Study provider (including either a Reserve Specialist or Professional Reserve Analyst) is a non-biased, third-party expert that is only concerned with providing accurate information for the association.

    When a board member or owner puts together a Reserve Study, there may be an opportunity to skew the numbers to achieve better outcomes since there is a lack of oversight. A professional Reserve Study provider has the training (for example, CAI requires a three-year apprenticeship to become a credentialed Reserve Specialist) to complete the job well, in order to serve their clients with a reliable report. 

    It may seem tempting to complete a Reserve Study ‘in-house’ to save a few bucks, but that money saved could turn into a special assessment in a few years. 

    A wise association will hire a credentialed expert to complete the Reserve Study in order to provide clarity constant and ongoing deterioration of their property. 


    Common Mistake #2 - Not Updating A Reserve Study

    Why should a property update their Reserve Study? Is this document good for 20-30 years? This is a question that we do receive on a regular basis. I tend to respond and ask how often their association updates their budget, to which they reply – every year. For a typical property, reserve contributions make up to 25%-45% of the total budget. That is a big piece of the budget pie, therefore it is important that the Reserve Study, which provides the recommendation for contribution rate, be up to date and accurate. A client wouldn’t use a roofing bid from 2012 to budget for their 2020 roof replacement project, yet many clients do this with their Reserve Study.    

    Updating a Reserve Study will not only provide accurate information to a board making long lasting financial decisions, but it will also save owners money. 

    We found that associations who update their Reserve Studies every five years enjoy a 35.1% decrease in special assessments when they shift to updating their Reserve Study annually.

     Associations who update their Reserve Studies every three years enjoy a 28.5% decrease in special assessments when they shift to updating their Reserve Study annually.

    It doesn’t matter what Colorado state law says about Reserve Study update requirements: Special assessments are disruptive, divisive, and predictable years in advance everywhere. Put time on your side by updating your Reserve Study annually, significantly lowering your exposure to special assessments.


    Common Mistake #3- Saving Money by Deferring Maintenance

    There are some boards out there that intentionally or unintentionally avoid reserving for a project since the board is interested in keeping costs down. This strategy is like not paying taxes on April 15th to save money for your vacation. It does not matter whether the board decides to reserve for a project or not, the project will be due and will most likely be costly. 

    Here is a quick example of what I mean; Imagine that your building’s roof needs to be replaced in 15 years and will cost about $250,000 to replace. Did you know that you can actually replace this roof for $232,000? This is possible thanks to compounding interest. If the board decided to put money away every year, even with nominal 1% interest, the ownership will save $18,000 by proactive stewardship. 

     What about current owners?  What if an owner is planning to move before that 15-year roof is due? Well, adequate reserves equates to better home values. We found that home values were 12.6% higher in associations with a strong (over 70% Funded) Reserve Fund than homes in associations with a weak (under 30% Funded) Reserve Fund. Assuming an average sale price of a condominium is about $400,000, this means that units in associations with a strong Reserve Fund can sell for $50,000 more than units in associations with a weak Reserve Fund. It pays to adequately fund the Reserve Fund. 


    Common Mistake #4 - A Reserve Study is for the Future

    A Reserve Study is not a rainy-day fund, a slush fund, or a ‘nice to have’ fund. Reserves are for current and ongoing deterioration. A roof does not just fail overnight, but rather month by month the roof becomes older and deterioration starts to show. We try to explain to clients that the roof (or any other common area asset) has a monthly bill that needs to be paid. However, unlike your monthly water bill, no one will shut off your roof if you neglect to pay the monthly roof deterioration bill. That is why a Reserve Study is important; it clearly describes to owners what the monthly deterioration ‘bill’ is.

    If you hear people at your property start to say –“Reserves are for the future”, or “A Reserve Study will show us how much money we’ll need in twenty years” – quickly correct them. Once a conversation starts drifting towards the future, human nature tends to assume that ‘someone else’ will take care of it; whereas if we frame the problem of underfunding reserves as a material issue, boards will have to take responsibility for their actions. 

    I hope that this article has highlighted the benefits of having a credentialed Reserve professional update and complete a Reserve Study for your property so that your board will budget appropriately for the ongoing and inevitable deterioration occurring at your property. 

    Bryan is the president of Association Reserves – Rocky Mountains. 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 homeowners’ associations throughout the United States, ranging from international high-rises to historical monuments.

  • 06/01/2019 4:30 PM | CAI Rocky Mountain Chapter (Administrator)

    By Lee Freedman, Gravely Pearson Wollenweber Freedman, LLC

    Budget Acres Condominium Association is desperately looking to hire a fencing contractor to redo the common element exterior fencing around the community.  For Budget Acres, price is always a factor.  You sit on its Board of Directors.  Luckily, your brother-in-law happens to be a fencing contractor.  You do not know how good he is, but you know he will give the Association a good price because he is “family” and he would be eternally grateful to you for the work.  You convince your fellow Board members to stop looking because you have the perfect person.  He cuts the Association a great deal, however, he does not provide a contract or even an itemized bid because, again, he is “family.”  What could go wrong?

    These type of “sweetheart” deals are not uncommon in community associations throughout Colorado because they tend to provide associations cheap and quick labor.  However, not only can these arrangements pose considerable legal exposure for Colorado communities if the work is done poorly or is not completed, they raise serious ethical concerns for associations, their board of directors, and the individual board members who may personally or whose family members may profit in some way from the deals.

    The ethics concerning the selection of vendors/contractors is not complicated.  Board members generally are not supposed to earn compensation in their roles as board members.  They are volunteers.  Their family members are not supposed to profit from their roles as board members either.  Board members of community associations are required under Colorado law to discharge their duties as a board member: (1) in good faith; (2) with the care an ordinary prudent person in a like position would exercise under similar circumstances; and (3) in a manner the board member reasonably believes to be in the best interests of the community association.  These are known as fiduciary duties.  In discharging their duties, board members may rely on information or statements of other officers or employees of the association whom the board member reasonably believes is reliable and competent on the matters presented.  This may come in the form of competent professionals, experts such as attorneys or public accountants, or a Board-appointed committee the board member is not on but which he or she reasonably believes merits confidence.

    Under Colorado law, to comply with their fiduciary duties, board members must, at the very least, act with loyalty towards the community association and with an extreme measure of candor, unselfishness, and good faith.  To ensure such compliance, community associations are required under the Colorado Common Interest Ownership Act (CCIOA) to adopt a policy governing the handling of board member conflicts of interest.  Such a policy must, at least, define or describe the circumstances under which a conflict of interest exists and set forth procedures to follow when a conflict of interest exists, including, but not limited to, whether or not the board member must recuse himself or herself from voting on the issue.

    Unless the conflict of interest policy states otherwise, board members with conflicts may, but are not required to, recuse themselves from any discussion or vote on the issue.  However, a board may want to require such recusal in its community’s conflict of interest policy to help reduce the appearance of impropriety in the board’s decision-making process.  Further, a board member is not prohibited from entering into a transaction with the community association so long as the transaction is fair as to the association.

    Under the scenario with which we started, the board member must disclose to the other board members prior to any vote that the contractor is related to him or her.  The board member must also disclose to the other board members any negative information about the transaction or the contractor known to the board member that would make reliance on the information about the transaction unwarranted.  Basically, if the related board member knows that his or her brother-in-law does shoddy work, has been sued many times, or is otherwise unreliable, the board member must share that information.

    If the related board member chooses to not recuse himself or herself and proceeds to participate in the discussion on or vote to approve the agreement, the board member must be honest and upfront with the other board members.  The board member also must remove his or her personal relationship with the contractor (the brother-in-law) and make a determination solely on what he or she believes to be in the best interest of the community association and as any other person in his situation as a board member would do.  This may include, if it is reasonably believed to be in the best interest of the community association, a requirement to have a written agreement with the brother-in-law, which contains express warranties.

    Failing to comply with these fiduciary duties could put a board member in jeopardy of facing extensive and expensive litigation and place their community association similarly at risk.  Under Colorado law, the elements for a suit against any association for breach of fiduciary duties are really simple. A member of a community must only demonstrate that a board of directors has made an arbitrary or capricious decision, which is not reasonable under the circumstances and in the best interests of the given community.  Hiring contractors for self-dealing purposes opens a door for an allegation of breach of fiduciary duty that no community wants to defend.  Preventing these allegations is not hard if board members simply avoid conflicts of interest.  Be upfront, candid, and unselfish in your role as a board member and you will avoid the risk. 

  • 06/01/2019 4:28 PM | CAI Rocky Mountain Chapter (Administrator)

    By Editorial Committee, CAI Rocky Mountain Chapter

    Fiduciary Duty.  It’s a phrase that is often heard in our industry; and we often field questions regarding exactly what that duty is and to whom it applies.  Often, those questions are answered in relation to our boards.  But does the duty extend to community association managers?  Does it apply to others?  In order to answer those questions, we need to first define what the phrase fiduciary duty means.  

    A fiduciary duty is a duty to act for someone else’s benefit, while subordinating one’s personal interests to that of the other person.  

    A person having duties involving good faith, trust, special confidence and candor towards another is a fiduciary.  So, who are fiduciaries?  Directors, officers (and committee members), community association managers and agents of an association all owe a fiduciary duty to the association.

    It is well accepted that association directors and officers owe a duty of undivided loyalty to their association.  This is because directors and officers exercise discretion on behalf of the association and are responsible for the money and property of others.  As such, they are in a “fiduciary capacity” and are held to the highest standard with a duty to act for the benefit of others and not for themselves.

    Additionally, community association managers are generally considered (and by their management agreement, are contractually defined as) agents of an association, and therefore owe fiduciary duties to the association.  Managers must 1) act in the interest of the association, 2) act in the same manner as fiduciaries who serve on the board or as an officer, and 3) must act only within the manager’s scope of duties as recited within the management agreement.

    Managers, like board members, must act in the interest of the association.  This is generally regarded as the Duty of Loyalty (aka Duty of Good Faith).  This means that the association’s manager also has the obligation to act in good faith, fairly, and in the best interest of the entire association (and not the interests of individual homeowners).  It also means that managers have the same restrictions regarding conflict of interest transactions, as well as upholding the duty to maintain confidences.  Any information in the possession of the manager which is confidential in nature, must remain strictly confidential.

    Finally, the manager has only the management authority delegated to it by the association’s governing documents, by direct instruction of the board, or in its management contract.  Actions taken by a manager outside of the scope of authority can bind an association.  This is called apparent (ostensible) authority.  An association can be held liable for the actions of its officers, directors, its manager or other agent, even when the association does not know about, approve of, or benefit from those actions, as long as the agent reasonably appears to outsiders to be acting with the association’s approval.  

    How can an association protect against apparent authority?  The board should take reasonable steps to ensure that the scope of its agents’ authority is clear to third parties and that agents are not able to hold themselves out to third parties as having authority beyond that which has been vested in them by the association.

    Here is an example: A community association manager decides to enter into contracts on behalf of all of the associations within his portfolio to allow a waste management company to serve as the sole and exclusive agent on behalf of each association to negotiate, manage and advise the association on its agreements with solid waste and recycling services.  The manager actually signed agreements for twelve different associations to contract with the company.  The waste management company, having no reason to believe the manager could not sign contracts on behalf of the association, is now looking to each of the associations for a combined payment of over $50,000.  The Boards are now asking how they could be contractually liable for the services when they never signed a contract.  The answer is because of apparent authority.

    In short, the existence of a fiduciary relationship means the fiduciary is required to act reasonably, prudently, and in the best interest of the association.  It should go without saying (but will be said) that a fiduciary must not engage in activities which could be viewed as negligent or fraudulent.  The concept of being a fiduciary can be difficult to fully understand.  Certainly, it can be hard to see the distinction between the duties owed to the association versus those owed to the members.  Always questioning whether you are or should be acting in a fiduciary capacity (you probably are!) will be to everyone’s benefit.  


    [1] This is an example from another community association lawyer.  The story is not from a Colorado community association lawyer, nor did it happen in Colorado, although it could absolutely take place anywhere.

  • 06/01/2019 4:26 PM | CAI Rocky Mountain Chapter (Administrator)

    By Meghan Wilson, Neil-Garing Insurance

    This article is going to address the basic needs of insurance for community associations.  They all apply regardless of the type of association.  We will discuss the Governing Documents as they relate to insurance, common policy forms, exclusions, and what to pay attention to, along with risk management tools to be proactive with.

    Governing Documents 

    When reviewing the insurance that an association should carry, it is critical to start with the coverages that are required by the Governing Documents.  It is the fiduciary responsibility of the Board to adhere to the Governing Documents as they dictate how they should be governed and insured.  The sections to pay attention to are the definitions and the insurance segments.  The key items to pay particular attention to in the Governing Documents are below:

    • Types/Limits of coverage required
      • Property
        • Definitions – focusing on common elements, limited common elements, and units.
        • Insuring Agreement – The association’s insurance is responsible for either the common elements, limited common elements, and then units up to the bare walls, “as originally conveyed”, or All-In.  Based on the insuring agreement, the Board can then set the replacement cost for what the association is responsible to insure in the event of a loss.  Regardless of what causes the loss, the insuring agreement will state who is responsible for covering the building, interior finishes, and personal property. 
        • Replacement Cost Appraisals – Many Governing Documents put a requirement for the Board to have a replacement cost appraisal completed.  Even if the declarations do not address it, we strongly recommend this be done at least every 3 years. 
      • Fidelity/Crime
        • The Declaration may just address the coverage, but it may also advise of a specific limit. For example, two months of assessments, plus all reserves. 
      • Directors and Officers
        • This is intended to cover the directors and anyone making decisions on their behalf.
      • Flood 
        • May state that this be required if in a flood zone.
      • Workers’ Compensation 
        • May state this is required if the association has employees. 
      • Liability
        • May state a specific minimum limit that association and or unit owner must carry.
      • Other coverages the Declaration may address that the association needs. 
        • Equipment Breakdown/Boiler
        • Deductible – may state a maximum deductible allowed.
        • Coinsurance/Agreed Value
        • Building Ordinance or Law

    It is the Board’s fiduciary responsibility to make sure that the association has adequate coverage and has, at minimum, the required coverages in the Declaration. 

    Understanding Warranties, Exclusions, and Coverage Limitations

    Not every insurance policy is created equal and certain policies can have warranties or coverage limitations.  As the Board and community manager you will want to educate yourself to make sure you know what to ask.  Here are a few of the warranties that we uncover when completing audits of policy forms:

    • Property
      • Extended Replacement Cost/Guaranteed Replacement Cost – Often times these coverage enhancements come with a warranty if the association is not insured to replacement cost at the effective date of the policy.  
      • Blanket building limit – Community Associations with multiple buildings should be written with a blanket building limit. 
      • Co-Insurance – Can create a penalty for being underinsured at the time of loss. 
      • Sub-limits on specific property coverages – Limitations on Building Ordinance or Law (A, B, and C), Sewer Drain, and Back-up of water. 
      • Building Ordinance or Law – Having enough limits on B and C coverages is often overlooked. 
        • Coverage A – Provided coverage for the undamaged portion of the building if a government entity requires it be torn down and rebuilt.
        • Coverage B – Covers the demolition cost and disposal of the undamaged portion if the government entity required it be demolished.  
        • Coverage C – Covers the cost to bring the building to current code in the event of either a partial or a total loss.  For example, Coverage C would cover retrofitting sprinkler systems in a non-sprinklered building. 
    • Directors and Officers – This is one line of coverage where not all policies are created equal and the limitations vary greatly from carrier to carrier. These are the items to pay close attention to:
      • If there is a community manager does the coverage extend to them?
      • Defense limits – Is the defense limit included in or outside of the aggregate limit?  We have seen claims that all $1,000,000 of the aggregate limit was used on defense.  
      • Retroactive dates – Do you have coverage for the prior Board or community manager decisions?  If there is a retroactive date, then decisions made before that date would be excluded. 
      • Exclusions – The most common two exclusions we find when auditing policy forms are non-monetary damages, and insured versus insured.  Both exclusions present a significant gap in coverage for the Board or the community manager.  
    • Fidelity – There are limitations on this policy form depending on how the book-keeping processes handle the money.  Adequate limits per state law are crucial. 
    • Umbrella – If the association has an umbrella, making sure it extends over the D&O policy is imperative.

    Risk Management 

    The main purpose for insurance coverage is that in the event of a claim, the association will be restored to the condition prior to the loss.  There are a few proactive items that community managers, Boards, and associations can do to help prevent claims. They include the following:

    • Construction Activities – Associations should be collecting General Liability, Worker’s Compensation, and auto certificates from all contractors for the association and unit owners, along with contractors hired on behalf of the community manager.   It is important to be aware of the exclusions that are on the contractor’s policy and what those exclusions do in terms of limiting coverage. The contractor doing the work has to have the correct coverage and limits.  Contractors working on individual units or on behalf of the association need to endorse their policy to protect the association and unit owners.
    • Facility Improvements – Associations should take a proactive approach to facility maintenance upkeep and/or upgrades.  A checklist can be extremely helpful in this area.
    • Vendor Contracts (Elevator maintenance, fire suppression services, landscaping, snow removal) – It is important to review vendor contracts before executing and making sure the association is protected by the contract. 

    Neil-Garing Insurance has been writing HOA insurance for the past 30+ years and currently insures over 700 HOAs in Western Colorado.  If you have questions about any of the items mentioned above, please feel free to give us a call. 


  • 06/01/2019 4:25 PM | CAI Rocky Mountain Chapter (Administrator)

    By Tressa Bishop, MBA, CIC, CB Insurance

    Let’s face it, no one really “likes” insurance.  Well, that is except those of us who consider ourselves insurance nerds and will take any opportunity to discuss the ins and outs of policies, exclusions, claims, etc., much to the chagrin of our audience, at times.  Insurance is a necessary evil.  Your association’s governing documents require it, lenders require it, and our state statutes require it.  Unfortunately, there is no getting away from having it.  The worst possible case scenario is you have purchased insurance for your association, paid what you feel is way too much for it, and, come claim time, the carrier doesn’t end up paying what you expected them to pay.  

    The old saying “A little knowledge is a dangerous thing” does not necessarily apply to insurance from the layman’s perspective.  While you’re not expected to become an insurance agent, you are expected to gather enough knowledge, with your agent’s expertise and guidance, to ensure your association’s assets are properly protected in case of loss.  Sticking your head in the sand and hoping everything is hunky dory is not a plan.  Developing an insurance process and understanding the common exclusions and limitations within many policies can help along the way.

    When to Start – Well before your association’s policy expiration date (preferably shortly after renewal or mid-term).

    What to Do – Review the governing documents for any information relating to Insurance.  This includes the types of policies required, what coverages within those policies the Association is required to carry, deductibles (amounts allowed and who is responsible for payment/reimbursement at the time of loss), and owner insurance requirements. 

    Next, take out (or pull up on the computer, if you love trees) the association’s insurance policies (the actual contractual policies, not policies and procedures) and organize a document as a sort of a cheat sheet. 

    Basic Information to Gather – List the policy type (Property, General Liability, Association Professional Liability/Directors & Officers Liability, Fidelity and Crime, Cyber Liability, Workers’ Compensation, Umbrella/Excess Liability, Flood, etc.), carrier name, policy effective dates (start and end dates – yes, they are the same day of the month, one year apart), policy number, policy limits, policy deductibles (or retention amounts), and claims reporting information.  For example:

    Property:  Carrier: Travelers Insurance Company

    Effective Dates:  04/01/2019 – 04/01/2020

    Policy Number:  xxx-xxxx-xxxxx

    Policy Limit:  $32,705,000

    Deductibles:  $10,000 All Peril, 5% Wind/Hail

    Claims Reporting:  XYZ Agency, John Davis, 555-555-5555

    Check the requirements of the governing documents for insurance against the policies to ensure there are no gaps.  Also, check that the policies also comply with CCIOA (C.R.S. § 38.33.3-313).  An insurance agent that specializes in HOA insurance should be doing this for you at each renewal and can assist here, if needed.  

    Although you aren’t expected to be an insurance agent and should be utilizing an agent who specializes in community association insurance, there are common exclusions and limitations in most policies that you should be aware of.  These can lead to big headaches, and potential assessments, after a loss (note: this list is not all-inclusive, and you should consult with the association’s insurance agent for details on your association’s specific policies).

    Common Exclusions or Limitations in Many Insurance Policies: 

    Ordinance or Law - Coverage available by endorsement when a community has building ordinances that state when a building is damaged to a specific extent (typically more than 50%), it must be completely demolished and rebuilt in accordance with current building codes rather than repaired.  There is very little automatic Ordinance and Law coverage in most property policies.  Most governing documents require Ordinance and Law coverage, as well as FHA and many other lenders.

    Coverage A - Loss to Undamaged Portion of the Building

    In some jurisdictions, ordinance or law requires that a building that is partially damaged be demolished (in other words, it becomes a total loss).  Coverage A states that if such an ordinance is in place and is enforced by local authorities, the insurance policy will treat the claim as a total loss even though the building was only partially damaged.

    Coverage B – Increase Demolition Cost

    This pays the increased cost to demolish and clear the site of the undamaged parts of the building.

    Coverage C – Increased Cost of Construction

    This pays to repair or reconstruct damaged portions of the building and bring them up to current code.  It also covers the cost to reconstruct or remodel undamaged portions of that building, regardless of whether demolition is required.

    Limit Guidelines:

    Coverage A should be included up to the Building limit.  Some policies will show the dollar amount, but many will show “Included” as the limit for this coverage.

    Coverage B – 10% to 20% of the Building limit (general range, age of building, number of stories, etc. should be taken into consideration when setting this limit).

    Coverage C – 10% to 20% of the Building limit (general range, age of building, number of units per building, number of stories, etc. should be taken into consideration when setting this limit).

    Debris Removal - This is the amount the carrier will pay following a covered loss to remove the damaged property from the site.  Common amount included in most policies is 25% of covered loss plus a small amount ($10,000 or $25,000). Since the percentage amount is included within the building limit, if there is a total loss, there may only be the additional small amount since the building limit would be used up replacing the building.  An additional amount should be added to the policy in case of a large or total loss to the community.

    Sewer/Drain Backup – This coverage is for the resulting damage to covered property from a water or sewer backup event, including sump pump failure.  Many policies include a small amount of coverage, usually $25,000 or less. Depending upon the type of interior unit coverage on the policy (All Inclusive or Original Construction, for example – usually driven by the governing documents), this limit may not be adequate.

    Limit Guidelines: $50,000-$100,000 per occurrence. Higher limits should be considered depending upon the number of units per building that may be affected in one loss situation, as well as the type of interior unit coverage the policy has.

    Flood – Excluded in most property policies, this coverage may be required by lenders based on the association’s location.  When it is not required, an association may want to consider adding coverage since it covers water damage to covered property that does not originate on association property.  This includes surface water, mudflow, and water under the ground surface.

    Limit Guidelines: When required by lenders, the coverage limit should match the limit on Property policy.  When not required, it is usually purchased through the property carrier.  They will usually determine how much they are willing to offer (typical amounts are $1,000,000 to $5,000,000).

    Earthquake – This coverage is used to provide protection for loss due to earth movement including earthquake shocks and volcanic eruption.  It is available by endorsement or as a monoline separate policy.  Note that is does not cover subsidence or earth movement.

    Limit Guidelines: When purchased through the property carrier, they will usually determine how much they are willing to offer (typical amounts are $1,000,000 to $5,000,000).

    Equipment/Mechanical Breakdown – This coverage is for loss caused by mechanical or electrical equipment breakdown, including damage to the equipment, damage to the other property of the insured, and damage to the property of others as specified in the policy form.

    Many only think of this coverage for associations that have elevators, pools, or boilers, but the coverage includes damage due to electrical arcing, which is an exclusion on most property policies.

    Limit Guidelines: Coverage limit should match the limit on Property policy, including the Business Income limit and Business Personal Property.  It is often shown as “Included” when purchasing the coverage from the Property carrier.

    The only time people really care about insurance is when they have to write a check for the premium and when they have to file a claim after a loss occurs. To make the claims process as smooth as possible from the start, be sure you are aware of the duties required under each policy.  

    Compliance with Policy Duties and Terms:

    Each policy has a list of duties that the insured agrees to perform.  Not performing these duties can have serious repercussions on any future claim.  Some of the most common duties are:

    • Prompt reporting of claims to the insurance company
    • Cooperation with the investigation of the claim and reasonable requests from the insurer
    • Allowing the insurer to inspect damaged and undamaged property
    • Examination of books and records
    • Submission of Proof of Loss (usually required within a specific timeline from the date requested by the insurer)
    • Examination under oath

    Policy Timelines:

    • Filing a claim: often these involve a specific timeline to report a claim or require that claims are reported within a “reasonable time”
    • Proof of Loss: many policies require this within 60 days from the date requested by the insurer
    • Legal action deadline: Can vary for each policy

    By preparing beforehand and documenting the policy requirements for reporting claims, you can save time and possibly future headaches.  Consult with your association’s insurance agent while setting up your insurance process.

    Acknowledgements: Peter O’Brien – Solutia Consultants, Jonah Hunt – Orten Cavanagh & Holmes, LLC

    The information in this article does not constitute insurance guidance for any specific association. The terms, conditions, exclusions, and endorsements of policies will apply. Every policy and every claim is different. 

  • 06/01/2019 4:23 PM | CAI Rocky Mountain Chapter (Administrator)

    By Ella Washington, Ella Washington Agency, Inc.

    Homeowner association boards face a lot of decisions when it comes to finances. Those decisions involve the responsibility of trying to keep their association within a reasonable budget. 

    With increased costs of doing business, common interest communities are seeking ways to save money. Having volunteers within their community is becoming more common. Often volunteers will perform services that the HOA would otherwise hire contractors for. Examples of volunteer acts within a community are: pulling weeds, removing snow, or planting a tree. Although volunteers in our homeowner association communities are an incredible asset, it can come with a severe price. Trying to save a little on labor costs can end up costing a community in the long run. Injuries to volunteers don’t happen often, but when they do, they can be extremely costly to an association. According to CAIS*, below are recent claims from a National Workers Compensation program built specifically for common interest developments:

    1. President volunteered to maintain light bulbs in a common area and fell from a 14-foot ladder - $65,000 paid claim. 

    2. Volunteer assisting in clubhouse renovation injured his back removing the old stove - $20,000 paid claim.

    3. Volunteer fell while picking up trash in the community - $16,000 paid claim.

    It is a common misconception amongst board members and association managers to think these kind of injuries are covered under the HOA’s General Liability (GL) policy. CAIS* explains that “unfortunately a General Liability policy has specific exclusions for bodily injury to an ‘employee’ because by design, employee injuries are covered under a workers compensation policy. While some minor injuries to volunteers have been paid through the GL policy under ‘guest medical coverage”, it doesn’t take much imagination to see where a GL carrier would use the ‘employee’ exclusion to decline a more serious injury to a volunteer.”

    Having volunteers in an HOA is not the only risk associations face. In 2007, a California Court of Appeals case: Heiman v. Workers Compensation Appeal Board, shed light on the potential liability that associations and their managers face when contracting for on-site service and repair. Below are the case details:

    Pegasus Management (Heiman), the manager for the Montana Villas Homeowners Association, hired the Hruby Company on behalf of the association to install rain gutters on the association’s common areas. An employee of Hruby was electrocuted and seriously injured on the job. Hruby was uninsured so the injured worker’s case was referred to the CA Workers Compensation Appeals Board (WCAB). The absence of a policy to provide benefits for the injured worker left the Workers Compensation Appeals Board assigning payment obligation to the Management Company (Heiman). Heiman took the ruling to court and the disposition from the CA Court of Appeals is outlined below:

    DISPOSITION FROM COURT REPORT

    ‘Heiman v. CA Workers’ compensation Appeals Board (2007) 149 Cal.app.4th 724

    “Hruby and Pegasus were dual employers of Aguilera that are jointly and serially liable for workers’ compensation under the Labor Code. Pegasus was also the agent of the Association, which was a separate legal entity that is liable for workers’ compensation as the principal. Pegasus and the Association were not owners or exempt employers under sections 3351(d) and 3352(h). The WCAB’s decision awards Aguilera workers’ compensation to be paid solely by the Pegasus. We reject that limited conclusion and hold that Hruby is jointly and severely liable with Pegasus and the Association is also liable as Pegasus’ principal. To the extent that WCAB’s decision is inconsistent with our conclusion, it is annulled. The award will otherwise be affirmed.”

    An important fact to consider, if the association carried its own workers compensation policy, it’s likely that the Workers Comp Board would have assigned the benefits of that policy to Aguilera and the case would have most likely been settled. 

    A traditional workers compensation policy is meant to cover employees who are injured on the job. By definition a “volunteer” is a person who provides services without the expectation of compensation of any kind. Most carriers do not offer coverage for organizations without direct employees. The carriers that do offer the “if any” coverage (meaning no direct employees) typically will not offer coverage for volunteers. Ideally, associations really need to protect themselves from both “if any” and “volunteers” under one simple workers compensation policy.

    So how does an HOA protect themselves from such risks? Until recently, there were not many options of a workers’ compensation policy for HOA communities that didn’t hire ‘direct employees’. CAIS* is a carrier that has designed such a policy. CAIS* mentions “it was truly a case of the insurance industry not understanding the niche and the risk associated with the class of business”. The program CAIS* offers was the first of its kind to offer both “if any” and “coverage for volunteers” on a national basis. Local insurance agents offer this “Volunteer” Workers Compensation policy with premiums usually ranging from $350-$400 per year.

    As an asset protection professional, it is my recommendation that every common interest community purchase this policy whether or not the CC&Rs require them. Any association that hires contractors for on-site repairs, or work within the community, or has any volunteers should consider this policy. This risk far outweighs the premiums. After all, the trip to an emergency room will well exceed the annual premium of this type of policy.

    *CAIS, LLC. helped co-write the information inthis article. For more information 

    Ella is a 23 year veteran in the HOA Insurance industry. Her agency has access to over 35 insurance carriers. Ella’s agency was established in 1996. Being an advocate to her HOA Board Members and Managers is always her top priority and is the foundation of her success. The Ella Washington Agency is a national agency insuring HOAs in 19 states.

  • 06/01/2019 4:21 PM | CAI Rocky Mountain Chapter (Administrator)

    By Editorial Committee, CAI Rocky Mountain Chapter

    Finding a business partner who will perform quality work at a reasonable price can be a daunting task.  Taking care to properly vet your community association’s business partners (and potential business partners) can help avoid problems down the road.  You should rely, at least to some extent on information and feedback from your community association manager (their relationships and opinions in the industry matter!).  But what else should you be doing to protect yourself and your association?  Aside from checking with the Better Business Bureau and licensing boards in Colorado, the following will provide a checklist of things your Board should be doing and considering when vetting business partners.  These can help alert you to unscrupulous, inexperienced or financially troubled vendors who may deliver broken promises rather than professional results.

    1. Review your association’s governing documents.  Your documents may have provisions which require business partners to possess certain levels of insurance (make sure their policies do!) and might also provide for other limitations on contract terms.
    2. Beware of low bids.  Price is absolutely an important consideration when selecting a vendor, but don’t let a low price or a special deal blind you to a potential problem.  A bid far lower than others may indicate that the vendor is not experienced enough to know the actual cost of the job or he/she never intends to finish the work.  Disreputable vendors may bid low to secure a contract and then tack on extra work as the scope of work progresses.
    3. Confirm insurance.  Make sure that the business partner will identity the association (and its management company) as additional insured on the business partner’s insurance policies.  Confirm that there are no exclusions in the business partner’s insurance which may prevent the policy from covering damage, claims, injuries or liabilities arising from the business partner’s performance under the contract.
    4. Take your time.  If you are pressured during the bidding process by tactics such as “limited time offers,” look for a different business partner.  Hiring a business partner is not a split-second decision; in fact, hopefully it is the start of a long and beneficial relationship with your association.  Review multiple bids and really understand all that is included in the scope of work requested by your Board and the costs/timelines to perform same.
    5. Call references.  Asking for business partner references and then never reaching out to speak to them is NOT due diligence.  Make sure that you are reviewing the bids, references, AND reaching out to the references to discuss experiences with the business partners.
    6. Have legal counsel review the bid and proposed contract.  Occasionally, community associations will forego this legal review because it is believed that the goods and/or services to be provided are nominal and do not justify the cost of legal review.  The legal review, among other things, is important in order to help your Board understand a contract’s proposed indemnification provisions.

    Taking these steps may not prevent future problems, but they can certainly help to minimize problems that could arise because of failure to perform basic due diligence when selecting business partners to perform work for your association!

  • 06/01/2019 4:18 PM | CAI Rocky Mountain Chapter (Administrator)

    By Clinton Dorris, (L2M) Large Loss Management, LLC

    We all know that most, if not all, insurance policies for wind and hail are going to a percentage based deductible accompanying more denials of coverage for Colorado. But did you realize that natural disaster costs doubled from $188 billion in 2016 to $306 billion in 2017 and continued to exceed the prior 10-year average at $155 billion for 2018[1]? Changes to our industry are here. So, what does this mean to you and why should you (the HOA/owner/management company) care? In short, the insurance carriers stand to “lose” billions of dollars paying for claims well above those estimated/anticipated by their actuary tables for 2016, 2017, and 2018. This translates into a significant catalyst for insurance carriers needing to save money and raise rates. Higher deductibles and more complicated claims and construction processes are just the beginning. It is becoming commonplace for carriers to enforce the policy’s statute of limitations for filing a claim and necessitating more detailed proof of loss while placing higher standards on the documentation required to recapture the recoverable depreciation. If you’re saying to yourself, “this is the way it’s always been,” you aren’t recognizing the half-trillion-dollar loss mentioned above. Additionally, carriers are increasingly more focused on identifying fraud or conflicts of interest, especially in large claims. As an example, if funds from a contractor are paid to the HOA or the management company, it may be considered a deductible buyback, or fraud, and could provide the carrier the leverage to deny coverage or sue all involved[2]. The same influencers affecting premiums and claims also necessitate a new strategy to adequately compensate the HOA management company and community managers for their work conducting assessments and other incurred costs beyond their standard duties. Don’t worry, there is an emerging carrier recognized method of getting those additional expenses paid, but not in the manner that some management companies and contractors have gone about it in the past. 

    Given the increase in carrier scrutiny, now is the time to make sure HOA boards and management companies are reducing their risk on large claims by recognizing a few things. 

    1.What worked yesterday for general contractors, HOA managers, HOA boards,and tradesman, won’t necessarily work tomorrow.•Given the size of carrier losses across the country, the claims environmentis changing significantly and swiftly.2.HOA boards and management companies accepting funds of any kind from contractors isnever a good idea.•If you wouldn’t want to read about it in the Denver Post, don’t do it.3.Not filing a claim because of a high deductible is a bad strategy and works in the carrier'sfavor. It also doesn’t prevent a premium increase.•Premiums are adjusted by the increase in claims based on a specific region, notbased on an individual property’s claim history. In other words, a property’s ratescan go up even if they don’t file a claim.•There are multiple strategies to address high deductibles.•If you have damage and don’t file, you put your property in a pre-existing conditionscenario, setting up an opportunity for a future denial.•Carriers have a statute of limitations on filing a claims which they are now standing behind.4.A changing industry environment requires new perspectives and professionals that canmanage both the claim and the construction.•Management companies are experts at managing HOAs and conducting assessments, rarely are they experts at insurance claims and large construction.•Roofing companies are experts at roofing, rarely are they experts at identifying allthe damage, at negotiating with the carrier, or at construction management. If theyare the roofer and the “general contractor” on the same project, then they are conflicted by self-dealing.5.Whomever you hire to manage the entire project should have a documented process that can withstand an audit.•If they can’t produce a final documented deliverable with a third-party financialaudit, you should reconsider. A deliverable as stated is your greatest asset iflawyers happen to get involved later.•Insurance proceeds should not be commingled with other HOA funds and should be held in an escrow account that requires a dual signature for release (ownerand project manager signature).•Most significant issues with large loss claims revolve around the management ofthe funds. 6.Utilize trades that have been vetted. •Trades should be picked based on their relevant experience along with a currentunderstanding of their debt at the supply vendors, their reputation in thecommunity, if their subcontractors are being paid, and if there is pendinglitigation that they are involved in.•There is never a need to collect multiple bids from contractors on insurance-related work. If you save funds by picking the lowest bidder, the residual funds belong to the carrier, not the owner, unless that was agreed upon in a settlement.

    The insurance carrier industry is making significant and swift adjustments to their process and procedures. Are you taking note? What are you doing to evolve with the changes? 

    Clinton Dorris has leveraged his two engineering degrees to manage billion-dollar programs for better than 20 years and is a managing director for (L2M) Large Loss Management, LLC. 

    Please visit www.4L2M.com for more information or call to schedule a CE credit discussion on this topic and others. 

    [1]Swiss Re https://www.swissre.com/media/news-releases/nr_20181218_sigma_estimates_for_2018.html 

    [2] Colorado State of https://leg.colorado.gov/sites/default/files/images/olls/2012a_sl_267.pdf 

  • 06/01/2019 4:13 PM | CAI Rocky Mountain Chapter (Administrator)

    By Alyssa E. Chirlin, Smith Jadin Johnson, PLLC

    Hail season in Colorado is underway and if recent trends continue, there will be a significant amount of large hail again this year. In 2018, while the total number of severe hail reports was consistent with past years, the percentage of such reports with hail measuring more than 2” in diameter grew substantially. Larger hail means more extensive property damage, both in prevalence and in severity, and insurance companies will want to minimize payments on these increased claims.

    One area where insurance companies limit coverage is in denying their obligation to match the replacement of storm-damaged materials to existing materials. When a storm damages only a portion of a building’s exterior and matching material is unavailable, insurance companies may propose a repair with cosmetically inconsistent materials, creating a mismatch with the undamaged exterior. With aesthetics a high priority in many community associations, it is important to know whether a policyholder is entitled to repairs that preserve a building’s uniform appearance and, inextricably, its market value.

    Some states have passed legislation requiring insurance companies to reasonably match existing exteriors and even to replace undamaged property when necessary to maintain a structure’s uniform appearance. And some insurance companies specifically offer ancillary coverage to avoid a material mismatch. This option, often called matching siding insurance, reimburses a policyholder for the costs of replacing undamaged siding in order to preserve an insured building’s uniform exterior. But even in states without matching legislation, and in policies without explicit matching coverage, courts are finding matching requirements in common homeowner policy language. The Supreme Court of Minnesota recently ruled that policy language that requires repairs of a “comparable material and quality” in fact requires materials of a “reasonable color match.” 

    Colorado has no statute or definitive case law regarding an insurance company’s obligation to match repairs to existing materials, although there is persuasive authority that Colorado will follow the same rationale applied in Minnesota. In 2017, the district court in Hamlet Condominium Association v. American Family Mutual Insurance Co. found that an insurance policy that promised repairs “of comparable material and quality” must cover the cost of obtaining reasonable matching. The court further required the insurance company to pay for “skim-coating” to the undamaged exteriors in order to avoid visible repair patches.

    In keeping with this finding and with other jurisdictions’ recent decisions, the common policy phrases “comparable material and quality” and the similar “materials of like kind and quality” likely do not demand an exact color match, and may not cover matching for weathered or faded materials, but they probably do at least require replacement materials to reasonably match the color of existing materials. And when damaged materials are no longer manufactured and there is no available reasonable color match, these phrases may further require the replacement of even undamaged materials in order to ensure a building’s uniform appearance.

    A cosmetic mismatch among siding or roofing is a “direct, demonstrable, and physical alteration” that can affect a property’s value and consequently the property as a whole can be considered to have sustained a “direct physical loss” when there is no reasonable match to the existing materials. This would trigger coverage under many homeowners policies and allow for the replacement of the entire exterior, even if only a portion of the property has sustained actual, physical damage.

    In Colorado, a policyholder’s best claim to trigger this coverage is to gather evidence that, without matching materials, a repair would not result in a reasonably comparable appearance and the mismatch would leave the policyholder in a worse position than before the damage. Expert evidence that a patch repair could not possibly match can be very effective in persuading an insurance company to cover matching.

    Ultimately, coverage depends on an individual policy’s specific language. So with hail season here and the potential for property damage high, it is crucial to be prepared and informed about your property insurance. Read your policy, ask questions, and make sure that you are comfortable with the coverage your policy provides and that you are familiar with its exclusions.

    And if you do suffer property damage, know that you may not have to settle for repairs that create aesthetic abnormalities. If you have any questions about the coverage that your policy affords, consult an attorney today.

    ______________________________________________________________________________

    Alyssa E. Chirlin is an attorney at Smith Jadin Johnson, PLLC, a law firm specializing in the representation of HOAs in insurance claim disputes as well as general community association law. If you have insurance coverage questions, please call her at 720-550-7280. 

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