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January 31, 2007
EARTHQUAKE INSURANCE CRISIS - Yes, Virginia, There is One - AGAIN!
I was at a luncheon in Westlake Village Calif yesterday put on by CAI. I went there to socialize, eat, and see colleagues and friends in the area. But especially, I went there to see what the CEA offers as insurance protection. I came away with a very uncomfortable feeling, and it was not the food, or the company. It was the topic. I have written articles on "Earthquake Insurance - To Buy or Not to Buy", two versions in fact, one based on a pragmatic discussion about why Boards should not "Just Say No" without doing considerable footwork involving the members, and one from the "Mickey Mouse" perspective of how to assess the risk. (Visit me at http://www.californiacondoguru.com to have a look.
But I feel the need to delve deeper into the overall problem and enlist help. Why? Because the problem goes deeper every time I scratch at it.
The CEA presenter made some things very clear. The CEA will not be selling earthquake policies to associations - they are classified as commercials. The CEA sells "residential policies" - and thank goodness for it, because that is a much needed product. Homeowners in single family and condo developments can go there and get coverage intended only as a "mini" policy, meaning it will likely not provide full coverage, unless you live in a box (and still, there is a 10% deductible and lots of small print involved). Go there, and read all you can, and you will see that you can take advantage of the options, to fill the gaps - as much as they can be filled, with the Association coverage. If your association does not carry EQ insurance - then you can still get a policy, but the premium is somewhat higher.
So for condos, what does the CEA policy do? It provides options for contents, building coverage for what you are responsible per the governing documents (paint, carpet, possibly cupboards, dry wall, or such), loss of use, even reduction in value of your home if that occurs, but most importantly, probably - loss assessment coverage for condo owners. When the CEA was set up, the loss assessment (that could be used to pay the deductible) limit for condos ($25,000) might have seemed palatable - but now, it probably won't cover all of the deductible costs in any sizable event for any condominium in this state with serious damage, except maybe in the most depressed areas. You can get more information by visiting the website, in fact, a lot of it. Go to http://www.earthquakeauthority.com.
Why is this important? With the severe increases in costs of the HOA master insurance policies, and the reductions in coverage being offered, the last vestage of hope was that owners could protect themselves to cover the deductible they might have to pay a fair share of (save the 10% or 15% deductible chosen for the CEA policy).
That hope is waning.
What saves an HOA in an EQ event that causes rampant damage throughout the complex is the owners remaining, bucking up, and weathering the assessment for the deductible and uninsured damaged areas. The SBA in Northridge came in in many cases and offered low interest loans. Owners in Associations that carried EQ insurance were generally able to survive and rebuild. Not so much with the uninsured associations. This happened because owners could withstand the temporary reversal in fortune (the fortune being the also substantial appreciation enjoyed by many Californians).
If the costs go out of reach, and associations do not carry EQ insurance, that will be a serious problem for CID housing and the economy of the state. If association do carryh the EQ insurance but the individual owners do not do EVERYTHING THEY CAN to fill the gaps in coverage, that could also be a serious problem for CID housing and the economy of the state.
And now, even if the owners do EVERYTHING THEY CAN to insure, they may not be able to count on their neighbors to do the same - and may not themselves be able to insure the gaps to an affordable level.
The availability of earthquake insurance is a big issue and needs the attention at the highest levels. I am sure that heard the CEA rep say in essence that it can do better with the monies collected for premiums than private carriers simply because of the lack of costs of doing business for profit. So I have to ask, would it not make sense for the CEA to be expanded into providing coverage for HOAs? I can think of no other solution? Can you? I invite comments. (Private insurer and brokers, you may hit me with comments too - but not to hard I hope!)
And does this mean I do not believe in earthquake insurance? Not at all. I believe in getting it, as much as possible under any circumstances, with as much coverage as the association and each individual owner can get. It could save your association when the "big one" hits and that is enough for me as a condo owner. Do I believe it is then a non-issue? No I do not. We need to keep fighting for options. This is ONLY ONE AREA of concern that needs attention, but it is a big one.
Posted by Beth Grimm at 10:01 AM
ARE CONDOS REALLY AFFORDABLE HOUSING?
Condos are sold as affordable housing. It is the only way lots of people can get the advantage of amenities like pools, parks, fancy clubhouses, and things like that. In some regions, common interest housing is the the only form of housing one can find. And for many, it is simply the only way they can afford a home. But are condos affordable? Many are wondering, here is a conglomeration of recent emails I received:
"I bought my condo four years ago. I was just able to get in with a creative loan. I was squeaking by to make the payments, and thought things would get better. But they are just getting worse. Everytime I re-budget, or get a raise at work, or think things will improve, my condo fees go up. Now we are facing a possible special assessment because our board did not save enough money to replace the roof. I am probably going to lose my condo. Is there anything I can do? I would like to sell it and go back to apartment living (no worries there) but the market has tanked. Do you have a solution for me?"
I wish I had a solution. Home ownership should be special. In California, as in other states, this product (condos) is sold as an "affordable, care free, get amenities" product. But there is another side. Costs have increased in every area for condo owners. They often have to pay premiums for water because use is combined into multi-living situations. Their associations have to pay commercial rates for insurance even though the housing is residential. They commonly suffer the common maladies associated with poor building construction and the higher costs of contractors insured to work in common interest developments (yes, there are special - meaning higher - rates for doing construction work on CIDs in California). And last, but not least, they suffer the ever increasing compliance costs that come with tighter, more technical and more complicated legislation, which is rampant in some states, especially California. They pay more for professional management because of training that is required to be considered "certified". But can they do without this legislation or the rights and protections afforded by it? That is the toughest thing. The associations are for the most part (since more than half the HOAs in the state are smaller than 50 units) run by volunteer boards with no training, no expertise, and sometimes, no brains or consensus building ability.
This discussion could lead to 50 blogs on the problems with HOA living. I do not want to become like the press, where it seems all bad. Because it is the bad news that makes the news. But the point I want to get across is that "affordable living" does not always mean what it sounds like. In the case for California housing, "affordable" means you can get in with creative financing, but when the costs rise seemingly without control, can you get out?
Posted by Beth Grimm at 9:42 AM
January 18, 2007
How Do You Accurately Assess the Risks of an Earthquake? - the Owner’s Perspective.
I have written an article for HOAs and Boards that you can find on my website at called “Earthquake Insurance, To Buy or Not to Buy”. I wrote it in 1996 after the Northridge earthquake, when rates skyrocketed and coverage options dropped drastically, and have updated it since. It has garnered quite a bit of interest. I think it helps Boards in fulfilling their duties as fiduciaries for the Association, to determine the prudent thing to do. But truthfully, it seems to me that the risks are really quite impossible to accurately assess.
One can peruse risk analysis websites, read about geological predictions, do everything an insurance analyst can do with charts, graphs, historical data, etc. But living in California has risks, especially near the faults, and predicting the extent of the risk is just darn near impossible. How does it work? I have found an analogy. I was in Disney World recently with my daughter, son-in-law and two grandchildren, and experienced an eiphany. Riding the Kali-Rapids in Disney World … how does it compare?
As you move through the line at the Kali-Rapids ride, you can see the people coming down the rapids, raft by raft. It becomes clear that the various rafts hit the rapids in different ways, and people get all levels of wet. Since the rafts rotate unpredictably, it is impossible to determine what is a safe “seat”.
You know there is a very strong probability that you will get wet, the question is “How wet?” The excitement mounts as you get closer and closer to the gate. Right near getting on the ride, there is a Mickey Mouse character offering ponchos for sale at $7 a pop. This comes as a surprise and you only have a few moments to make a decision. Do you buy one? Here, at the moment of truth, you are offered a carrot and you have to make a quick decision. Do you purchase protection, or take your chances? 7 bucks seems like a lot of money for one short ride down the Rapids. However, a chance of staying at least partially dry has its appeal. Getting thoroughly soaked is not too appealing to me. So I fork over the seven dollars and take a poncho. I of course put myself in the position of risk, but appreciate this opportunity to get some protection.
My children on the other hand, and their children, are less willing to spend the money. Of course, it is a bigger investment for four than for one. And, they have back up clothes for the children. They forego the ponchos.
We all got wet, they much more than I. But they are young, and resilient, and survived being soaked. I was happy to be pretty much dry. I thought the poncho was a great investment.
I do not want to be too simplistic but it’s just about like that with earthquakes. It does not matter where you are sitting, if there is a big earthquake, you will probably be adversely affected. How badly is difficult to predict. But one thing is sure – if there is a devastating earthquake in California again, or should I say when there is one, those that have protection will be happy they do, and those that don’t will probably be sorry they don’t. Northridge was a lesson.
Read the articles on the website for more on earthquake insurance, and the whys and why nots. Visit http://www.californiacondoguru.com
Posted by Beth Grimm at 10:26 PM
Are Board Members in HOAs Prohibited From Being Compensated?
I often get asked this question in various forms. May Board members in an HOA be compensated? Are they prohibited from being compensated? Should they be compensated for their time? Is there a law on this?
The first inquiry should be to governing documents for the Association as those generally control over the statutes with reqard to this question. Most HOA documents in California pose some kind of limitation on Board members receiving compensation other than for reimbursed expenses related to tasks performed for their board service. Such a clause is for the Board member's own protection. There is not a prohibition in the law - in California at least - that would prevent Directors in HOAs from getting paid for their services, but there are important protections that generally apply to Board Members found in the Davis Stirling Act (Civil Code Section 1367.9) and Corporations Code (Section 7231.5) that provide protection for volunteer board members acting in good faith. These are often referred to by attorneys as "safe harbor" statutes and provide protections that are lost once a "volunteer" board member becomes a paid employee, contractor or staff person, or paid board member. In the Civil Code, the protection is lost if a Board member owns more than 2 units in an association, because at that point they are seen as an "investor" in the eyes of the law, and not worthy of the protection volunteers get.
In my experience, the "pay" suggested often amounts to a mere stipend and is generally not comensurate with the risk that attaches for the Board Member's actions when the volunteer status is lost. But as the job becomes harder and harder, more board members are having to make considerable personal sacrifices and more Boards and potential Board members are asking about compensation.
If the question is whether a Board member can provide services for the association that are normally compensated (like painting or managing the association) and get compensation for them, watch for the next blog. There is a difference between getting paid for board member services and other services, and it is a delicate situation that needs special consideration.
It is entirely possible that the wave of the future might be paid Board Members for HOAs. If the volunteers do not take steps to educate themselves, the horror stories about shortage of funds and poor planning in HOAs that surface in the news will continue, and everyone will be looking for solutions. If paid Board Members = more expertise for financial planning and trustee duties, then so be it.
As for the education part - the State of California is not doing a very good job of it - so I suggest that you go to or send Board members to my website and start there - http://www.californiacondoguru.com.
Posted by Beth Grimm at 1:17 PM
January 17, 2007
May an Association Prohibit Home Businesses in HOAs?
I get a lot of questions from visitors to the website who want to know if an HOA Board can prohibit an owner from having a home business. Many people telecommute today and its that kind of society. Many work out of their homes with their own businesses. Many HOA documents prohibit commercial activity in an HOA. When I write documents for California HOAs (I should say here that I only write for mature associations or those that want to convert to Plain English documents) I write provisions that prohibit commercial activities or any business that has outward visible signs. Sometimes I define various examples, depending on how specific a Board wants to get. I do this because I do not believe it behooves an association to spend any energy in the form of money or physical energy on trying to determine if someone is working out of their home. If they are, and it is obvious, then there are "outward visible signs" and the violation can be addressed.
As for other attorneys and Boards - many attempt to enforce commercial prohibitions even when there are no outward visible signs and some are successful. Some fail miserably and end up in a "war". Sometimes, the claim or complaint about a home business or commercial activity comes from someone on the board or a neighbor who is "disgruntled" and upset wiith the person being charged or whose "secret" at home work has been revealed.
On the other hand, some residents "push the envelope" and expect their neighbors to accept activities that are associated with doing business, believing the Association has no power to control what they can do in their homes or about their property. That is not the case. When the goverrning documents prohibit commercial activities, take them seriously. But if you keep the activities within your home, and do not flaunt what you are doing, there should not be a problem.
Posted by Beth Grimm at 9:31 PM
DETERMINING LEVEL OF MAINTENANCE NEEDED - HOW?
Here is a common question sent to me recently: "I have a question about periodic inspection of property, along with maintenance. How can the association properly maintain the property without proper inspection? " This person was focussed on roofs; however, the same discussion below applies equally to other building components.
Proper maintenance of building components and other things like irrigation systems, roads, fences, pool equipment and facilities is inextricably coupled with inspections. Whether an HOA schedules periodic visits from its contractors to have specific maintenance performed, or has interim inspections to determine if maintenance is needed, the key is staying on top of the components such that maintenance is preventive - meaning that it prevents the need for replacement until the reasonable lifetime of the component has been expended. Logically, the better the preventive maintenance, the longer the life of the component. And this does not occur without inspections or periodic maintenance.
California law requires HOAs to perform periodic inspections, tied to preparation of the reserve study, which is intended to tell HOAs how much money to put away for component maintenance, repairs and replacement. Civil Code Section 1365 requires a diligent visual inspection of components the Association is required to maintain at least once evey three years in conjunction with preparation of a reserve study.
This does not mean, however, that it would be irresponsible to schedule yearly or even more frequent inspections. The condition and life of the components has bearing on the prudence of frequency.
Posted by Beth Grimm at 9:30 PM
January 12, 2007
Identifying Incumbents on a Ballot - Is it Fair?
I recently had a question posed to me that I think is probably a common one. This, from a manager:
"We recently sent out a ballot for an association and a homeowner contacted me and questioned the fact that some of the candidates were identified on the ballot as incumbents. Is this allowed? Is this specifically not allowed?"
The new California HOA electiions laws do not specify whether candidates in an HOA can be identified in materials or on the ballot as incumbents. It would make sense that owners who know nothing about candidates have a right to know whether those who have been nominated have any experience on the board. On the other hand, it would be reasonable for a non-incumbent to argue that listing that identifying factor on the ballot creates a bias in favor of certain candidates and that giving that advantage is unfair.
The truth is that a candidate has a right to identify themselves as an incumbent in any statement submitted, any speech given and any opportunity he or she has to address the members. However, I believe that identifying incumbents on the ballot could be seen as inequal treatment of candidates. I am not saying, however, that if this occurs, an election would automatically be invalidated or required to be done again if challenged. That would be decided a case by case basis and there are many factors that could affect a decision of an election challenge based on this particular issue.
For your information, the new law (Civil Code Section 1363.03) provides that Associations must: "(1) Ensure that if any candidate or member advocating a point of view is provided access to association media, newsletters, or Internet Web sites during a campaign, for purposes that are reasonably related to that election, equal access shall be provided to all candidates and members advocating a point of view, including those not endorsed by the board, for purposes that are reasonably related to the election. The association shall not edit or redact any content from these communications, but may include a statement specifying that the candidate or member, and not the association, is responsible for that content. AND (2) Ensure access to the common area meeting space, if any exists, during a campaign, at no cost, to all candidates, including those who are not incumbents, and to all members advocating a point of view, including those not endorsed by the board, for purposes reasonably related to the election."
It is probably this equal access and equal treatment language that leads people to question the ability to list candidates as incumbents as it is believed by some that that will give the incumbent candidates an unfair advantage in the election.
However, it is as yet an untested argument under the new law. My advice is to not identify incumbents on the ballot, but otherwise allow candidates to identify themselves as incumbents. After all, Associations are not allowed to redact language in candidate's statements and even if they were, whatever a candidate wants to say about themselves, including identifying board service as experience, should be allowed.
This new law will trip up many along the way, until it is fully understood by all (which will probably be never, unforetunately).
Posted by Beth Grimm at 9:28 PM
January 8, 2007
Should We Do Away With Board Elections By Making Every Owner a Board Member?
Here is another in the stream of questions sent to me about elections and how circumstances make board elections especially difficult.
"I am a member of a small association [under 20] units. We have very little common area - no pool or clubhouse or any recreation facilities. There are few decisions to make and we have a totally apathetic group of members. With the new mandated elections nightmare we are going to have to spend even more of our dues on yet another pile of useless bureaucratic paperwork. Is possible to amend the governing docs to make every lot owner a director and do away with director elections? Wouldn’t this also limit director liability since every owner is a director?"
It is possible to amend the documents (with membership approval) to make all of the members board members. But do not assume that means your problems would end there. There are things to consider. Many associations are having difficulties with elections. Lots of people are looking for solutions.
I have worked with many very small associations and in many cases they act as if everyone is a board member and discuss all decisions with the group before any actions are taken. Sometimes the documents say every owner is a board member, and some documents do not provide at all for a board or even for an association. The various scenarios have their pros and cons. As to situations where all owners serve on the board, or all decisions are subjected to owner discussion and decision making processes, these are some of the pros and cons based on my own experience:
PROS
* Having all members serve on the board would eliminate board elections and the need for the complicated new system to choose the directors.
* Having all members serve would preclude complaints that any member was being kept from running for the Board.
* Perhaps more members would get involved if their opinions and choices on decisions that would normally be made by the Board carried equal weight with all other members.
CONS
* In any situation involving enforcement of rules or regulations against a neighbor, there would be no buffer at all between leadership and perpetrator.
* Some owners would have great difficulty "leading or enforcing" against their peers or neighbors.
* The more board members there are, the higher the quorum (number that needs to be present to make decisions for the association) generally is and as interest wanes, it becomes harder and harder to get enough people present to vote on the necessary action matters.
I find that generally the larger the Board is, the more cumbersome decision-making becomes. So considering proposing an amendment to the members to change the board makeup, to avoid having to follow the double envelope mail balloting system, could have unintended consequences. It might make things more difficult.
If you read the blogs and articles on my website (http://www.californiacondoguru.com), you will see that I have provided commentary on possible options when members are so apathetic as to not be willing to run for the Board or to vote in elections. But to get members to serve or to vote, going door to door or using the phone, or documenting efforts and using the acclamation or appointment resolutions seems more palatable than bringing the apathetic owners into the fold of board service.
Posted by Beth Grimm at 8:38 PM