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December 2, 2007
If Your CC&Rs Require EQ Insurance - What Should You Do?
I get asked to amend CC&Rs to require the purchase of earthquake insurance, and requests to amend to eliminate the requirement. I give similar remarks in either case. It is not good to have a duty imposed, without the ability to carry it out.
If a board wants to eliminate the requirement because it can't raise the money without an owner vote for a special assessment (under California requirements), I can understand that. I generally suggest though the importance of at least retaining the discretionary authority to purchase it, and explaining to members that the purpose of the amendment is to eliminate a legal quandary. I generally suggest that a Board explain why it is proposing what it is. Why? You can be sure that there will be members vehemently opposed to any measure that suggests the Board will not ever again consider purchasing earthquake insurance.
I would think any Board would still continue to at least review and offer to the members information each year, in order to bring the owners' interests into the fold in determining whether to purchase it, based on current conditions, including cost and availability factors, as well as available funds for purchase. And Owners being presented with a ballot to eliminate the requirement of purchase, need to know if the Board is still going to continue to address the question each year of whether and how much, if any, coverage to get, so they do not dispose of the ballot in disgust, assuming that is the end of the inquiry.
I get that the requirement to purchase earthquake insurance could hurt the association and board - it could lead to a lawsuit against the board members if they do not buy the insurance, or if they buy it and usurp funds from some other category of need to do it. But I do not care for the casual dismissal, when it is based solely on cost factors. Without a doubt, EQ insurance should be looked at each year, as it is such an important consideration.
And as to the purchase of it, even when the documents do not require it, I believe that Boards can get owner “buy-in” in many cases if the pros, cons, and options with regard to coverage are explored and are presented completely. I am certainly not in favor of keeping the language that creates the problem of having a duty to fulfill without the funds to do it, but I am always concerned if I believe that the idea of getting or keeping earthquake insurance has been dismissed too lightly.
In any situation where the Board wants to consider adding the requirement to purchase the EQ coverage each year so that future boards cannot drop it, I have to caution the Board that it not necessarily a good idea to write in a requirement that may place the Board in the position of having a duty without the funds to carry it out. When California sets limits on expenditures boards can make by limiting assessment increases - it leads to conflicts with documents that require boards to charge more in assessments (without a vote of the members) than is allowed to do legally. If the Board cannot get membership approval to raise the funds, it is thrown into a bad situation that could lead to a lawsuit, for failure to fulfill its duty. That would hurt all owners.
So, when considering proposing an amendment to the documents, either to remove the requirement to purchase earthquake insurance, or to add it, keep in mind that the inquiries are all the same, i.e., if a board wants to be prudent, i.e., there is a need each time the question comes up to consider what is available, what the costs are, what monies might be available, what the affect on the property values might be or what the difficulty in rebuilding might be if there is no level of coverage at all, what the financial hit might be if owners are not able to protect their investment individually, and whether it is fair for the oldtimers with equity let the newtimers with none decide that the risk is not worth it. And ... etc. etc. etc. - see the other articles on my website and blogs here for a lot more.
Posted by Beth Grimm at December 2, 2007 6:56 PM