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August 1, 2008
Uninsured HOA Funds - Who Pays For the Losses?
An interesting question came up at a legal resource panel this morning. Hopefully most everyone knows that many D&O policies for Boards of HOAs carry an exclusion of coverage for failure to insure, meaning, for example, that if an HOA fails to carry earthquake insurance and the Board or HOA is sued by someone who bears a loss because of that failure, the D&O Insurance would likely decline to provide a defense for the Board or HOA, or coverage for damages.
So, the question is "Does that play out the same way in the case where a Board invests the HOA money in an uninsured account, or the deposits exceed the FDIC insurance limits of $100,000 for the corporation, the bank goes bust, and the HOA loses part of its investment?
I would say "you betcha."
With the cavaet - the facts may have bearing one way or the other. What comes into play are factors like: does the policy language specifically identify types of insurance contemplated, or identify generally coverages such that the uninsured accounts fall into the category? Are there cases in the jurisdiction that play out this scenario to rely on? (I know of none in California but remain to be enlightened.) Was the decision not to get the insurance within the hands of the Board or was it determined by a shortage of available coverage in the marketplace, or was it simply a voluntary termination of or failure to get coverage based on the cost?
As we know, FDIC insurance does not cost money outright; it is there for every FDIC insured investment product. I believe that makes it even more eggregious to ignore the value of it (but maybe that is just me). Granted, the accounts may not be the highest interest bearing accounts .... but
The answer is an unequivocal yes - anticipating the next question to be - does the Board have a duty to protect the association funds?
And the next question I would anticipate is: "So who pays for those losses?"
The answer is the members of the association most likely, because most documents have what are called "indemnification clauses" that assure board members will be protected from claims for negligence, etc. However, there is a "good faith" element to the protection in many cases which means, if there is, that the board members might be liable for losses if they did not act in good faith. The burden of proof would be on the owner to prove the lack of "good faith" which may be a difficult burden, but not necessarily an impossible one.
Boards, for your members, do everything possible to protect the funds of the HOA. Your "job" (volunteer as it is) is not to make money with the association funds, but to seek the best return while protecting the principal so that the funds will be available when needed.
Posted by Beth Grimm at August 1, 2008 1:07 PM