Berding | Weil - Attorneys At Law

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What Protects an Individual Homeowner From a Catastrophic Judgment Against Her Community Association?

There's a lot of media and blog space being devoted to the question of whether the homeowners in the community where Trayvon Martin was killed could end up personally responsible for a judgment obtained against their association and perhaps lose their homes as a result. This tragedy could certainly result in a lawsuit brought against the association by Martin's family. If it were, it could be based in part on the fact that the homeowner's association authorized the “neighborhood watch” program which included the work of George Zimmerman, Martin's alleged assailant. A verdict of negligent supervision resulting in wrongful death could result in a judgment against the association. It has already happened. In March, 2012 a jury in Hawaii awarded $3.89 million in general and punitive damages against an association's board of directors and management for what was termed a violation of condominium laws and a “gross abuse of the board's power.”

The jury found a pattern of intentional abuse in the Hawaii case. Notwithstanding all of the publicity and national attention, the damages in the Trayvon Martin case, assuming a finding of liability against the association, would likely be an award of general damages—a punitive damage award against the association is unlikely on these facts.1 But the possibility of a damages award in any substantial amount against the association will create concern among owners about their potential individual responsibility. Are the individual owners exposed to personal liability in this or similar scenarios?

We have written previously on this subject2 and have noted that a bankruptcy filing by a community association would not likely protect owners from an association's judgment creditors. The owners would not usually be parties to the litigation as the corporate status of most community associations would protect them unless they had been personally involved in the incident. But the provisions of most community association governing documents permit the association, under the right circumstances, to “pass through” debts owed to creditors, including judgment creditors, through the vehicle of an assessment lien.3 Given those possibilities, what can owners do to protect themselves?

Proper Management and Board Oversight

It should go without saying that avoiding negligent or illegal acts in the first place should be high on everyone's list. Properly supervising volunteers, employees and contractors who do work for the association to be sure that they carry out their duties without endangering the safety or lives of others is a paramount responsibility of every manager and board of directors. Insuring proper licensing of tradespeople and professionals is a good place to start. Background investigations and reference checks as well as regular oversight of their activities by management or by the board are a must. Requiring that all contractors be properly insured against claims of negligence brought by third parties who might be injured or damaged is critical.

Insurance

There's an old adage that says “liability flows uphill.” What that means in the legal world is that a plaintiff or judgment creditor will seek to impose liability, or collect their judgment, against anyone up the chain of responsibility. With a claim against a community association and its contractor, that chain could look something like this:

Plaintiff --> Contractor --> Community Association --> Individual Owners

It is important that each link in the chain carry sufficient insurance to protect not only itself from liability for its own negligence, but the next link in the chain as well. A landscape contractor maintaining the association's common areas should insure not only itself against claims by someone who, say, slips on a wet sidewalk, but should also name its client, the association, as an “additional insured” so that the client has the benefit of the contractor's insurance as well. These obligations are often handled by means of contractual agreements to indemnify clients or customers, but an agreement to indemnify should be backed by insurance wherever possible. It is important that where a contractor is to name the association as an additional insured, that a certificate from the carrier evidencing this is obtained before the contractor starts work.

Insuring the various links in this liability chain is accomplished in most cases by a Comprehensive General Liability (CGL) policy which is intended to protect those insured by it, both primary and additional insureds, against claims for damage brought by third parties—bystanders, or others who are not in contract with the negligent party.

Protecting Owners

Property owners within a community association are protected by the layers of insurance in the chain of liability below them, and by their own individual insurance. The layers below them include the CGL policy of say, the contractor, and the CGL policy of the association itself. Each of these policies, if the particular loss were otherwise covered, would insure against that loss up to the specified limits of that policy—usually one or two million dollars as the “primary” liability insurance and possibly more if an “excess” policy had been obtained.4 So if an injured party sued the association's contractor and the association, the combined limits of both parties' general liability insurance, and any excess, would be available to cover the loss.5

Let's assume that the limits of the contractor's policy were $2 million and the same limits for the association's policy. In that instance, there would be $4 million available to pay the claims of the plaintiff, assuming both of those parties were found liable. If the plaintiff's judgment or claim could be paid or settled for less than that amount, the individual owners would have nothing to worry about—there would be no need for a “pass through” to the owners by way of a special assessment. Or, if the judgment against the association were less than the limits of its own policy, there would still be no problem. But what if the limits of the insurance available to the contractor and the association combined were not enough to satisfy the plaintiff's judgment? What if the plaintiff had succeeded in obtaining a $5 million judgment against the contractor and the association and that amount exceeded all available insurance in the layers below the individual owners?

Loss Assessment Coverage

Individual owners generally carry their own insurance against liability and other losses by way of their condominium owner's policy. That policy not only insures against loss by theft of the owner's possessions and damage to separate interest property, it usually has a liability insurance component. If the owner were sued directly, that liability component could be called upon to defend the owner and pay any judgment up to the limits of the owner's policy. But if the owner were not named as a defendant, their general liability policy would typically not provide coverage for the claim. The obligation to pay a special assessment levied to recover funds to pay the judgment against the association would likely not be a covered loss under the owner's general liability policy.

But owners who live in community associations have another option—an endorsement to their owner's policy that will cover them against a special assessment levied to pay for a loss sustained by the association—whether due to fire, some other catastrophe or, in this case, a judgment against the association. This insurance is called “Loss Assessment” coverage and will pay a covered special assessment up to the limits of the endorsement. We say a “covered” special assessment, because loss assessment coverage would not pay, for example, a special assessment levied by the association to raise funds for a routine roof replacement or repair of other damage that is not the unexpected result of a catastrophe.

Loss Assessment coverage will provide another layer of insurance protection for individual owners. If, as in the example above, the judgment creditor was demanding that the association pay the $1 million not covered by other insurance, the association would likely levy, or a court could order, a special assessment upon the owners for that amount. If there were 100 owners in the project that would mean an average assessment of $10,000 per owner. If an owner had loss assessment coverage of that much or more, a special assessment levied by the association would be paid by that owner's loss assessment insurance. The cost of liability insurance has changed a lot in the past few years, but loss assessment coverage is usually not expensive. But the typical coverage limits are often low—perhaps only $5,000. Owners who live in community associations where loss assessment coverage is available should consider raising those limits to as much as $50,000 if limits in that amount are available from their insurance carrier.6

It is important that all owners carry loss assessment coverage. In essence, loss assessment coverage benefits not only the individual owner but all of her neighbors as well. When a special assessment is levied on the individual owners by an order of a court to collect a judgment obtained against the association by a third party, it becomes a lien against the collective equity of every home in the development. If some owners fail to pay their share, as with other association obligations, the burden falls on the remaining owners to pick up the balance. Owners who fail to carry loss assessment coverage pose a risk to their neighbors to the extent they are unable to meet their assessment obligation from personal funds.

Conclusion

If the Board of Directors of the association has done its due diligence when hiring and has properly supervised volunteers, contractors or employees; If contractors are properly insured against negligence claims and the association is either a named insured on their policies or can claim indemnity under the contract; If the association has general liability insurance and excess coverage in sufficient limits; and if each individual owner carries adequate loss assessment coverage, the combined protection offered by these various “layers” of insurance will often be sufficient to protect the equity in each individual owner's home from an unexpected judgment or loss sustained by the association. If all 100 owners in our example carried $50,000 in Loss Assessment coverage that would effectively add another layer of liability insurance totaling $5 million. With the right combination of prevention and insurance, most community associations could sustain a big unexpected liability hit without individual owners losing equity, or their homes.

1 This is an important point in the insurance analysis. It is an open question whether a punitive damage award would be covered under an existing CGL policy. First, the language of the policy may or may not exclude such coverage. California Insurance Code Section 533 prohibits such coverage. But that prohibition can be avoided in some instances. For example, in a case where the insured is not found directly liable, but only vicariously liable for the acts of others, there may be coverage.

2 Berding and Bonato, “Bankruptcy Won't Work” 2010

3 Berding, “No Right to Refuse Payment” 2009

4 “Excess” insurance is an endorsement or separate policy which adds to the limits of the primary policy under certain specified circumstances.

5 It is important to note, as with any general statement of the law, that insurance coverage is very fact and policy specific and what may be covered in one case may be no indication of what might be covered under different facts or under a different policy.

5When Berding|Weil amends a community association's governing documents we recommend that the documents require each owner to carry Loss Assessment coverage as follows:

“Each Owner shall be responsible, at his or her sole expense, to carry an “HO6 Condominium Owners Policy” or the equivalent insurance covering the following risks which are not covered by the insurance policies carried by the Association:

(v) Loss assessment coverage in an amount not less than Fifty Thousand Dollars ($50,000)…”

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