The recent 7.0 earthquake in Alaska has brought to light the importance of homeowners associations having proper insurance coverage when a catastrophic event occurs. Unfortunately, it is often not until after the catastrophic event occurs and the losses become realities, when those affected by the lack of having insurance coverage for the event (i.e. earthquake or flood insurance) learn the ramifications of decisions that were made not to spend the money for the insurance coverage. Such a scenario is now playing out in the Rivers Edge Condos located on the northern bank of Eagle River in Anchorage Alaska, where the 7.0 earthquake that struck on November 30thhas caused considerable damage and left properties uninhabitable. (See Sean Maguire, December 10, 2018, article entitled, Homeowner Association didnt have quake insurance, residents of condemned Eagle River condos say).
Association directors have an obligation to act in the best interests of the association and its members. The fulfillment of directors responsibilities necessitates making well-reasoned and informed decisions and the business judgment rule that association directors rely on for protection against liability requires sufficient investigation of the matter at hand. By making well-reasoned decisions and acting in good faith, directors will limit the potential liability of the association, and their personal exposure to liability.
Frequently, association directors are under the mistaken impression that they are always protected against personal liability by state statutes and/or provisions in their associations governing documents that are designed to shield the individual volunteer officers and directors from personal liability for their acts as an officer or director of their homeowners association. While it is correct that there are state statures and provisions in governing documents that are designed to protect the volunteer officers and directors of the association against personal liability for their actions as an officer and/or director, there are conditions that generally apply to such protection, such as: (i) the act or omission was performed within the scope of the officer / directors association duties; (ii) the act or omission was performed in good faith; and (iii) the act or omission was not willful, wanton, or grossly negligent.
Although keeping HOA dues low is a valid concern of an associations directors, artificially suppressing dues at the expense of the safety and stability of the associations infrastructure is not a good faith course of action, let alone sound business judgment. The association as a whole was organized to manage the development and the board can, and should levy assessments to fulfill that management obligation.
Maintaining proper insurance is an important element in association management. At the very least, for directors attempting to avoid individual liability, the board must make a reasonable inquiry into obtaining coverage and make responsible and informed decisions regarding such policies. When it comes to making decisions about carrying earthquake insurance, association directors must be familiar with any requirements for such insurance that are contained in state statutes and/or their associations governing documents. If the state statutes and/or the associations governing documents do not require it, associations are not obligated to purchase earthquake insurance. If the coverage is required, association directors cannot disregard the requirements and elect not to purchase the coverage. When the requirement for earthquake insurance is imposed by the associations governing documents, the directors can seek to amend the governing documents to eliminate the requirement by the required vote of the association members.
In deciding on whether or not to purchase earthquake insurance when it is not mandated, association directors should investigate the insurance coverage that is available from multiple insurance carriers, the nature of the coverage, and the cost to the association. If a decision is made not to obtain earthquake coverage, the board must have a plan that is provided to its members (the owners of the separate interests) as to how the association will pay for repairs to earthquake-damaged property without insurance. That information should be discussed in an open meeting and documented in the board meeting minutes that are distributed to the associations members. Even if assessments for earthquake insurance premiums are prohibitively expensive, some alternative plan or fund must be in place.
A decision by an associations board of directors not to carry earthquake insurance may have an additional effect on the individual owners. Many insurance companies will not insure individual property, units or homes located within a common interest development unless the association is covered by adequate insurance, including earthquake coverage. If a catastrophic event occurs, the owners will be looking to the association and to past and present board directors who made the decisions not to purchase insurance for indemnification and reimbursement for damages.
To protect their interests, association members should take it upon themselves to review all insurance that is currently being carried by the association. This information should be provided annually by the association but if it is not, the individual owners should demand that the board produce copies of the policies that are carried by the association in accordance with their right to receive such information. If it is determined that the association is not covered by insurance that is required by state statutes and/or the associations governing documents, immediate action should be taken to obtain compliance. Such action should be based on guidance provided by experienced legal counsel located in the same state where the association is domiciled.