Condominium Privacy Law

  1. You must have a legally protected expectation of privacy
  2. That privacy was violated

Prove that there was an unreasonable intrusion upon your solitude. To prove this, you must show that the intrusion upon your seclusion or solitude was intentional, the intrusion invaded your private affairs or concerns, and this intrusion was something that would be considered highly objectionable to a reasonable person.

A plaintiff must generally show that there was an act of prying or intruding in a manner that would be objectionable to a reasonable person in order to make a claim for intrusion upon the plaintiff’s affairs or seclusion. This invasion of privacy must be committed in a private place, such as one’s home. There is no claim for intrusion upon the plaintiff’s seclusion in a public location.

If the cameras are only taping what can be seen by the naked eye, it is not an invasion of privacy. If they recorded sound, there may be a violation of state or federal wiretapping laws. If the cameras are hidden in your home or have some type of special view lens, you could have a case for invasion of privacy.

A neighbor has a right to survey his property as long as he does not violate your rights to privacy. If the camera views the outside of your home and garden, it is generally not an invasion of privacy, but if the camera is surveilling the inside of the home, rights to privacy are violated.

The CC&Rs may regulate the installation of devices that are visible from the street or from a neighbor’s property. The CC&Rs often regulate the installation of satellite dishes and HAM radio antennas, for example. The same CC&Rs may require a homeowner to obtain HOA permission to install security cameras unless the cameras are unobtrusive. The CC&Rs should be carefully analyzed to determine if the neighbor complied with CC&Rs and architectural guidelines before installing the security cameras.

For whatever reason, if you want privacy from the cameras, then a strong infrared light attached to the side of the house with the beam shining in the direction of the camera may block anything behind the lamp from being captured on tape. A couple of IR illuminators shining out the window may also block the neighbor from recording what happens inside of your house.

The following is a California statute about this matter:

  • 1708.8 Civ.

(a) A person is liable for physical invasion of privacy when the defendant knowingly enters onto the land of another person without permission or otherwise committed a trespass in order to physically invade the privacy of the plaintiff with the intent to capture any type of visual image, sound recording, or other physical impression of the plaintiff engaging in a personal or familial activity and the physical invasion occurs in a manner that is offensive to a reasonable person.

(b) A person is liable for constructive invasion of privacy when the defendant attempts to capture, in a manner that is offensive to a reasonable person, any type of visual image, sound recording, or other physical impression of the plaintiff engaging in a personal or familial activity under circumstances in which the plaintiff had a reasonable expectation of privacy, through the use of a visual or auditory enhancing device, regardless of whether there is a physical trespass, if this image, sound recording, or other physical impression could not have been achieved without a trespass unless the visual or auditory enhancing device was used.

(c) An assault committed with the intent to capture any type of visual image, sound recording, or other physical impression of the plaintiff is subject to subdivisions (d), (e), and (h).

(d) A person who commits any act described in subdivision (a), (b), or (c) is liable for up to three times the amount of any general and special damages that are proximately caused by the violation of this section. This person may also be liable for punitive damages, subject to proof according to Section 3294. If the plaintiff proves that the invasion of privacy was committed for a commercial purpose, the defendant shall also be subject to disgorgement to the plaintiff of any proceeds or other consideration obtained as a result of the violation of this section.

(e) A person who directs, solicits, actually induces, or actually causes another person, regardless of whether there is an employer-employee relationship, to violate any provision of subdivision (a), (b), or (c) is liable for any general, special, and consequential damages resulting from each said violation. In addition, the person that directs, solicits, instigates, induces, or otherwise causes another person, regardless of whether there is an employer-employee relationship, to violate this Section shall be liable for punitive damages to the extent that an employer would be subject to punitive damages pursuant to subdivision (b) of Section 3294.

(f) Sale, transmission, publication, broadcast, or use of any image or recording of the type, or under the circumstances, described in this Section shall not itself constitute a violation of this section, nor shall this Section be construed to limit all other rights or remedies of plaintiff in law or equity, including, but not limited to, the publication of private facts.

(g) This Section shall not be construed to impair or limit any otherwise lawful activities of law enforcement personnel or employees of governmental agencies or other entities, either public or private who, in the course and scope of their employment, and supported by an articulable suspicion, attempt to capture any type of visual image, sound recording, or other physical impression of a person during an investigation, surveillance, or monitoring of any conduct to obtain evidence of suspected illegal activity, the suspected violation of any administrative rule or regulation, a suspected fraudulent insurance claim, or any other suspected fraudulent conduct or activity involving a violation of law or pattern of business practices adversely affecting the public health or safety.

(h) In any action pursuant to this section, the court may grant equitable relief, including, but not limited to, an injunction and restraining order against further violations of subdivision (a) or (b).

(i) The rights and remedies provided in this Section are cumulative and in addition to any other rights and remedies provided by law.

(j) It is not a defense to a violation of this Section that no image, recording, or physical impression was captured or sold.

(k) For the purposes of this section, “for a commercial purpose” means any act done with the expectation of a sale, financial gain, or other consideration. A visual image, sound recording, or other physical impression shall not be found to have been, or intended to have been captured for a commercial purpose unless it is intended to be, or was in fact, sold, published, or transmitted.

(l) For the purposes of this section, “personal and familial activity” includes, but is not limited to, intimate details of the plaintiff’s personal life, interactions with the plaintiff’s family or significant others, or other aspects of plaintiff’s private affairs or concerns. Personal and familial activity does not include illegal or otherwise criminal activity as delineated in subdivision (f). However, “personal and familial activity” shall include the activities of victims of crime in circumstances where either subdivision (a) or (b), or both, would apply.

(m) The provisions of this Section are severable. If any provision of this Section or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.

 

 

Reasonableness Standard

Collecting homeowners’ association fees from unit owners in foreclosure, fixing leaky roofs from hurricane damage, and hiring a new landscaper. These are just a few examples of the many decisions that a condominium association’s board of directors must consider on a regular basis. The condominium association is the governing body of a community, with duties ranging from promulgating and enforcing rules and regulations to handling financial matters such as the collection of dues. See Matter of Levandusky v. One Fifth Ave. Apartment Corp., 75 N.Y.2d 530, 536 (N.Y. 1990); Papalexiou v. Tower W. Condo., 401 A.2d 280, 285 (N.J. Super. 1979). Those brave few who volunteer to serve on the association’s board should always remember that it is nearly universally accepted that they owe a fiduciary duty to all of the association’s members. See, e.g., Bd. of Managers of Weathersfield Condo. Ass’n v. Schaumburg Ltd. P’ship, 717 N.E.2d 429, 436 (Ill. App. 1999); Bd. of Managers of Fairways at North Hills Condo. v. Fairway at North Hills, 603 N.Y.S.2d 867, 870 (1993); Schwarzmann v. Ass’n of Apartment Owners, 655 P.2d 1177 (Wash. 1982). But see Smith v. Ridgeview Homeowner’s Ass’n, 2011 WL 1743787, at *3 (Minn. Ct. App. 2011) (holding the governing body of a condominium association owes a duty to members as a whole as opposed to individual unit owners); Office One, Inc. v. Lopez, 769 N.E.2d 749 (Mass. 2002) (holding that members of the governing board of a condominium association, in their capacity as trustees, owe no fiduciary duty to individual unit owners).

When a disgruntled condominium unit owner challenges the board’s decision through litigation, under what standard will the board’s action be governed? The answer depends on the jurisdiction, and even then, the answer is not entirely clear. Most jurisdictions apply one of two standards: reasonableness or business judgment. Under the reasonableness standard, the condominium association’s board of directors must demonstrate its decision was reasonable, thus requiring the court to conduct a fact-intensive inquiry into the substantive and procedural decision-making process. See, e.g., Bolandz v. 1230-1250 Twenty-Third Street Condo. Unit Owners Ass’n, 849 A.2d 1010, 1014–15 (D.C. 2004). On the other hand, the business-judgment rule gives deference to the decision made by a condominium association’s board of directors absent a showing of fraud, bad faith, incompetence, or a variety of other factors varying by jurisdiction. See, e.g., Micheve, LLC v. Wyndham Place at Freehold Condo. Ass’n, 885 A.2d 35, 39 (N.J. App. Div. 2005) (finding the business-judgment rule afforded when the board’s actions authorized by statute or its own bylaws, and when the decision is not fraudulent, self-dealing, or unconscionable); Black v. Fox Hills N. Cmty. Ass’n, 599 A.2d 1228, 1231–32 (Md. App. 1992) (holding the business-judgment rule precludes the judicial review of a condominium association’s board of directors absent fraud or bad faith).

While courts try to distinguish their decisions to neatly fit under one of the two standards, the history of cases involving decisions of condominium association boards of directors proves the two concepts to be anything but neatly distinguished. In fact, case law shows “reasonableness” and “business judgment” in the context of condominium associations to be more like overlapping circles on a Venn diagram than two separate, distinct standards.

Origin of the Reasonableness and Business-Judgment Confusion

One of the earliest cases to consider the standard for reviewing a decision of a condominium association’s board of directors is Hidden Harbour Estates, Inc. v. Norman (Hidden Harbour I), 309 So. 2d 180 (Fla. 4th Dist. Ct. App. 1975). In Hidden Harbour I, the association’s board of directors adopted a rule, subsequently ratified by the vote of unit owners, prohibiting alcoholic beverages from the clubhouse and adjacent areas. Id. at 181. The trial court granted a permanent injunction prohibiting the association from enforcing the rule because the action engaged in by the board constituted a nuisance. The Fourth District reversed, concluding the association can adopt rules passing the test of “reasonableness,” and each case must be reviewed based on the particular facts and circumstances. Id. at 181–82. The Fourth District held the same standard in Hidden Harbour Estates, Inc. v. Basso (Hidden Harbour II), 393 So. 2d 637 (Fla. 4th Dist. Ct. App.  1981). In Hidden Harbour II, the association’s board of directors denied the association members the right to drill a well next to their mobile home unit. Id. at 638. The members drilled the well anyway, and the trial court denied injunctive relief to Hidden Harbour. On appeal, the Fourth District held the board of directors must demonstrate “reasonableness” when the validity of promulgated rules is challenged or when a board refuses an owner’s action where the board has the power to grant or deny the action. Id. at 640. Because Hidden Harbour failed to demonstrate its decision to deny the drilling of a well was reasonably related to its concerns, the Fourth District affirmed the trial court’s ruling.

In between Hidden Harbour I and II, the Superior Court in New Jersey decided Papalexiou v. Tower West Condominium, 401 A.2d 280 (N.J. Super. 1979). In Papalexiou, the board of directors for Tower West Condominium voted to levy an assessment of $100,000 to pay overdue bills and repair leaks in the roof. Id. at 284. All but seven unit owners paid the special assessment. The remaining unit owners secured an injunction restraining the association from asserting a lien or imposing other sanctions on the nonpaying owners. Id. at 282. In beginning its analysis, the court cited Hidden Harbour I for the “test of reasonableness.” Id. at 285. The court also cited Ryan v. Baptiste, 565 S.W.2d 196, 198 (Mo. Ct. App. 1976), in which the Missouri Court of Appeals considered the reasonableness of a board’s actions by weighing the rights of objecting owners against the rights of the entire residential community.

The Papalexiou court inexplicably transitioned from the “reasonableness” rules of Hidden Harbour I and Ryan to a discussion of the business-judgment rule. The court defined the business-judgment rule to require a showing of fraud or lack of good faith before a board’s decisions can be questioned. Id. at 285–86. The court held fraud, self-dealing, or unconscionable conduct must be evidenced before a court will review authorized conduct of directors. Id. at 286; see also Comm. for a Better Twin Rivers v. Twin Rivers Homeowners’ Ass’n, 929 A.2d 1060, 1074 (N.J. 2007). In declining the invitation to review the board’s decision, the court found no fraud, lack of good faith, self-dealing, dishonesty, or incompetence in the decision-making process. Id. at 286–87.

The only link between the “reasonableness” discussion and the “business judgment” holding is the court’s explanation that, while directors are not expected to be perfect, “[a]ll that is required is that the persons in such positions act reasonably and in good faith in carrying out their duties.” Id. at 286. Without rejecting the holdings of Hidden Harbour I or Ryan, the court did no analysis of the particular facts and circumstances nor any balancing test of the objecting owners’ rights versus the rights of the community at large. Left unclear by the court’s decision is whether there remains an argument to be made that boards’ decisions can be overturned by showing unreasonableness.

In an oft-cited and arguably clearer opinion, the New York Court of Appeals addressed the issue of “reasonableness” versus “business judgment” head-on in Matter of Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d 530 (N.Y. 1990). In accordance with an agreement the board and Levandusky executed, the board of directors for the condominium cooperative issued a stop-work order to prevent Levandusky from moving a steam riser pipe in violation of Levandusky’s proprietary lease. Id. at 533–34. The supreme court initially granted Levandusky’s petition to set the stop-work order aside and held the board’s decision to stop the renovations was “arbitrary and capricious.” Id. at 535. On rehearing, the supreme court withdrew its decision, holding it was “precluded by the business judgment rule from reviewing the board’s determination.” Id. On appeal, a majority of justices in the appellate division agreed with the original supreme court decision, while two justices dissented and agreed the board’s actions were not subject to judicial review under the business-judgment rule.

After a thorough discussion about the role a cooperative or condominium association board of directors plays in governing the affairs of the respective community, and the unit owners’ rights they tacitly relinquished by agreeing to be regulated by the rules and regulations, the court of appeals held the appropriate standard of review for a board’s decisions is analogous to the business-judgment rule. Id. at 536–37. “So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board.” Id. at 538; see also Yusin v. Saddle Lakes Home Owners Ass’n, 73 A.D.3d 1168, 1170–71 (N.Y. App. Div. 2010). The court further supported its opinion by citing other cases inside and outside of its jurisdiction (including Papalexiou) applying the business-judgment rule to cooperative and condominium boards. Id. at 537.

The court of appeals then took the extra step the court in Papalexiou did not take by explicitly rejecting the “reasonableness” test. Id. at 538. The court recognized the “reasonableness” standard and business-judgment rule have a lot in common, but pointed out the two biggest differences. Id. at 539. First, the business-judgment rule places the burden on the objecting unit owner to demonstrate the breach of fiduciary duty, whereas the reasonableness standard places the burden on the board to show the decision was reasonable. And, second, citing Hidden Harbour II, the reasonableness standard requires the court to independently evaluate the board’s decision. The court of appeals, therefore, decided the more appropriate standard was the one of limited judicial review.

New York is one of the few jurisdictions in which an appellate court went the extra mile to explain what the reasonableness standard is, what the business-judgment rule is, and why one is more beneficial than the other. Most other jurisdictions fail to provide a clear statement of the standard to be applied. The court selects one of the standards without a thorough review of the other and, in skipping this part of the process, conflates the two. It is understandably difficult to separate them, as the analysis in Levandusky illustrates. But a review of opinions from around the country demonstrates some courts are not just conflating them, but also perhaps mislabeling them.

Does the Business-Judgment Rule Require Finding Reasonableness?

As discussed in Papalexiou and Levandusky, the business-judgment rule restricts a court’s ability to review the substance of a decision made by the condominium association’s board of directors. Some courts looked to stay in line with these early cases on point. The Court of Special Appeals of Maryland cited Papalexiou in adopting Maryland’s business-judgment rule, requiring the court to give deference to a board’s decision absent bad faith or fraud. Black v. Fox Hills N. Cmty. Ass’n, 599 A.2d 1228, 1231–32 (Md. App. 1992). The Superior Court of Massachusetts adopted the business–judgment rule discussed in Levandusky and held trustees of the condominium trust were not liable for actions “taken in good faith and in the exercise of business judgment in the lawful and legitimate furtherance” of the unit owner’s interests. Pederzani v. Guerriere, 1995 WL 1146832, at *1 (Mass. Super. Ct. 1995). The Superior Court of Connecticut also adopted the business-judgment rule as enumerated in Levandusky. Powder Farm Park Ass’n v. SKF Leader Hill, LLC, 2008 WL 4853332, at *4 (Conn. Super. Ct. 2008).

Another one of the leading cases applying the business-judgment rule to condominium associations is Lamden v. La Jolla Clubdominium Homeowners Ass’n, 980 P.2d 940 (Cal. 1999). In Lamden, the Supreme Court of California reviewed several of its past cases in which actions of a condominium association were at issue. Id. at 947–49. The court looked to its then recent opinion in Nahrstedt v. Lakeside Village Condominium Ass’n, 878 P.2d 1275 (Cal. 1994), wherein it concluded that “courts will uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development’s governing documents, and comply with public policy.” Lamden, 980 P.2d at 950. Staying in line with its holding in Nahrstedt, the court in Lamden concluded the board’s decisions should be given deference when the board is acting on reasonable investigation, in good faith with regard to the best interests of the association and its members, and exercises discretion within the scope of its authority under relevant statutes, covenants, and restrictions.

Other courts have relied on legal treatises and their own body of case law to allow condominium associations the deference afforded by the business-judgment rule. The Court of Appeals in South Carolina reviews conduct of directors under the business-judgment rule and will not disturb their actions absent a showing of incompetence, dishonesty, or bad faith. See Goddard v. Fairways Dev. Gen. P’ship, 426 S.E.2d 828, 832 (S.C. Ct. App. 1993). An Illinois Appellate Court applied its corporate business-judgment rule to a derivative suit brought by unit owners on behalf of the condominium association. Davis v. Dyson, 900 N.E.2d 698 (Ill. App. Ct. 2008). The Davis court makes its analysis of the business-judgment rule based on the holding in Stamp v. Touche Ross & Co., 636 N.E.2d 616 (Ill. App. 1993). The Stamp court concluded the business judgment of directors would not be interfered with absent bad faith, fraud, illegality, or overreaching. Id. at 621. In affirming the rule from Stamp, the court also noted that, for a board to get the benefit of the business-judgment rule, exercise of due care is a prerequisite. Davis, 900 N.E.2d at 714. Because the plaintiffs in Davis alleged “inexcusable unawareness or inattention” as well as illegality, they alleged enough to survive the business-judgment rule challenge at the pleadings stage. Id. at 715–16.

The Supreme Court of Washington in Riss v. Angel discusses condominium directors’ fiduciary duty to “exercise ordinary care in performing their duties and to act reasonably and in good faith.” 934 P.2d 669, 680–81 (Wash. 1997). The court appears to conflate the two differing standards by stating the duty as such, and by concluding “whether or not the business judgment rule should be applied to property owners associations, the decisions of these associations must be reasonable.” Id. at 681. Quoting its business-judgment rule from prior decisions, the court stated it will not disturb the directors’ judgment absent a showing of fraud, dishonesty, or incompetence, but that “reasonable care” is also required, and good faith is insufficient because the standard requires the directors to act as reasonably prudent people in like situations would act.

The business-judgment rule quoted by the Supreme Court of Washington reflects the “pure” business-judgment rule approach. But does this approach support its conclusion? The court concludes the rule does not “exonerate the homeowners for their unreasonable decision to reject Plaintiffs’ proposal.” Why was the decision unreasonable? Because it was an unreasonable decision-making process. Id. at 679. Although the court refers to a “reasonable decision” in several places in the opinion, Washington does appear to adhere to the “pure” business-judgment rule.

Florida is perhaps the most difficult state to understand whether its courts apply the business-judgment rule. As discussed earlier, one of the first cases on point as to the issue of the appropriate standard of review for condominium associations is Hidden Harbour I. In a recent decision by the Fourth District Court of Appeal in Florida, the court in Hollywood Towers Condominium Ass’n v. Hampton cited numerous cases holding the business-judgment rule to be the appropriate standard of review. 40 So. 3d 784, 787 (Fla. 4th Dist. Ct. App.  2010) (citing Garcia v. Crescent Plaza Condo. Ass’n, 813 So. 2d 975 (Fla. 2d Dist. Ct. App. 2002); Farrington v. Casa Solana Condo. Ass’n, 517 So. 2d 70, 72 (Fla. 3d Dist. Ct. App. 1987); Tiffany Plaza Condo. Ass’n v. Spencer, 416 So. 2d 823, 826 (Fla. 2d Dist. Ct. App. 1982)). When deciding on the appropriate business-judgment review test, the court adopted the two-prong test in Lamden, stating the decision must be within the association’s scope of authority and must be reasonable, meaning not arbitrary, capricious, or in bad faith.

But how did the Florida courts transition from the reasonableness standard to the business-judgment rule? Arguably, they never did. In Farrington, the Third District Court found support for its decision to support the business-judgment rule. One case was Papalexiou, a business-judgment rule case. Another is Hidden Harbour I, a case oft-cited for the reasonableness standard. Indeed, many courts outside of Florida have used Florida cases to support their position that the reasonableness standard is the appropriate standard. See Barclay Square Condo. Ass’n v. Grenier, 899 A.2d 991, 996–97 (N.H. 2006) (citing Hidden Harbour I); Hutchens v. Bella Vista Vill. Prop. Owners’ Ass’n, 110 S.W.3d 325, 330 (Ark. Ct. App. 2003) (citing Scudder v. Greenbrier C. Condo. Ass’n, 663 So. 2d 1362, 1369 (Fla. 4th Dist. Ct. App. 1995)). In Florida, therefore, there appears to be authority to support both the reasonableness standard and the business-judgment rule as appropriate standards of review.

Reasonableness Standard Isn’t Far from Business-Judgment Rule

Many other jurisdictions adhere to the “reasonableness” standard when reviewing the decisions of a condominium association’s board of directors. Conceptually, as discussed in Levandusky, the reasonableness standard is going to have a significant amount of overlap with the business-judgment rule. Can there be a scenario where an action taken or decision reached by a condominium association’s board of directors is both reasonable and done arbitrarily, capriciously, incompetently, or in bad faith? But one would expect if a court intends to employ a reasonableness standard, there should be some difference between reasonableness and the business-judgment rule. When looking at the specific standards the courts use, however, it seems clear that the reasonableness standard hardly varies, if at all, from the business-judgment rule.

For example, an Arkansas Court of Appeal in Hutchens v. Bella Vista Village Property Owners’ Ass’n held the power of the governing body for a condominium association is limited by the “reasonableness” test, requiring a determination of whether action is unreasonable, arbitrary, capricious, or discriminatory. 110 S.W.3d 325, 330 (Ark. Ct. App. 2003). The Supreme Court of North Dakota also employs the same reasonableness test. See Buckingham v. Weston Vill. Homeowners Ass’n, 571 N.W.2d 842, 845–46 (N.D. 1997); see also Barclay Square Condo. Ass’n v. Grenier, 899 A.2d 991, 996–97 (N.H. 2006) (finding the amendment at issue “is reasonable and not arbitrary or capricious”). On its face, this standard is the business-judgment rule, almost exactly as defined in Florida, California, New York, and New Jersey, with an additional “unreasonable” defense. Yet neither jurisdiction proposes what “unreasonable” means. Is it procedurally unreasonable, thus making the actual standard the business-judgment rule, since the court does not question the substance of the decision? Or is it substantively unreasonable, thus making the test the more traditional reasonableness standard?

Both Hutchens and Buckingham cite the Ohio Court of Appeals case Bluffs of Wildwood Homeowners’ Ass’n v. Dinkel, 644 N.E.2d 1100, 1102 (Ohio App. 1994), in describing the “reasonableness” test in Ohio. One of the cases cited in Dinkel sheds some light on Ohio’s reasonableness standard. In River Terrace Condominium Ass’n v. Lewis, the First District Court of Appeal in Ohio stated, when reviewing a decision by the association’s board of directors, “the trial court does not substitute its judgment for that of the board of managers or weigh the various elements and considerations to be taken into account as though the court were acting de novo.” 514 N.E.2d 732, 737 (1st Dist. Ct. App. Ohio 1986). In so holding, the court applied a three-part test of reasonableness, looking at whether the decision was arbitrary or capricious, whether the decision was nondiscriminatory and even-handed, and whether the decision was made in good faith for the common welfare of the owners and occupants. The reasonableness standard in Ohio, and by extension in Arkansas and North Dakota, appears to be, for all intents and purposes, the business-judgment rule.

Perhaps the purest “reasonableness” standard can be found in Washington, D.C. On a case of first impression, in Johnson v. Hobson, the D.C. Court of Appeals reviewed a condominium association board’s decision to have cars without valid license plates or registration towed from the premises. 505 A.2d 1313, 1314–15 (D.C. App. 1986). Citing Hidden Harbour I and Ryan (like the court in Papalexiou), as well as Holleman v. Mission Trace Homeowners’ Ass’n, 556 S.W.2d 632, 636 (Tex. Civ. App. 1977), the court adopted the reasonableness standard. Id. at 1317. In a footnote, the court specifically declined to adopt the business-judgment rule as adopted in Papalexiou. Id. at 1317 n.7.

The court’s analysis went through both the substantive and procedural aspects of applying the reasonableness standard. Id. at 1317–18. For substantive reasonableness, the court looks at whether the action taken was within the powers granted to the board by statute or condominium documents; whether the substance bears a relationship to the “health, happiness and enjoyment of life” for owners; and whether the substance has an unfair or disproportionate impact on select unit owners. As for procedural reasonableness, the court should review whether owners had notice the board could regulate the topic at issue and whether the board failed to follow the procedures mandated by the condominium documents. Id. at 1318. The D.C. Court of Appeals definitively affirmed the reasonableness standard, the decision to not adopt the business-judgment rule, and the analysis of Johnson in Bolandz v. 1230-1250 Twenty-Third Street Condominium Unit Owners Ass’n, 849 A.2d 1010, 1014–15 (D.C. 2004). The court in Bolandz left no doubt about the inquiry to make when utilizing a reasonableness standard, citing the quoted language Johnson used from Hidden Harbour I, “[E]ach case must be considered on the peculiar facts and circumstances thereto appertaining.” Id. at 1015.

Other jurisdictions that have elected to apply a version of the reasonableness standard go so far as to explain how the business-judgment rule is properly incorporated. The Supreme Court of Alaska, in upholding the condominium rule at issue, held the reasonableness standard was “supported by case law and commentary.” O’Buck v. Cottonwood Vill. Condo. Ass’n, 750 P.2d 813, 817 (Alaska 1988) (citing Hidden Harbour I and Johnson). In a footnote, the court additionally stated that applying the business-judgment rule advocated by the condominium association, while favored by commentary and with good authority, would make little to any difference in this case because “the rule at issue measures up to any standard of reasonableness.” Id. at 817 n.4. The language in the footnote left some question as to whether the Supreme Court of Alaska would adopt the business-judgment rule in the future because the court elected not to take the association’s invitation to make the business-judgment rule the law. Little doubt remains as evidenced by the holding in Bennett v. Weimar, 975 P.2d 691, 696–97 (Alaska 1999). The Supreme Court of Alaska, this time forced with the argument of reasonableness versus business judgment (as applied in Papalexiou), stayed with its holding in O’Buck in favor of the reasonableness standard. Id. at 697. The court continues to leave itself an “out” for ruling on the business-judgment rule by not taking a firm position and once again stating, “[T]he rule at issue measures up to any standard of reasonableness.”

The Restatement Attempts to Balance the Two

The Court of Appeals of Arizona dealt with the reasonableness standard versus business-judgment rule debate by following a third option. In Tierra Ranchos Homeowners Ass’n v. Kitchukov, the association advocated for the business-judgment rule of Lamden while the unit owner argued Arizona case law did not allow for judicial deference to condominium associations. 165 P.3d 173, 177–78 (Ariz. App. 2007). Because the court found this case of reviewing the decision of a condominium association’s board of directors to be a case of first impression, Arizona law mandated the court look to the appropriate Restatement for guidance. Id. at 179. Under the Restatement (Third) of Property: Servitudes (2000), a unit owner challenging an action by the association must show the association breached its duty to treat members fairly or its duty to act reasonably in the exercise of its discretionary powers. When challenging a discretionary action, the unit owner also has the burden of proving the breach of duty has caused, or threatens to cause, injury to the member individually or to the interests of the common-interest community. Finding the Restatement’s approach to be well-reasoned, the Arizona court adopted it. Id. at 180.

The court discussed the Restatement commentary as it related to the reasonableness standard and business-judgment rule. Id. at 179. The Restatement does not adopt the business-judgment rule because it provides “too little protection against careless or risky management,” but balances the protection taken away from the association by now requiring the unit owner to establish the board’s action was unreasonable, as opposed to putting the burden on the association to prove its actions were reasonable. Id. at 179–80. What the Restatement sees as balancing between the two standards may ultimately be very detrimental to the unit owner. Is the burden of proving unreasonableness a fair burden to put on one unit owner? Can one unit owner ever prove a board’s decision was unreasonable as to all unit owners? In a condominium development of nearly 1,000 units, what sort of time and expense will a unit owner have to endure to prove his or her case? Ultimately, more case law will need to be developed to conclude how effective the third Restatement option really is.

Conclusion

A review of the case law shows three approaches to reviewing the validity of an action challenging the decision of a condominium association’s board of directors. The two most readily recognizable approaches, the reasonableness standard and the business-judgment rule, share so many characteristics that defenses of one are almost certainly defenses to the other. The minority approach, as prescribed by the Restatement (Third) of Property: Servitudes (2000), attempts to be a hybrid between the two majority approaches, but may only create an undue burden on the challenging unit owner as opposed to clarifying the standard. When reviewing a decision by a condominium association’s board of directors, a lawyer should probably allege all substantive and procedural flaws in the association’s decision-making process to avoid missing a successful defense to any of the above standards.

 

Receivership for HOAs and Condominiums

Receivership for HOAs and Condominiums

When associations cease to function properly, everything stops: bills go unpaid, directors resign, and critical maintenance is ignored. In this situation, the remaining board members might look to a court-appointed receiver as a way out. But should they? Consider the following points on receivership: The appointment of a receiver is a drastic remedy.

Receivership is expensive, time-consuming and someone outside the association makes all the decisions that the Board or members would make. Sometimes receivership is the ONLY remedy to break a deadlock or to get critical health & safety repairs completed. An association seeking the appointment of a receiver must have a compelling reason that would satisfy the judge that there is an immediate threat of injury, damage or destruction to property and to property values of the residences within the community association.

All other efforts have failed. An association may be required to show to the court different degrees of evidence depending on the reason for its dysfunction. In most cases, the association must show that efforts to resolve the matter were not successful: e.g., ADR failed or was refused, and there is correspondence showing multiple, but unsuccessful attempts to obtain voluntary compliance. Different events can trigger a motion to appoint a receiver. Some reasons include member apathy or fear of personal liability (no one will step forward to serve on the board), failure of board to meet its fiduciary duty (failure to undertake reasonable investigations, due diligence or to impose essential emergency assessment), or in a small complex with an even number of units, a tie-vote precludes the passage of a special assessment to fund critical health & safety repairs to structures.

It is expensive, the association loses control, and the court directs the receiver to perform all necessary work. The court may impose assessments, and the law requires a receiver to make monthly reports and to file documents with the court. Both requirements add to the cost of the receiver (usually an attorney), who already charges by the hour to do the work that a volunteer board did before the receiver was appointed. How long does it last? The receiver will stay in place until the problem(s) is solved to the satisfaction of the court.

HOA Personal Reimbursement

A Familiar Issue

The association incurs an expense or imposes a fine against an owner for common area damage or the violation of the governing documents.  Is the owner responsible?  How can the association collect the money spent as a result of “bad conduct” of the owner (or their tenant)?  Consider this:

Oren Owner is drunk.  Instead of waiting for the security gate at the entry of his development to finishing opening, he drives through smashing the gate.  The repair cost turns out to be $1,500.  Oren continues driving and parks his car on the driveway of his lot.  The car, having been smashed on the undercarriage, leaks oil causing a stain on the driveway.  Power blasting the stain away will cost $1,000.

Oren is blissfully unaware of all of this.  Instead, he continues partying with friends and some backyard dancing to loud rock ‘n’ roll until 4:00 a.m.  The board notices a hearing and imposes a $100 fine for the noisy behavior; a reimbursement assessment of $1,500 for the cost to fix the gate; and a $1,000 reimbursement assessment for the cost the association will (and later does) incur to power blast the driveway.

Oren is given notice of the penalties but ignores the manager’s request for payment.  Counsel is engaged.  She reviews the CC&Rs – including the enforcement, reimbursement assessment and lien provisions – and sends a formal demand letter addressing these issues.  The demand letter requests payment of $3,500 including $900 in legal fees (for the analysis and letter) and management fees (for preparing a previous demand letter and phone calls with the lawyer).  Oren responds saying, among other things, “No, I won’t pay.”

Breaking Down the Amounts Owed:

$1,500 Reimbursement assessment for amount paid to gate contractor to fix damaged gate on common area based on CC&R provision requiring owners to pay for damage they cause to common area
$1,000 Reimbursement assessment for amount paid to paving contractor to power blast the driveway necessitated by Oren’s breach of the CC&R provision banning driveways with oil stains
$100 Fine in an amount based on the “schedule of monetary penalties” arising out of Oren’s noisy behavior which unreasonably disturbs his neighbors thus constituting a “nuisance”
$900 Reimbursement assessment for legal and management fees the association incurred in curing the damage and dealing with the CC&R breaches.

These expenses, depending on the definitions used in an association’s CC&Rs, are variously called “reimbursement assessments,” “single individual assessments,” “personal assessments,” or other similar phrases.  Here, we are calling them “personal assessments” for convenience.

Rules: What the Civil Code says (or doesn’t say) (Civil Code section 1367.1(d))

As we all know, the law – and this will be true under “New Davis Stirling” effective January 1, 2013 as well – permits an association to impose and collect (by a lawsuit or nonjudicial foreclosure) “regular” and “special” assessments levied against all members.  It is also lawful to impose and collect personal assessments against a specific member but some of the rules are different.  In any case, no personal assessment (except a fine) may be levied in excess of the actual costs incurred.

Assuming the Governing Documents are written as broadly as the law permits – and the “original” set almost never is – the association can impose a personal assessment for the $1,500 spent to repair the common area gate.  That is just the first step in the analysis.  Next, we need to determine how that personal assessment can be collected.  Again, assuming the CC&Rs have all the enforcement tools possible, this kind of personal assessment can be collected like an unpaid regular or special assessment – by lawsuit or nonjudicial foreclosure.

The Civil Code is completely silent on whether the association can use these same remedies for collection of the $1,000 spent to eliminate the oil stains on the driveway or for the $900 paid to management and the attorney.

Finally, for the fine, there is a funky rule.  It says a monetary penalty (i.e. a fine) may not become a lien enforceable by nonjudicial foreclosure.  This is unclear because it does not appear to prohibit recording a lien and then suing in court to foreclose (instead of nonjudicial foreclosure).  It is doubtful that the amount of a fine will typically warrant a full-blown lawsuit for “judicial” foreclosure and it is very unlikely that a Judge will allow someone’s home to be taken away as a result of a fine for “bad behavior.”

Tools

The bottom line is that the association can implement tools that will give it the ability to successfully bring a claim in court – small claims or Superior Court – or to use the same nonjudicial foreclosure procedures for all the expenses above except recovery of the fine.  For that, the “safest” course will be to sue the owner in small claims court.

Violations: The language in the Governing Documents supporting the violations must be clear.  In the example above, the CC&Rs must say that damage to common area caused by owners will be repaired at owner expense; that owners have a duty to assure that driveways are free of stains; and that excessive noise that unreasonably disturbs neighbors is banned as a nuisance.

Remedies: Likewise, the Governing Documents must clearly specify the remedies available for violations.  Again, in the above example, the remedies should include the right to incur expenses to make common area repairs; to use an easement to access an owner’s “separate interest” lot and to make repairs to the extent reasonably necessary to cure a violation; to engage counsel and management to enforce the Governing Documents; and to record a lien and use judicial or nonjudicial foreclosure or to sue to recover sums due.  “Liening” is not banned for the recovery of any sum due although the legality of use of a lien that simply “sits” on title to collect a fine has not been tested.  We do not recommend it.  Finally, if the association wishes to pursue an owner for the conduct of their tenants or guests, the authority for that should be specific, broad and clearly spelled out in the Governing Documents.

Due Process: The Governing Documents must give the owner an opportunity to address the “charges” at a hearing.  That means pictures and written evidence of the violation must be provided.  Copies of invoices of expenses already incurred (such as the gate repair) or of bids to be incurred (power blasting of the driveway) should also be given.  In some cases, it may mean that evidence of member complaints must also be given the owner against whom action is sought.  In cases where violations are objective – oil stains on a driveway or construction without committee approval – neighbor complaints probably do not have to be revealed.  In cases where the violations are subjective – such as moving violations or noise – the owner may have a right to know who is complaining and when.  In situations where the association plans to access an owner’s property, the possibility of doing so should be included in the notice of hearing.  The key in all due process notices is to give the owner, where appropriate, fair warning of what things will happen, and when, if violations are not dealt with.

Do not Forget the Rules Are Governing Documents: The authority to pursue the enforcement and collection described above must be found in the Bylaws and CC&Rs.  They should also be contained in operating and other rules.  For example, the assessment collection policy (that must be annually distributed) should provide for collection of personal assessments by the lien and foreclosure power in addition to recovery by a lawsuit for money damages.  The schedule of monetary penalties (which is typically distributed annually) should remind members that expenses incurred in enforcement of the governing documents are a penalty, which may be imposed.

So long as the governing documents are written broadly enough, and due process rights have been respected, the Association’s enforcement rights can be used with great effect.  The other important components – fairness and consistent enforcement – are key as well and should not be ignored in pursuing remedies.

 

Personal Reimbursement Assessments

 

A Familiar Issue

The association incurs an expense or imposes a fine against an owner for common area damage or the violation of the governing documents.  Is the owner responsible?  How can the association collect the money spent as a result of “bad conduct” of the owner (or their tenant)?  Consider this:

Oren Owner is drunk.  Instead of waiting for the security gate at the entry of his development to finishing opening, he drives through smashing the gate.  The repair cost turns out to be $1,500.  Oren continues driving and parks his car on the driveway of his lot.  The car, having been smashed on the undercarriage, leaks oil causing a stain on the driveway.  Power blasting the stain away will cost $1,000.

Oren is blissfully unaware of all of this.  Instead, he continues partying with friends and some backyard dancing to loud rock ‘n’ roll until 4:00 a.m.  The board notices a hearing and imposes a $100 fine for the noisy behavior; a reimbursement assessment of $1,500 for the cost to fix the gate; and a $1,000 reimbursement assessment for the cost the association will (and later does) incur to power blast the driveway.

Oren is given notice of the penalties but ignores the manager’s request for payment.  Counsel is engaged.  She reviews the CC&Rs – including the enforcement, reimbursement assessment and lien provisions – and sends a formal demand letter addressing these issues.  The demand letter requests payment of $3,500 including $900 in legal fees (for the analysis and letter) and management fees (for preparing a previous demand letter and phone calls with the lawyer).  Oren responds saying, among other things, “No, I won’t pay.”

Breaking Down the Amounts Owed:

$1,500 Reimbursement assessment for amount paid to gate contractor to fix damaged gate on common area based on CC&R provision requiring owners to pay for damage they cause to common area
$1,000 Reimbursement assessment for amount paid to paving contractor to power blast the driveway necessitated by Oren’s breach of the CC&R provision banning driveways with oil stains
$100 Fine in an amount based on the “schedule of monetary penalties” arising out of Oren’s noisy behavior which unreasonably disturbs his neighbors thus constituting a “nuisance”
$900 Reimbursement assessment for legal and management fees the association incurred in curing the damage and dealing with the CC&R breaches.

These expenses, depending on the definitions used in an association’s CC&Rs, are variously called “reimbursement assessments,” “single individual assessments,” “personal assessments,” or other similar phrases.  Here, we are calling them “personal assessments” for convenience.

Rules: What the Civil Code says (or doesn’t say) (Civil Code section 1367.1(d))

As we all know, the law – and this will be true under “New Davis Stirling” effective January 1, 2013 as well – permits an association to impose and collect (by a lawsuit or nonjudicial foreclosure) “regular” and “special” assessments levied against all members.  It is also lawful to impose and collect personal assessments against a specific member but some of the rules are different.  In any case, no personal assessment (except a fine) may be levied in excess of the actual costs incurred.

Assuming the Governing Documents are written as broadly as the law permits – and the “original” set almost never is – the association can impose a personal assessment for the $1,500 spent to repair the common area gate.  That is just the first step in the analysis.  Next, we need to determine how that personal assessment can be collected.  Again, assuming the CC&Rs have all the enforcement tools possible, this kind of personal assessment can be collected like an unpaid regular or special assessment – by lawsuit or nonjudicial foreclosure.

The Civil Code is completely silent on whether the association can use these same remedies for collection of the $1,000 spent to eliminate the oil stains on the driveway or for the $900 paid to management and the attorney.

Finally, for the fine, there is a funky rule.  It says a monetary penalty (i.e. a fine) may not become a lien enforceable by nonjudicial foreclosure.  This is unclear because it does not appear to prohibit recording a lien and then suing in court to foreclose (instead of nonjudicial foreclosure).  It is doubtful that the amount of a fine will typically warrant a full-blown lawsuit for “judicial” foreclosure and it is very unlikely that a Judge will allow someone’s home to be taken away as a result of a fine for “bad behavior.”

Tools

The bottom line is that the association can implement tools that will give it the ability to successfully bring a claim in court – small claims or Superior Court – or to use the same nonjudicial foreclosure procedures for all the expenses above except recovery of the fine.  For that, the “safest” course will be to sue the owner in small claims court.

Violations: The language in the Governing Documents supporting the violations must be clear.  In the example above, the CC&Rs must say that damage to common area caused by owners will be repaired at owner expense; that owners have a duty to assure that driveways are free of stains; and that excessive noise that unreasonably disturbs neighbors is banned as a nuisance.

Remedies: Likewise, the Governing Documents must clearly specify the remedies available for violations.  Again, in the above example, the remedies should include the right to incur expenses to make common area repairs; to use an easement to access an owner’s “separate interest” lot and to make repairs to the extent reasonably necessary to cure a violation; to engage counsel and management to enforce the Governing Documents; and to record a lien and use judicial or nonjudicial foreclosure or to sue to recover sums due.  “Liening” is not banned for the recovery of any sum due although the legality of use of a lien that simply “sits” on title to collect a fine has not been tested.  We do not recommend it.  Finally, if the association wishes to pursue an owner for the conduct of their tenants or guests, the authority for that should be specific, broad and clearly spelled out in the Governing Documents.

Due Process: The Governing Documents must give the owner an opportunity to address the “charges” at a hearing.  That means pictures and written evidence of the violation must be provided.  Copies of invoices of expenses already incurred (such as the gate repair) or of bids to be incurred (power blasting of the driveway) should also be given.  In some cases, it may mean that evidence of member complaints must also be given the owner against whom action is sought.  In cases where violations are objective – oil stains on a driveway or construction without committee approval – neighbor complaints probably do not have to be revealed.  In cases where the violations are subjective – such as moving violations or noise – the owner may have a right to know who is complaining and when.  In situations where the association plans to access an owner’s property, the possibility of doing so should be included in the notice of hearing.  The key in all due process notices is to give the owner, where appropriate, fair warning of what things will happen, and when, if violations are not dealt with.

Do not Forget the Rules Are Governing Documents: The authority to pursue the enforcement and collection described above must be found in the Bylaws and CC&Rs.  They should also be contained in operating and other rules.  For example, the assessment collection policy (that must be annually distributed) should provide for collection of personal assessments by the lien and foreclosure power in addition to recovery by a lawsuit for money damages.  The schedule of monetary penalties (which is typically distributed annually) should remind members that expenses incurred in enforcement of the governing documents are a penalty, which may be imposed.

So long as the governing documents are written broadly enough, and due process rights have been respected, the Association’s enforcement rights can be used with great effect.  The other important components – fairness and consistent enforcement – are key as well and should not be ignored in pursuing remedies.

 

Property and Liability Coverage

Completing the condominium insurance picture necessitates “jigsaw puzzle” tenacity. Quite a few pieces must be snapped together to assure the proper insurance picture is presented; any missing information can leave a gaping hole in either the association’s or unit owner’s coverage picture. Regardless of the client’s status as the association or individual unit owner, the puzzle cannot be completed until the agent can connect the answers to three questions:

  • Who is responsible for what property?
  • What is the value of the insured property?
  • Who can be held liable for injury or damage?

Who Insures Which Property?

Associational responsibility is divided into three levels: “Original specifications,” “all-in” and “bare walls.”  Remember, each definition presented in this chapter is from the association’s perspective – delineating which part of the real property it is responsible to insure. Property not insured by the association must be protected by the unit owner’s insurance policy.

To fully understand the three levels of associational responsibility first requires the four categories of condominium real property be specifically described. The four categories are 1) “common elements;” 2) “limited common elements;” 3) “unit property” and 4) “unit improvements and betterments.”

Condo Real Property Definitions

“Common elements” are owned by and benefit all members of the association. Land, parking lots and the building’s structural foundations and load-bearing walls are examples of common elements. Also included in this definition are clubhouses, pool houses, pools, fences, gates, playground equipment, tennis courts and other property owned by and allocated to all unit owners. Not all property categorized as a common element is insurable in standard property policies (i. e., land), but most can be scheduled.

“Limited common elements” are beneficial to more than one but less than all unit owners. Common hallways or corridors providing access to several units, walls and columns containing electrical wiring or sprinkler piping serving or protecting multiple units or a plenum enclosure providing heating and cooling to multiple units are examples. Doorsteps, stoops, decks, porches, balconies, patios, exterior doors, and windows or other fixtures designed to serve a single unit but located outside the unit’s boundaries are often categorized as limited common elements because the appearance and safety of these fixtures directly affects multiple unit owners although connected to just one unit.

“Unit property” is defined by the association’s declarations or statute and is limited to and benefits none but the unit owner. The inside of the exterior walls, interior partition walls, countertops, cabinetry, plumbing fixtures, appliances and any other

“Unit property” is defined by the association’s declarations or statute and is limited to and benefits none but the unit owner. The inside of the exterior walls, interior partition walls, countertops, cabinetry, plumbing fixtures, appliances, and any other real property confined to the unit are examples. “Unit” property’s definition can vary widely with no universal designation.

“Unit improvements and betterments” like “unit property” benefit none but the unit owner. The three previous definitions of associational responsibility classifications require improvements and betterments be classed separately – excluding improvements and betterments from the definition of covered property under the association’s policy. A unit improvements and betterments is created by the unit owner’s engagement in any activity or improvement that increases the value of the real property within an individual unit – such as updating the flooring from carpet to hardwood or other such improvements.

Levels of Associational Responsibility Explained

Original specification requirements, known as “single entity coverage,” make the association responsible for the common elements, limited common elements, and unit property. Unit improvements and betterments are not the responsibility of the association. Connecting the pieces:

  • The association insures the common elements, limited common elements, and unit property;
  • Unit owners insure unit improvements and betterments and their personal property within the

A majority of states default to some form of original specification wording as recommended by the Uniform Common Interest Act governing the insurance requirements of condominium associations.

“All in” (“all inclusive”) statutes differ from original specification wording in one major aspect: the association’s additional responsibility to insure unit improvements and betterments. In addition to insuring common elements, limited common elements, and unit property, associations are also charged with insuring unit improvements and betterments in “all in” jurisdictions. Snapping the parts together:

  • Associations subject to “all in” wording insure common elements, limited common elements, unit property and unit improvements and betterments;
  • Unit owners insure only personal property within the

Approximately half of the states not applying “original specification” requirements utilize some form of “all inclusive” wording. Only a few of those states apply statutory terminology that could be exclusively interpreted as “all in.”

“Bare walls” wording limits associational insurance responsibility to the common elements and limited common elements.  To complete the puzzle:

  • The association insures the common elements and the limited common elements; unfinished walls (meaning the paint is insured by the unit owner); or the sub-floor and underside of the ceiling; or any other variation.
  • Unit owners are tasked with insuring unit property, any unit improvements and betterments and the owner’s personal property within the

Dividing responsibility for insuring real property may not be the most advantageous for the association or the unit owner; however, there are several states and individual associations that apply some form of bare walls wording.

NFIP – A Special Case

Two standard flood insurance policies (SFIP’s) connect in condominium forms of ownership: The Residential Condominium Building Association Policy (RCBAP) provides coverage for the association, and the Dwelling Form is purchased by the individual unit owner to cover personal property. These forms apply as per NFIP standards regardless of any statutory or associational declaration regarding insurance responsibility.

The RCBAP policy form specifically states that coverage is provided for all real property to include real property that is part of the unit. FEMA guidelines further clarify in rule IV. COVERAGE: A. Property Covered: The entire building is covered under one policy, including both the common as well as individually owned building elements within the units, improvements within the units, and contents owned in common. Contents owned by individual unit owners should be insured under an individual unit owner’s Dwelling Form. In essence, the RCBAP is “all in” coverage.

Flood insurance policies do not have to necessarily comply with statute or associational guidelines. When insuring a condominium association or unit owner, agents must be aware of the differences mandated by the NFIP.

Default Setting

Bylaws and declarations are the governing documents of all condominium or unit owner regimes. These documents supersede statute as per the subject statutes themselves. Division of ownership and insurable interest is dictated by these documents. Statutory wording is only the “default setting” if the bylaws or declarations are silent or are ambiguous regarding the insurance requirements.

Defined Values

Three distinctly different property “values” can be assigned to associational property: actual cash value, replacement cost and market value. Two are common to insurance, and one generally has no relevance in insurance, until the government or an unknowing attorney gets involved.

Actual cash value (ACV) is the cost new (replacement cost) on the date of the loss minus physical depreciation. Physical depreciation results from use and ultimate wear and tear meaning that the insured does not get paid for the “used up” value of the property.

Attention must be paid to the beginning point in the calculation of ACV, the cost new on the date of the loss. ACV is not based on the value when it was built or at any point between the construction date and the date of the loss. Only the cost new on the date of the loss matters; this is key when choosing limits.

Replacement cost is the cost to replace with new material of like kind and quality on the date of the loss. There is no allowance or penalty for age, depreciation or condition.  The insured must simply insure the property at what it will cost to buy or build it today.

Market value is negotiated between and agreed to by a willing buyer and a willing seller. It can fluctuate up and down based on the economy, condition, use or need and has little relation to the true cost to rebuild a particular structure. Normally market value has little relationship to insurance. The rise and fall of the market value does not necessarily change the cost to rebuild a building following a loss.

If the market value is the rule applied in a particular state or association’s declarations, the agent must be prepared for and be able to explain this concept regardless of the fact that such value is not normally associated with property insurance values.

Values and Coverage Provided by the Unit-Owners Form (HO 00 06)

Unendorsed the Unit-Owners Form provides replacement cost coverage on the building (Coverage “A”) and actual cash value on personal property (Coverage “C”). Coverage “A” is limited to a specified amount ($1,000 or $5,000) unless specifically increased by the unit owner. The owner’s need to increase Coverage “A” is a function of the coverage required to be provided by the association based on the level of associational responsibility defined above.

Both Coverage “A” and Coverage “C” apply Broad Form Named Perils coverage unless endorsed to cover “Special” causes of loss. Expansion to “open perils” coverage can be accomplished by attaching HO 17 31 to Coverage “C” and the HO 17 32 to Coverage “A.”

Coverage “C” can be transformed from actual cash value to replacement cost with the attachment of the HO 04 90 – Personal Property Replacement Cost Loss Settlement endorsement.

Developing Property Insurance Values

Establishing associational and unit owner property values requires knowing who is responsible for insuring which property and which valuation method (AVC, RC, or market value) is being applied.

Cost estimators are effective tools for developing accurate values in most replacement cost and actual cash value settlement scenarios, as are discussions with knowledgeable builders in the area. If market value is the method of valuation, a market analysis by a licensed appraiser may be required to develop the necessary value (it is not recommended that market value ever be used as the insurance value). The accuracy of these calculations varies based on the level of associational responsibility.

Original Specifications: Developing relevant values may be easiest when single entity requirements apply as the valuation program, and original specification requirements overlap in their result and mandate. Property valuation programs calculate the cost of rebuilding the structure utilizing modern materials of like kind and quality; original specification insurance requirements limit associational responsibility to the cost of replacing original construction materials with modern materials of like kind and quality.

All-In: All inclusive statutes and associational bylaws increase an association’s standard of care. Associations subject to this insurance settlement mandate are forced to closely monitor building and unit values (including value increases created solely by a unit owner) to avoid inadequate insurance and a possible coinsurance penalty that could arise because they (the association) are insuring all real property regardless of location or who installed it. Cost estimators work well in these associations provided the association, and the agent are aware of any individual unit owner upgrades.

Bare Walls: Conflict arises if the unit owner does not have coverage, or enough coverage, to rebuild what is defined as the “unit.” The association is only responsible for the common elements and limited common elements. To arrive at the insurance value, a cost estimator has to be completed, and the value of each “unit” must somehow be subtracted out of the calculation.

Two questions arise regarding the value of property in a bare walls association:

  • Who deciphers the definition of a “unit” allowing the unit owner, the association and the respective insurance carriers to know who is responsible for insuring what property? and
  • Who calculates the ultimate amount of coverage needed? There is no available method to produce a verifiable “unit” property value.

Attorneys, appraisers, agents and other professionals may be required to answer these questions and design the correct programs (one for the association and a separated program for each unit owner). A lot of professional expertise is required up front to avoid future disputes, and the valuation answer is still just a little better than a guess.

Legal liability is liability imposed by the courts or by statute on any person or entity responsible for the financial injury or damage suffered by another person, group, or entity. Legal obligations, or legal liability, can arise from intentional acts, unintentional acts, or contracts.

When the potentially liable parties are mutual beneficiaries and users/occupiers of the same location, the need for each party to be properly insured is of paramount importance. Residential condominium associations and individual unit owners are prime examples of this need to close all gaps in liability protection.

Essentially there are three legal liability possibilities following bodily injury or property damage at a residential condominium property. Legal liability is placed on 1) the condominium association; 2) the unit owner; or 3) jointly on the association and the unit owner.

When legal liability is assigned to only one party, whether it be the association or the unit owner, defining coverage is easy. The cost of the bodily injury or property damage is covered, subject to policy limits, by the at-fault party’s insurance policy:

  • The association’s commercial general liability (CGL) coverage pays if the association is found to be solely negligent; or
  • The unit owner’s HO-6 pays if legal liability is solely placed on the

The unit owner’s liability coverage (most commonly provided by the HO-6) is generally first dollar protection. Likewise, the association’s CGL may be written providing first dollar protection; however, many associations utilize a deductible or self-insured retention (SIR). If the association’s deductible is high, or there are several liability claims against the association, the unit owner(s) may suffer an out-of-pocket expense because of the association’s decision to use a deductible or SIR.

Unit Owner Assessments

When the association is subject to a deductible or SIR, it generally collects the resulting out-of-pocket expense by assessing all the unit owners a share of the deductible/SIR (however such division is calculated). The unendorsed HO-6 provides the insured with $1,000 for such assessment with two main requirements: 1) the loss must be one that would have been covered under the HO-6, and 2) $1,000 is all the policy will pay for assessment in aggregate for any one incident leading to an assessment.

Obviously, the association’s choice of a deductible/SIR can be detrimental to the unit owner. However, the unit owner does have the opportunity to increase the coverage for assessment by purchase of the HO 04 35 (Supplemental Loss Assessment Coverage). However, the attachment of this endorsement may not solve the unit owner’s deductible/SIR assessment problem – depending on the endorsement’s edition date approved and used in the unit owner’s state.

Attaching Insurance Services Office’s (ISO’s) HO 04 35 allows the insured unit owner to incrementally increase the loss assessment limit up to $50,000 (relatively inexpensively). However, the limit of coverage for an assessment related to the association’s use of a deductible/SIR has been historically limited to $1,000 – even when the HO 04 35 endorsement was attached. This limitation was removed in ISO’s 05/11 edition of the endorsement. The HO 04 35 05 11 extends the full amount of loss assessment coverage purchased to all assessments, including those resulting from the association’s use of a deductible/SIR.

However, the new endorsement may not yet be approved in the insured unit owner’s state (and may not be for some time), or the insurance carrier providing coverage may not be using the new wording (depending on the rules of the state). Agents cannot make assumptions; a review of the insured’s policy is required to confirm which loss assessment wording is in use or available. The difference between the old and new endorsement language can mean hundreds or even thousands of dollars to the insured unit owner’s bank account.

Joint Liability

If both the association and unit owner are held jointly liable for the injury or damage, court involvement will likely be required. The first problem the court will address is the amount of liability assignable to each party. Once liability has been assigned, the second question to be considered is what happens when liability limits differ (which they most likely will)?

Both questions can and might be governed by the legal concept of joint-and-several liability, along with how each state applies this concept. Losses are shared equally or unequally among tortfeasors based on the facts of the case, each tortfeasor’s level of “fault,” and statute. The concept of joint-and-several liability is designed to assure that the victim is fully compensated for their injury or loss.

Joint means that anyone tortfeasor can be held responsible for the entire amount (each tortfeasor is responsible for all others). Several means that each is responsible only for its share of the fault (liability can be “severed” between or among parties). Each state applies the joint-and-several liability differently:

  • 9 states apply pure joint-and-several laws: Each defendant is responsible for the entire amount regardless of its amount of fault;
  • 27 states utilize modified joint-and-several laws: One specific tortfeasor is potentially responsible for the entire only if they are judged at-fault beyond a specific level or amount. Additionally, some of these states bar recovery if the injured party is found to be a certain percentage liable; and
  • 14 states employ pure several laws: Each party shares the financial consequences based on its amount of

Generally there is a wide gap between the association’s CGL limits and the unit owner’s HO-6 liability limits; maybe as much as $900,000 ($1 million in the CGL vs. $100,000 in the HO-6). Because of this gap, the association may be called upon to cover more than their share of damages in pure and modified joint-and-several liability states.

To avoid this potential gap, the association may decide to require each unit owner to carry relatively high limits of liability coverage (maybe even an umbrella).

Many state laws related to condominium ownership prevent an association from subrogating against the unit owner if the unit owner’s negligence leads to a liability loss. Again, this could be very costly for the association from an insurance perspective; and it is even more costly if the association does not have enough protection to cover the cost of the injury or damage.

Deciding Which Party is Legally Liable

Disclaimer: This section shall not and cannot be construed as legal advice. Any ruling of negligence and legal liability must be made in a court of competent jurisdiction. The following is simply a guideline that may be useful in determining which party and therefore policy may be called upon to cover the cost of injury or damage suffered by a third party.

Where did the Injury/Damage Occur?

Arriving at the more correct answer to the question, which party (the association or the unit owner) may be ultimately responsible for paying the cost of injury or damage suffered by a third party, first requires the answer to this question. Knowing where the injury occurred provides clues as to who is most likely going to be held financially responsible.

Like analysis of the property coverage, analysis of the liability coverage requires knowledge of and a deep understanding of three definitions: common elements, limited common elements, and unit property. The definition of each (presented earlier in this article) indicates which party (the association or the unit owner) is responsible for the care and upkeep of the property; and also, who is responsible for any injury or damage suffered on the property.

Injury or Damage on or Caused by a ‘Common Element’

Because a common element benefits all unit owners, the association is nearly always going to be ultimately responsible for covering the cost of any bodily injury or property damage that occurs on a common element. This is true even if a unit owner in some way contributed to the injury or damage.

When written correctly, and depending on the state, condominium liability policies generally include unit owners as insureds or name them as additional insureds using the CG 20 04 (Additional Insured – Condominium Unit Owners). This endorsement grants all unit owners additional insured status for liability arising out of any portion of the premises not reserved for the unit owner’s exclusive use or occupancy. This means that the unit owner is an insured for any injury or damage on or caused by a common element. Further, as an insured, the insurance carrier cannot seek recovery from the unit owner if he/she is somehow responsible for causing the injury or damage on the common element.

Injury or Damage on or Caused by a ‘Limited

Common Element’

Assigning financial responsibility for an injury or accident occurring on a limited common element is a little more complicated. Largely, the rules that apply to common element apply to limited common elements (meaning the association will most commonly be held financially responsible); however, there are gray areas.

Of particular interest and problem are those defined limited common elements that benefit only one unit owner, such as stairs, stoops, balconies, decks, etc. Although these elements benefit one unit owner, often the association is responsible for the care and maintenance of these features.  Might there be joint negligence or liability assignable to both parties?

Picture a unit owner and his guests sitting on the deck enjoying the evening. They decide to move the party inside nearer the food. As one of the guests crosses the threshold from the deck into the unit, he trips on “something” and breaks his arm in the fall. Which party will be held responsible?

The injury occurred leaving a limited common element and moving into unit property. Based on statute, the associations bylaws, and policy wording, who knows? Some situations may require court involvement.

As stated previously, most situations involving limited common elements will follow the rules for common elements. However, some may end up in a court of competent jurisdiction to decide if one or both parties will be held responsible for the injury or damage.

Injury or Damage on or Caused by Unit Property

Like assigning responsibility for injuries that occur on or caused by common elements, it is rather simple to assign financial responsibility for injury occurring within a unit or caused by unit property. The unit owner will be held responsible, and his HO-6 will be called upon to pay for any injury or damage within the unit or caused by defined unit property.

 

 

Loss Assessment Coverage

A personal insurance coverage that many people do not understand is Loss Assessment Coverage.

Every association has a set of bylaws, and in those bylaws the association’s board is given the authority, under certain circumstances, to make assessments against the individual unit owners. There are two reasons an association might need to make an assessment:

  1. If the association needs additional funds to complete a community improvement
  2. If the association finds itself with inadequate association insurance to cover a particular claim
  3. It is this second type of assessment which can be insured on your individual unit owner’s insurance policy.

First of all, we should reassure everyone that it is very unlikely that the association would have inadequate insurance. The board takes its fiduciary responsibility very seriously and obtains expert advice about the types of coverage to purchase.

Having said that, the purpose of insurance is to protect you against this unlikely event. In simple terms, what loss assessment coverage on your personal policy does is this: If you receive an assessment from the association to help pay for loss or claim against the association, and if that claim would have been covered by your insurance policy if it had been made against you directly then the loss assessment coverage will pay the assessment, up to the limit you have purchased

Example: There is a fire in an association building which for some reason either had no insurance or inadequate insurance. The association assesses each unit owner $2,000 as their share of the total cost. Because fire is a covered peril on your personal insurance policy (if the fire had been in your home instead of the association building, it would have been covered), your policy will pay the assessment. Note that the limit of coverage that is needed is only for the individual unit owner’s assessment amount – not the total amount the association needs to collect. So if there is a $1,000,000 assessment in a 500 unit community, each unit owner would be assessed $2,000, and that is what the unit owner’s policy would cover. Be aware that the loss assessment coverage available from most insurance companies will pay up to $1,000 for an assessment that is due to the application of the association’ insurance deductible. However, again remember that $1,000 limitation is for each unit owner’s portion of the deductible, not for the whole deductible.

Example: There is a devastating fire in the community which kills or injures many people, and it is determined that the cause of the fire was the association’s responsibility. There are so many claims that the association’s liability insurance limit is used up and there is an assessment against each unit owned to cover the difference. Because those claims would have been covered if the injuries had occurred in your home, the policy will pay the assessment.

Example that is not covered: The association decides to build new tennis courts and assess the cost to all unit owners. This would not be covered because your insurance policy would not ever pay for you to build yourself a new tennis court.

Example that is not covered: The association suffers a flood loss that is not adequately insured. This assessment would not be covered even if the unit owner has a flood insurance policy because flood insurance policies never include loss assessment coverage.

We are often asked whether a unit owner’s personal umbrella policy would cover an assessment that is due to liability claims against the association (such as the injuries and deaths in the example above). That answer is no because the umbrella policy covers claims made directly against the unit owner for their own personal liability. In this case, the unit owner is not liable to the claimant, as co-owners they are financially liable to the association.

Also, assessments are only covered when they are made against ALL unit owners. If there is an assessment made only against your unit, because of the specifics of the need for the assessment that would not be covered no matter what the reason for the assessment.

 

Completed Homeowners Operations

Completed operations in a general liability insurance policy covers damage or bodily injury resulting from work not properly done by a company. For many businesses this insurance is a good idea because it protects the company from large losses that otherwise might cause bankruptcy or severe stress on a business. This insurance is a way for a business to reduce risk by paying an insurance company a premium.

  1. Coverage Details
    • Completed operations coverage covers a business for work that was not properly done. There is usually a limit to the insurance coverage, a maximum amount the insurance company will pay. This amount typically includes a maximum amount per instance and a maximum amount for all claims for the year. This is known as an aggregate amount. For example, a company could have coverage for $1,000,000 per incident and an aggregate coverage of $4,000,000. If a claim resulted in damage of $900,000, then the entire claim would be covered, and the aggregate coverage would have $3,100,000 remaining after the claim.

Cost of the Insurance

  • The cost of completed operations insurance varies with the type and size of the business. Insurance companies factor in the expected frequency of claims as well as how potentially large the claims may be. Insurance companies will look at a business’ claims history and industry trends in damages to set a price for the coverage. The coverage may be based on the company’s revenues for the year. In addition, the insurance company may do an audit at the end of the year and adjust the price based on changes in sales volume.

Example

  • A company makes control rooms and sells them directly to consumers. The rooms are designed to store expensive wines. The company buys completed operations coverage. After shipping the control room to a customer, the room is assembled, and wine is stored in the room. However, because the room was built with several errors, the wine is ruined. Because the damage was caused by the company’s faulty product and occurred off-premises, the claim would be covered.

Considerations

  • A business is usually covered for damage that occurs during the policy period. This is an important point because there could be a lag between the end of a policy period and when a claims event takes place. For example, a builder could complete a house during a policy period of January 1 through December 31. Then after the policy period ends, the builder might choose not to renew the coverage and sells the business. Meanwhile, in March of the following year, the house built during the policy period develops a major problem. This damage would not be covered even though the house was built during the policy period.

What are Products and Completed Operations Liability Insurance?

Products liability may be included in the basic general liability coverage form, or be written on its own. It protects manufacturers, wholesalers and distributors against exposure to lawsuits by people who may have been injured or suffered other losses because of their product. It provides coverage for the policyholder against claims stemming from products sold, manufactured or distributed.

Completed operations responds to bodily injury or property damage claims that would occur after the completion of a project, resulting from the negligence of the work performed. For example, if a contractor were to build a deck, and fail to secure the railing property, and someone were to lean on the railing and suffer bodily injury, the completed operations portion of the general liability policy would respond. It is important to note however, that this does not cover the faulty work itself, just the resulting bodily injury and or property damage.

Coverage for “ongoing operations” not synonymous with contractor’s completed work

An additional-insured endorsement added to a subcontractor’s general liability policy conferred no greater coverage to its contractor for property damage once the subcontractor had completed its work, an appeals court in Mississippi decided (Noble v. Wellington Associates Inc.November 19, 2013, Maxwell, ).

Background. Noble Real Estate hired subcontractor Harris Construction Company to perform dirt work and site preparation work for a new home Noble was building. As part of Noble and Harris’s agreement, Harris obtained an additional-insured endorsement to its commercial general liability insurance policy with Ohio Casualty Insurance and named Noble as an additional insured. But the insurance provided under the endorsement was limited to liability caused in whole or in part by Harris’s ongoing operations performed for Noble.

Harris’s work operations performed for Noble ended in March 2006. More than a year and a half after Harris had completed its work, the Salyers entered a contract to purchase the home. The Salyers noticed cracks in the home, so they had an engineer perform a structural analysis. Because the engineer concluded the home had no foundation problems, the Salyers went through with the purchase. After they moved in, they noticed the problems were worse. Another engineer determined there were foundation problems, partially linked to the fill dirt beneath the slab. After having to pay another contractor to shore up the foundation, the Salyers sued Noble.

After a federal suit started by Noble’s own CGL insurer, including him, his insurance agent and the agency, ended with judgment in favor of all three of those parties, Noble amended his original state-court complaint to add Harris’s insurer, Ohio Casualty Insurance Company. In addition to claiming breach of contract and bad faith, Noble argued that Ohio Casualty was bound to provide coverage, even if there was no coverage under the additional-insured endorsement, because Noble reasonably believed there was coverage based on Ohio Casualty’s previous actions connected to a lawsuit against Harris and Noble concerning another Noble-built house. The state court judge found that there was no coverage under the additional-insured endorsement for the Salyers’ property damage claim against Noble because the endorsement only covered liability for property damage caused by Harris’s “ongoing operations,” thus concluding that when Harris ended its work in March 2006, Noble’s coverage under the endorsement also ended. Since the Salyers’ damage did not arise until after Noble built and sold the house, it was not covered. Noble appealed.

Additional-Insured Endorsement. The endorsement limited the insurance provided to the additional insured to liability caused in whole or in part by Harris’s ongoing operations performed for that insured. The endorsement also limited coverage, excluding “‘property damage’ occurring after (1) All work on the project was performed by or on behalf of the additional insured[s] at the site where the covered operations have been completed; or (2) That portion of ‘Harris’s work’ out of which the damage arises has been put to its intended use by any person or organization.” The certificate of insurance sent to Noble informed him that, as “certificate holder,” he was a “named Additional Insured in regard to General Liability required by written contract.” The certificate explicitly stated it was being issued for Noble’s information only, did not confer on Noble any rights, and did not alter coverage.

Decision. The court determined that the endorsement protected Noble against lawsuits arising out of accidents occurring during the time Harris performed dirt work—it was not a bond guaranteeing Harris’s dirt work. Because the endorsement was unambiguous in covering only liability that arose from “ongoing operations,” and because the homeowners’ damage did not arise until well after Harris had completed its operations, the homeowners’ claims against Noble did not trigger coverage under the additional-insured endorsement.

Therefore, the court concluded that the lower court had properly granted Ohio Casualty judgment on Noble’s coverage-based claims. The court also found that judgment was correctly granted in favor of all other parties for the remainder of Noble’s action.

The Scope of Ongoing Operations Additional Insured Endorsements: Broader than Expected

Additional insured endorsements come in all shapes and sizes. Some cover the sole negligence of the additional insured. Others cover the additional insured only for the named insured’s negligent acts. Still others cover particular projects or a particular activity. In every case, the language of the endorsement and the jurisdiction’s interpretation of that language governs the scope of the coverage provided.

One type of additional insured endorsement expressly excludes coverage for completed operations: another includes language purporting to limit the scope of coverage provided to the “ongoing operations” of the named insured. Courts addressing these endorsements often direct their analysis at interpreting the phrase “arising out of” and whether these endorsements provide coverage for the additional insured’s own negligence. Andrew L. Youngquist, Inc. v. Cincinnati Ins. Co., N.W.2d 178, 184-5 (Minn. Ct. App. 2001)(holding that the phrase “arising out of your ongoing operations” covers the additional insured’s own negligence); also Mikula v. Miller Brewing Co., N.W.2d 613 (Wis. App. 2005). As several courts make evident, these “ongoing operations” additional insured endorsements more often than not will cover claims arising out of the insured’s completed work despite the endorsement’s apparently clear language limiting coverage to ongoing operations.

“Ongoing Operations” Language

Here are two examples of “ongoing operations” additional insured endorsements:

WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured and then only as respects any claim, loss or liability arising out of the operations of the Named Insured, and only if such claim, loss or liability is determined to be solely the negligence or responsibility of the Named Insured.

* * *

WHO IS AN INSURED (Section II) is amended to include as an insured, any person, organization, trustee, estate or governmental entity to whom or to which you are obligated by:

  1. virtue of a written contract; or
  2. The issuance or existence of a permit;

to provide insurance such as is afforded by this policy, but only with respect to liability arising out of:

  1. your ongoing operations performed for that insured; or
  2. facilities used by you;

and then only for the limits of liability specified in such contract, but in no event for limits of liability in excess of the applicable limits of this policy.

However, such person, organization, trustee, estate or governmental entity shall be an insured only with respect to occurrences taking place after such written contract has been executed or such permit has been issued.

All other Terms and Conditions of this Insurance remain unchanged.

Insurers have frequently asserted that both of these endorsements provide coverage only for ongoing operations. Insurers rely upon these endorsements to deny coverage for completed work. However, most courts interpreting the phrase “ongoing operations” have rejected this limitation on coverage. Interestingly, courts that don’t interpret “ongoing operations” have limited coverage on this basis. Pro Con Construction, Inc. v. Arcadia Ins. Co., A.2d 108 (N.H. 2002)(finding that the named insured’s ongoing operations to be painting and that the injuries alleged were not connected to painting operations so there was no coverage for the additional insured). also Fleniken v. Entergy Corp., So. 2d 64 (La. Ct. App. 2001)(noting that the injury occurred while the named insured was performing its operations).

“Ongoing Operations” language eliminates coverage for completed operations

In Pardee Construction Company v. Insurance Company of the West, 92 Cal. Rptr. 2d 443 (Cal. Ct. App. 2000), the court explained that the revision of the endorsement to specifically include “ongoing operations” “effectively precludes application of the endorsement’s coverage to completed operations losses.” Pardee at 456.

The plaintiff homeowner’s association sued Pardee for construction defects in a multi-phase residential project. Pardee tendered its defense, as an additional insured, to the four insurers that issued policies to the four subcontractors whose work was allegedly defective. Each insurer either denied or failed to acknowledge any responsibility to Pardee. The trial court granted summary judgment in favor of the insurers, reasoning that “the policies did not incept until after construction of the project was complete and thus were not issued to provide Pardee coverage as to it.” Pardee at 448.

In finding that three of the four insurers’ policies required a defense of Pardee, the appellate court considered the language of the additional insured provisions and found that “the unambiguous language of the policies and endorsements provides Pardee with coverage for the completed operations of the named insured subcontractors.” Id. at 454. The court explained that there was no language in the endorsements “expressly limiting the time frame of the additional insured coverage to the time of the ongoing operations of the named insured.” Id. (citation omitted).

The court then explained how the insurers could have used language to exclude coverage for the subcontractor’s completed operations. The court first cited the evolution of the ISO additional insured form, suggesting that the insurers could have used a form employed since the mid 1980s that explicitly excluded coverage for completed operations. Next the court cited the 1993 ISO form, with its revisions to “expressly restrict coverage for an additional insured to the ‘ongoing operations’ of the named insured.” Pardee at 456. In explaining the change, commentators noted that “it was never the intention of insurers to provide additional insureds with completed operations coverage” and the prior language inadvertently accomplished that result. Id. at 456, n.16.

Citing industry commentators, the court noted that “these endorsements provide coverage only with respect to ‘your ongoing operations,’ which effectively eliminates coverage for completed operations” and the failure to include this, or any, limiting language manifested the insurers intent not to exclude coverage to Pardee for completed operations. Id.

“Ongoing Operations” is not limited to work in progress

Pardee clearly explained the effect of the revised form and how the use of “ongoing operations” was intended to restrict coverage to “work in progress only” so that “when the named insured’s operations for the additional insured are no longer ‘ongoing,’ the additional insured no longer has coverage.” Pardee at 456, n.16. Despite this, other courts considering this language in practice have found coverage for completed work.

In Valley Insurance Company v. Wellington Cheswick, LLC, 2006 WL 3030282 (W.D. Wash. 2006), a condominium association sued the owner, developer and general contractor alleging construction defects. The construction contract required that the subcontractors name the owner, developer and general contractor as an additional insured under the subcontractors’ general liability policies. Pursuant to the additional insured endorsements, the owner, developer and general contractor sought a defense and indemnification from the subcontractors’ general liability carriers.

Two of the subcontractor policies contained additional insured endorsements that limited coverage to claims arising out of the named insured subcontractor’s, ongoing operations. These insurers declined coverage because the defects alleged by the association occurred after the work had been completed. The insurers argued that the purpose of the “ongoing operations” language “was to limit additional insured coverage to losses that occurred while the contractor was onsite or while work was actually in progress.” Wellington at 5.

In considering that argument, the court explained that the underlying complaint alleged that the owner, developer and general contractor were liable for damages resulting from improper construction by the subcontractors. The court noted that the phrase “ongoing operations” was not defined in the policies at issue. The court then looked to the dictionary for the common and ordinary meaning. Citing the Merriam-Webster online dictionary, the court found that “ongoing” was defined as “being actually in process” and “operations” was defined to mean the “performance of a practical work or of something involving the practical application of principles or processes.” Id. (citation omitted).

After reviewing these definitions, the court determined that the “the common and ordinary meaning of this phrase is simply those things that the company does.” Wellington at 5 (citing Marathon Ashland Pipe Co. v. Maryland Cas. Co., 243 F.3d 1232, 1238 (10th Cir. 2001)). The defendants’ liability for the property damage “arises from the ongoing operations performed by the subcontractors. While the property damage may not have occurred during those ongoing operations, the alleged liability did.” Id. Thus, the court held that the owner, developer and general contractor were additional insureds under the policies at issue.

Similarly, in Wausau Underwriters Insurance Company v. Cincinnati Insurance Company, 2006 WL 2990205 (2d Cir. 2006), Cincinnati argued that “ongoing operations” “‘connoted actions currently in progress’ such as ‘active work’.” Wausau at 1 (emphasis in original). Cincinnati argued that because the subcontractor was no longer providing the contracted-for plowing and salting work, that the claim (a slip and fall in the additional insured’s parking lot) did not arise out of the named insured’s ongoing operations. The court rejected this argument, stating that “New York courts have not adopted such a narrow definition of ‘ongoing operations’.” Id.

Analysis

Wellington and Wausau’s determination that an additional insured endorsement provides coverage for “ongoing operations” even if the work out of which the liability arises had been completed ignores the definition of “ongoing” and improperly relied upon the Marathon court’s construction of the definition.

Marathon did not address whether the phrase “ongoing operations” addressed ongoing or completed operations. The issue in Marathon was simply whether the phrase “ongoing operations” encompassed the type of operations being performed by the named insured at the time of the events giving rise to Marathon’s liability.

Marathon was sued by a temporary employee hired by SSI, Marathon’s building erection subcontractor. In its 30-year relationship with SSI for building erection, Marathon had regularly asked SSI to hire temporary employees to be supervised by Marathon. SSI had a policy of general liability insurance with Maryland Casualty and, as required by its service contract, included Marathon as an additional insured under its general liability policy. Marathon sought coverage under SSI’s Maryland Casualty policy for the temporary employee’s claim.

Maryland Casualty argued that the phrase “your ongoing operations,” contained in the additional insured endorsement, was limited to building erection work as referenced in the endorsement’s schedule. Maryland argued that because the temporary employee was not injured during SSI’s performance of building erection, but rather while SSI was providing the services of the employee unrelated to building erection, that Marathon was not an additional insured. Because “ongoing operations” was not defined in the policy, the court looked to the dictionary to determine the plain and ordinary meaning of the term.

The court explained that “[t]he common and ordinary meaning of this phrase is that a company’s ‘ongoing operation’ is simply those things that the company does, as opposed to the meaning suggested by Maryland Casualty which would limit ‘ongoing operations’ to mean only the core or most prominent operations that a company might undertake.” Marathon at 1238. In finding coverage, the court noted that the “occasional nature of [SSI’s hiring] activity does not negate the fact that it was an ‘ongoing operation’ for SSI.” Id. The court concluded that “at the very least, this limitation is ambiguous as to whether the parties intended to cover the risks associated with SSI’s activities in this regard and therefore must be read in favor of the insured.” Id. at 1239.

Similarly, in Wausau, the Second Circuit relied upon a prior New York Appellate Division decision which focused on the scope, not the timing, of the contractor’s work. The earlier case held that a pipe rupture resulting in a scalding injury arose out of the contractor’s “ongoing operations” even though the contractor was not actively testing or installing a valve at the time of the incident because “‘[u]nder any plain meaning of the word, the contractor’s work was ‘ongoing’ as long as the tests designed to assure proper performance remained undone’.” Wausau at 1 (citing Perez v. New York City Housing Authority, 754 N.Y.S.2d 635, 636 (N.Y. App. Div. 2003)).

Conclusion

Courts frequently broadly construe the scope of additional insured endorsements. Insurers relying on a distinction between completed operations and “ongoing operations” in their GL policies should exercise caution when applying their understanding of the meaning of those phrases to additional insured endorsements that contain those phrases. Despite the apparently clear limitation of the phrase “ongoing operations,” some courts have broadly construed additional insured endorsements containing that term to include both “ongoing operations” and completed operations.

What is the difference between an additional insured for ongoing operations and for completed operations?

Most contractors have a standard practice for obtaining an additional insured status under other parties’ liability policies. It is still common for contractors to require the additional insured coverage to extend to completed operations. This standard practice protects the contractor and owners from losses that occur during the course of construction as well as claims arising out of the completed project (damages found after the project is completed).

The Insurance Services Office, Inc. (ISO) and others in the industry advised that it was never the intention for the insurance industry to provide additional insureds with completed operations coverage. In 1993, ISO changed the coverage provided to additional insureds by revising many of their additional insured endorsements. They specifically revised the endorsements by removing the “your work” reference. This change would rule out the additional insured claims for completed operations. ISO amended their additional insured endorsement to apply only to the liability arising out of the contractor’s “ongoing operations” for the additional insured. This caused a huge gap for many and forced ISO to correct this. In 2001, ISO developed an additional insured form that provided coverage for completed operations.

What does this really mean? Often times damage resulting from a subcontractor’s work does not arise for years after the work has been completed. When that claim occurs, a suit is often filed against both the general contractor and the subcontractor. The general contractor will tender the defense back to their subcontractor. Assuming the loss is a covered loss and filed in a timely manner, the coverage afforded the general contract by the subcontractor is dependent upon the additional insured endorsement issued. If that subcontractor has the general contractor listed as an additional insured for their “ongoing operations” only, the general contractor will have no coverage under the subcontractor’s policy. If the subcontractor has the general contractor listed as an additional insured for their completed operations or “your work”, the general contractor may have coverage under the subcontractor’s policy.

Although the contractors still require the additional insured status to respond to completed operations claims, they are continuously faced with the challenge of understanding if the correct additional insured endorsement and wording is used.

 

Construction Defect Insurance

 Question: Can an HOA be taxed on recoveries for construction defect claims?

Answer

 “Proceeds from the settlement of construction defect litigation are generally not taxable to a community association…” as long as they (1) “are used for the correction of defects, the payment of attorney fees and other costs of litigation, or other extraordinary expenses, (2) are not commingled with assessments from normal operations, and (3) do not exceed the aggregate basis of the capital assets involved in the litigation.”

Discussion

Although litigation proceeds are typically recorded as income in the financial statements of the HOA, tax treatment of the proceeds is generally different. In the case of construction defect recovery, proceeds are likely not the property of the HOA, but instead, belong to the members with the HOA acting as their agent. The party that actually gets taxed is a function of the mechanics of the lawsuit, and if the HOA is acting as an agent for the members, for purposes of the legal action, the members may be considered the taxpayers.

In Private Letter Ruling 8004028 from October 30, 1979, an HOA filed a class action construction defect lawsuit on behalf of HOA members against the developer. Prior to settlement, the HOA found it necessary to correct the defects that were alleged in the complaint because of the length of time of the legal proceedings. The funds used to pay for the repairs were assessed against the condominium unit owners. Once the case was settled, proceeds were deposited into a segregated account that was maintained by the HOA board and ultimately dispersed to make final repairs to the building and to pay attorneys fees. Further, it was noted that “the settlement proceeds did not exceed the aggregate basis of the capital assets involved in litigation.” This Private Letter Ruling emphasized that the settlement proceeds were used for repair of the defects and attorneys fees, not commingled, and did not exceed the aggregate basis of capital assets.

Oppositely, lawsuit settlement proceeds that are, “(1) payments in lieu of assessments (past, present, or future), (2) punitive damages, or (3) cumulative interest would be includable in gross income (though, in the first instance, would generally not be taxable).” In Revenue Ruling 81-152, the IRS decided that when settlement proceeds are used entirely for construction defect repairs, “there will be no net effect on the individual owners.”

 

 

 

Construction Contracts for HOAs

The following items must be in construction contracts:

  1. Commencement date of the work.
  2. Completion date of the work.
  3. The scope of the work/plans and specifications. An explicit and detailed scope of work or carefully drawn set of plans and specifications tells the contractor what he is required to build, and what the association will receive for its money. A less specific description of the project, its elements, and its systems increases the chance that the association will be dissatisfied with the work and will want to change its scope.
  4. Progress payments. Contracts usually provide for progress payments during the course of the work. If the association does not monitor progress payments carefully, payments to the contractor may exceed the value of the work completed up to the date of the payment. It is possible for a contractor to receive payments that so exceed his expenses that he realizes the cost of completing the job exceeds the unpaid amount of the contract price. In such instances, a contractor may walk off the job because he will only lose money if he continues.
  5. Final payment. To make sure the contractor has plenty of incentive to finish the job, the construction contract should provide that the Association retain a portion of the payments due to its Contractor on each progress payment.

It is customary that an owner pays 90% of the Contractor’s invoice approved by the administrator. Upon final payment, it is critical that the association obtain an unconditional final lien release.

  1. Specific duties of the contractor. Many contracts do not specifically describe the scope of services to be provided by a contractor, structural engineer, design professional or consultant.
  2. Insurance. All contractors, structural engineers, design professionals and consultants must maintain certain minimum liability insurance coverage for claims for damages to persons or property that may arise out of the work under any contract whether directly or indirectly caused by the contractor, structural engineer, design professional or consultant or their employees or subcontractors. Also, such insurance coverage should include claims under California Worker’s Compensation law and other employee benefit laws and should name the association and property manager as additional insureds.
  3. Performance bonds. Some associations conclude that they are better off by obtaining a bond from a third party in case the contractor does not have the financial resources to complete the construction work.
  4. Correcting work. In the event the contractor, design professional, structural engineer, or consultant fails to perform their work properly under the terms of any agreement, the agreement should provide that the contractor, design professional, structural engineer, or consultant redo their work at no cost to the association.
  5. Warranties. Reputable contractors provide the association with certain warranties regarding the work and material used under the contract.
  6. Termination of the contract. All contracts should provide specific performance guidelines that, if not met, and after prior notice, will allow the association to terminate the contract.
  7. Changes in the work. It is possible that the scope of work necessary to complete complex construction projects will be altered after the construction process begins. This often occurs because a contractor, design professional or consultant discovers additional damage or reevaluates the best method for repairing the damage which can only be determined after the parties have entered into the original contract. A well-drafted contract should address how changes in the work are evaluated, who is authorized on behalf of the association to approve changes and a mechanism developed for possible changes in price that result from such changes.
  8. Notice provisions. We recommend that a specific provision describing how notices are to be given be included in the contract so that in the event a dispute arises under the contract, and one party desires to terminate the contract, or changes in the work occur, proper and timely notice is given to the parties.
  9. Status of the contractor as an independent party. We recommend that such a provision be clearly stated in the contract.
  10. Dispute resolution. Many associations find it beneficial to include a provision which specifically discusses how any disputes will be resolved. This provision may include a binding arbitration provision or other alternative dispute resolution and establishes the framework for such forums.
  11. Payment of attorney’s fees. Contracts typically include a provision which states that in the event of a dispute between the parties, the prevailing party is entitled to recover all of its reasonable attorney’s fees and costs in connection with resolving such dispute.
  12. Indemnification. We strongly recommend that contracts contain a provision in which the contractor, design professional, structural engineer, or consultant indemnifies and holds the association harmless from all claims and liabilities incurred in connection with the work to be performed under the contract.

The quality of the contractor, design professional, structural engineer, and the consultant is probably more important to the association than the provisions of the construction contract. It will be of little value to try to enforce a contract against a “deadbeat” contractor, design professional, structural engineer, or consultant. We strongly recommend that you obtain good references for your proposed contractor, design professional, structural engineer, and consultant. Their personal integrity is probably the most important component. However, you may also want to determine their financial condition. Some owners request financial statements from their contractors, design professionals, structural engineer, or consultants before executing an agreement.

While most association’s governing documents require the association to obtain at least two bids from reputable licensed contractors, we strongly recommend that all associations obtain multiple bids prior to entering into any contract. Obtaining multiple bids may be the only method that an association has to confirm that the prices quoted by the different contractors, design professionals, structural engineers, and consultants are fair and reasonable and that the scope of the services accurately describes the necessary repair work.

As noted above, there are many issues which should be addressed in a contract between an association and a contractor, design professional or consultant. We are mindful of the fact that the amount of money and the scope of services in such contracts can range from several thousand dollars to multi-million dollar repair contracts. Although all contracts generally raise the same issues as set forth above, the contracts involving significant sums of money or addressing critical initial evaluations of the extent of the damage may require more careful review than smaller contracts involving minor repairs. We strongly recommend that all associations consider evaluating the foregoing issues raised in this letter for each contract submitted by any contractor, design professional, structural engineer, or consultant.

A contract which is properly drafted before work commences will ultimately save the homeowner association significant money and will help address certain problems and issues which may arise during the construction.