Trends in Homeowner Association Director’s & Officers’ Liability Insurance Claims, Part 1

Trends in Homeowner Association Director’s & Officers’ Liability Insurance Claims, Part 1

Ian H. Graham’s D&O program, underwritten by CNA Insurance, insures over 40,000 community associations nationwide. Attorneys who specialize in HOAs and Condominium Association claims have seen certain trends emerge as described below. It is important that board members are aware of these trends and how their association might be protected or exposed.

Emotional Support Animals

When we think of animals providing help to the disabled, we typically think of service animals such as seeing-eye dogs or dogs for the deaf and hearing impaired. However, persons suffering from mental and emotional disabilities also use animals for support and comfort. Unfortunately, some of these individuals live in community associations whose rules and regulations include pet restrictions. A clash between the duties of the board and the needs of the disabled person could result in a legal dispute as to whether the community association is required to provide a reasonable accommodation under fair housing laws in the form of an exception to the community’s pet rule.

The general public is becoming increasingly aware of emotional support animals and a community association’s obligation to accommodate them under the Fair Housing Act.* As the public becomes educated, more disabled persons may make inquiries with their healthcare providers as to the availability of this form of treatment. The management and board of directors of community associations have a duty to enforce the rules and regulations of the association and to represent the desires and inclinations of their members, some of whom may take offense to neighbors who they perceive are flaunting the rules by living with prohibited pets. This is almost inevitable in pet-restricted condominium buildings where dog owners must take their animals through the common area elevators and lobby. If the animal is a service or emotional support animal, a clash between the duties of the board and the needs of the disabled person could result in a legal dispute as to whether the community association is required to provide a reasonable accommodation under the fair housing laws in the form of an exception to the community’s pet rule.

Approving Tenants and Purchasers

The effects of the downturn in the housing market still exist. Owners want tenants in their investment properties and they want the ability to sell their properties when the opportunity arises. Community associations, on the other hand, want to ensure new purchasers and tenants have the financial wherewithal to meet their obligations to the association. State courts generally recognize the right of community associations to screen prospective purchasers and tenants. The most common screening procedure is a simple criminal history background check to help identify those who may pose a threat to the health and safety of the other residents. Communities may also curtail an owners’ right to lease altogether by imposing minimum lease durations and restrictions on the number of times an owner can lease in a given period. The purpose of this type of restriction is to discourage an environment of transiency, where the short-term occupants have little investment in preserving the quality and character of the community.

Claimants may challenge a community association’s refusal to approve a prospective tenant or purchaser. In an effort to balance competing public policies, courts typically adopt and apply a reasonableness test with respect to transfer restrictions. Courts will apply the reasonableness test by analyzing the transfer restriction within the context of the uniqueness of community association living. Within community associations, there is a need for a greater degree of limitation upon the rights of individual owners. To promote the health, happiness and peace of mind of the majority of owners living in close proximity and using facilities in common, it is recognized each owner must give up a certain degree of freedom of choice which he or she might otherwise enjoy.

Foreclosure Purchasers and Assessment Collection

Assessments are often a community association’s only source of income. Without regular payment of assessments, community associations in financial distress downgrade amenities, close recreational facilities, lay off staff and reduce security. This has a negative impact on quality of life, happiness, safety and property values, but may be the only option for many communities suffering in a difficult economy. Obtaining regular assessment income can be particularly problematic in communities with a large percentage of units in foreclosure. Of course, when an owner fails to pay, this increases the burden on other owners.

We are seeing a great deal of litigation over an association’s ability to collect un-paid assessments that came due prior to foreclosure transfers. Many community association declarations provide that unpaid assessments are extinguished as a result of foreclosure sales. State law, however, often provides that an owner is jointly and severally liable with the previous owner for all unpaid assessments that came due up to the time of transfer of title.

Upon acquisition of a parcel or condominium unit via a foreclosure sale, successful bidders typically assert that foreclosure judgments foreclose, and thus bar, any claim for unpaid assessments that accrued with the prior owner. Such successful bidders argue that a legislature did not intend to include owners who take title at a foreclosure sale or by deed in lieu of foreclosure among those who are jointly and severally liable with the previous owner for all unpaid assessments. This is largely an un-settled area of the law. Liability will depend on the strength of the language contained in the community’s declaration. Community associations can protect themselves by re-visiting the language contained in the governing documents to help ensure purchasers at foreclosure sales must pay past due amounts accrued for unpaid assessments.

Collecting Rents from Tenants

State law and the association’s governing documents may provide the community association with a number of tools to compensate for an owner’s failure to meet their financial obligations to the association. For instance, if a tenant occupies the parcel or condominium unit, and the owner is delinquent in paying any monetary obligation due to the association, the association may demand that the tenant pay to the association the subsequent rental payments. The association may demand that the tenant continue to pay rent to the association until the delinquent monetary obligation is paid in full or until the tenant discontinues tenancy.

Where do the owner’s monetary obligations end? Can the association collect rents from the tenant to pay down attorney’s fees incurred in collection efforts against the owner? These types of questions are being asked in a growing number of claims that challenge tools used by community associations to help ensure a steady flow of income in difficult times. These claims are typically resolved in favor of the community association when the community has a strong set of documents that set forth clear and broad powers of assessment collection and enforcement.

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