In recent months, Farmers Insurance canceled insurance policies for condo complexes with hundreds of units in San Diego's Tierrasanta, Rancho Penasquitos, and Scripps Ranch communities. Formerly “good neighbor” State Farm Insurance announced it will no longer “be there” to sell casualty insurance to California homeowners. Many California HOAs have learned that their insurers are either cancelling policies or renewing them only at vastly increased premiums.
In addressing insurance policy cancellations and price hikes, it is important to communicate with members to help them understand the challenges being faced. Civil Code Section 5810 requires an HOA to “as soon as reasonably practicable” give individual notice to all members if any of the insurance policies described in the annual budget report have “lapsed, been canceled, and are not immediately renewed, restored, or replaced, or if there is a significant change, such as a reduction in coverage or limits or an increase in the deductible,” as to any of the policies. Upon its receipt of a non-renewal notice for an insurance policy described in the annual budget report, the association must “immediately” notify all members if replacement coverage will not be effective by when the existing coverage lapses. Under Civil Code Section 5300(b)(9), HOAs must distribute a yearly summary of their property, general liability, earthquake, flood, and fidelity insurance policies, including, for each policy, the insurer name, the type of insurance, the policy limit, and the deductible amount, if any. While boards must satisfy these statutory requirements, they should also consider holding “town hall” meetings to provide a forum to discuss the insurance challenges and available options.
HOAs faced with unanticipated cancellations and price hikes may need to increase regular assessments or specially assess members to meet their CC&Rs' insurance requirements. While boards of directors are ordinarily limited in their authority to increase regular assessments or impose special assessments that exceed certain threshold amounts without the approval of owners, there are certain “emergency situations” when those limitations do not apply. There are differing opinions as to whether any of the “emergency situations” described in Civil Code Section 5610 would apply in the context of purchasing insurance.
Boards should review their CC&R insurance requirements, which can range from clear and specific to frustratingly vague. HOAs frequently purchase insurance coverage inconsistent with what their CC&Rs require. Some HOA boards are considering CC&R amendments to reduce the scope of coverage or to shift insurance responsibilities from the HOA to individual owners. Whether the Board is considering increased regular assessments, a special assessment, or a CC&R amendment, Civil Code provisions – and common sense – require that members be informed.
Changes in insurance can have unanticipated consequences, from potential default under home loans to loss of FHA certification. Accordingly, boards considering how to address insurance cancellations and price hikes – whether through increasing assessments, amending CC&Rs, or revising insurance coverage – should consult with the HOA's insurance professionals and legal counsel.