QUESTION: Can an HOA use force-placed insurance? Force-placed insurance is when the banks buy an insurance policy for homeowners to protect the bank’s investment. I’m wondering if an HOA can do the same thing if owners fail to insure their units? The HOA needs a way to protect itself.
ANSWER: Banks are able to “force-place” insurance because of two important conditions: (i) the loan agreement gives the lender authority to do so and (ii) banks has an insurable interest in the property because the home is collateral for the loan.
No Authority to Purchase. Unless an association’s governing documents grant authority, boards cannot purchase insurance for an owner and charge back the premium to the homeowner. Even if the governing documents allow it, the association does not have an ownership interest in the unit. Without an insurable interest, it’s unlikely a carrier would sell them a policy.
Administrative Nightmare. Assuming an association could purchase individual policies for owners, it creates an administrative problem for the association. To purchase insurance for owners who fail or refuse to purchase their own insurance, the board would have to monitor every owner’s insurance. If there are 100 units in the development, there are 100 different insurance policies to monitor with 100 separate expiration dates to calendar and track. Since homeowners could let their coverage lapse at any time during the policy term by simply missing one or more monthly installments, the board would need to monitor their insurance daily and immediately purchase coverage for the owner when it lapsed.
Expensive. Because force-placed insurance is very expensive, the homeowner has incentive to buy his own insurance as soon as the costly back-billed premiums hit. This creates yet another task for the person monitoring the insurance. Once the homeowner buys his own insurance, the force-placed coverage must be immediately removed and any unused premiums refunded to the homeowner.Forced-place insurance is so complex that even lenders don’t administer their own programs; they rely on third-parties to oversee them.
RECOMMENDATION: Instead of force-placed insurance, associations should consider amending their governing documents to require owners to carry insurance. To protect the association from administrative headaches and potential liability, the amendment needs to exempt the association from the duty of monitoring the provision. If your association needs assistance with the amendment, contact me.
Thank you to Tim Cline of the Timothy Cline Insurance Agency for his assistance with this question.
Condominium associations need “Building Ordinance” insurance coverage if they wish to be compliant with Fannie Mae requirements. It affects the ability of some buyers to purchase in condominium associations. See Form 4335′s highlighted description of Ordinance or Law Coverage and talk to your association’s insurance broker to find out if you have such coverage.
QUESTION: We have someone that wants to donate a treadmill to us. One board member thinks its a great idea to put it in the recreation room. I say it is a huge liability.
ANSWER: It is a potential liability but not a huge one.
No Risk-Free Environment. It is impossible to be free of risk in an association. If you have common areas, you have risk from sidewalks (trip and falls), lobbies (slip and falls), trees (falling branches), roofs (water leaks), plumbing (water leaks), drain lines (backups), etc.
Weigh & Manage Risk. The more sensible approach is to weigh the risk and benefits. If you have risk with no reward, avoid the risk. If you have low risk and high reward, take the risk. If the risk equals the reward, figure out how to reduce the risk. There are common sense ways to manage risk related to a treadmill. First and foremost, make sure your exercise equipment is covered under your HOA’s insurance policy. Second, make sure you properly maintain the equipment by setting up a regular inspection and maintenance program for all equipment. Putting a sign on the wall that equipment is used at the user’s own risk offers only limited protection but it can’t hurt. Finally, you could have users sign a hold harmless agreement releasing the association from liability in the event the person is injured.
RECOMMENDATION: For some associations, ensuring that everyone sign a release is manageable. For others, it is impossible. Associations should talk to legal counsel about how best to minimize risk when it comes to exercise equipment.
Please Move! #1. Wonderful response! -John C
Please Move! #2. Good Grief! Do not tell a toxic homeowner to sell and move to another association. Tell him/her to sell and buy a single family home. That person is unsuited to community living and should not be inflicted on other HOAs. -Bill R.
RESPONSE. I don’t know what I was thinking.
Baby Attorney #1. Great picture of the baby-you are so thoughtful to include everyone. -Mom
RESPONSE: Thanks Mom. I had a good teacher.
Growing Pot #1. Just an additional thought on the marijuana plants. As a board member, I have fiduciary duties. Regardless of my personal point of view, I have an obligation to see that rules, regulations, and laws are adhered to. Even though local jurisdictions may have decriminalized certain aspects of marijuana use and possession, Federal Law clearly forbids it. As a result, it’s my duty to protect the property of the HOA. Should the federal government prosecute such activity, this could result in property being seized, which would be detrimental to the HOA. -Bret R.
Growing Pot #2. We deal with a certain amount of pot growers (patients) in our dental practice. We serve the rich and the poor on medical/dental assistance through the state. Almost half of them sell their medicinal pot for extra income to survive society or live foolishly spending it on self-gratification. How can it be regulated safely–who knows? My biggest beef is the one who drives under the influence and causes harm to the innocent person in an accident and yet there is the one person who truly needs it for medical conditions and stays home while using it. Let it be grown under controlled regulations (pot farms) and then perhaps it can be monitored better and then there would be no concern for any homeowner having to smell it or visualize it. -S.C.
Adrian Adams, Esq.
Adams Kessler PLC
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