Bad Boards

I have been hearing on the news recently about yet another scientist or group of scientists who are saying there are signs that "The Big One" in California is imminent. Yes, sure, this is not the first and will not be the last time we have heard this. We live in earthquake country after all. But it suggests that it is time to again give you good information about earthquake insurance and making a decision as to whether or not to get it.

The problem for HOA owners in California is that boards commonly make the decision and use these excuses: It is too expensive. The deductible is too big. It's money down the toilet. If there is a big one, everybody is going down, so why waste the money.

Do these sound like "Chicken Little" (the sky is falling) decisions - or informed decisions? I wonder how many boards realize these facts:

If your HOA or Condo Association does not carry earthquake insurance and there is a big event that causes substantial damage, the owners with equity lose the most! The owners without equity have much less risk and are likely to walk away from the properties leaving those owners behind who have been paying on their mortgages for years to pick up the pieces.

Without earthquake insurance, there is no "foundation" upon which to rebuild. Your HOA or Condo association will be starting from scratch. That is a much harder place to be when trying to "recover" as has been proven by past history based on real life experience from the aftermath of the big Northridge and Loma Prieta earthquakes in California. If you get the insurance those with little equity are now rightfully sharing in the risk of an earthquake and it they end up walking away from their property after a big earthquake, at least they contributed the "foundation" to rebuild.

If there is no insurance, and there is substantial damage, you can be certain some of the owners will be running to lawyers, and some of the lawyers will see dollar signs and encourage litigation, and if there is a lawsuit, the owners who want to rebuild are in for a triple whammy: paying to rebuild their unit, paying to rebuild other units, and paying to defend a lawsuit. Ouch!

I would ask, has any of this been considered when you as a board decided to drop the coverage or took a vote of owners supplying them only with the "woe is me" cost factor?

earthquake Where can you go to find information, assuming you "want to look".

There is an article posted here on my website that remains timely since we live in earthquake country. It is republished all the time and has been for the last 25 years since I first wrote it. Go to "Earthquake Insurance - To Buy Or Not To Buy". Between this E-news and that article, you will have the necessary "foundation" to try and plan a good EQ strategy for your HOA. Go also to the CEA site, the state website, and EQ risk assessment sites on the internet to gather information. There is plenty of it out there.

It is critically important to assess the risks of an earthquake to your own buildings and to look into at least some kind of coverage based on a risk assessment. Not having earthquake insurance more seriously threatens those who have considerable equity in their property. The owners who stay and remain to pay the bills take the brunt of the problem. New owner board members who bought their property on a lick and a promise are not likely to fully appreciate this. So you may have to educate them! ! If they don't listen, get a written request on file to re-examine their choice and do more footwork. They are not considering the entire community if they make the decision based on their own interests. If need be, reach out to other owners to weigh in. This is an important subject not to be dismissed lightly.

Why should you "want to" look for more information? Boards at the least have a fiduciary obligation to gather information about the risks, the options, and the levels of insurance available, and in my view, to present meaningful information to owners if you are asking them to vote on it so they can make an informed decision. I strongly believe that the duty of a board goes beyond just getting a bid and considering the cost and deductibles to be prohibitive. Lots of members will believe it to be so (that the insurance is not a good purchase), unless they are educated on the options and possibilities.

What are the possibilities? Would you believe that an association might be able to almost fully insure for earthquake damage if the owners are brought "on board"?

Here is the big picture. If the HOA or condo association carries enough insurance to rebuild the foundations of the buildings and the shell of the Units, and the owners carry individual CEA EQ policies to cover their share of the deductible and some of their own property, voila, you have a good plan in place in case of "the big one". You have an excellent shot at rebuilding, and that will discourage the "walk-aways" (people who abandon their property because of low equity). It will give those who have built up equity hope of saving their investment. If a board looks at the big picture in this way, it is an eye opener. A good "sell" job becomes considerably easier when it comes to getting owner support for purchasing EQ insurance.

What if you just say "screw it" and don't do any of the "heavy lifting" for the owners? Can you be sued??

First check the governing documents for the HOA and see what they say. If they say the board has a duty to get EQ insurance then you better get it. You, I, all of us can always be sued - especially in California which is to a degree a litigious and self-absorbed society. The question is whether the other side can win, and whether you have the funds to defend. Insurance is a love-hate purchase but you will see why EQ insurance is more valuable than just as it appears on the surface.

If the documents require the insurance and you are not getting it, either figure out a way to get it or get legal advice about what to do to fix the problem, because if there is an earthquake and there is substantial damage and owners do not have the money to pay for it (or even if they do), if they sue, they might win. And that is a problem on so many levels.

If your documents require a membership vote, you took one, and it failed to pass, and you don't get the insurance, then at least you as board members can be assured that you won't have personal liability for not purchasing it.

Unfortunately, the inquiry does not end there. That does not mean that the association and board members could not be sued for the losses. However, if the association and/or board members were to be sued for losses for damages from an earthquake, at least most Association's as a whole would be obligated to provide indemnification for the directors - which essentially means that the association would be required to pay for the defense and any damages including any that might be assessed against a director. Again, check your governing documents to make sure of this.

Failure to purchase EQ insurance when the owners vote it down is not willful or wanton malfeasance which is key as you will see below. So if the indemnification protection is there, at least the HOA will be paying the legal bills. But how does that make you feel, as a member of the community who might be spending money on lawyers instead of rebuilding? Any owner whose property was damaged seriously or who has to pay a large special assessment because of earthquake damage might bring a lawsuit and argue that the Board failed its fiduciary duty. "Fiduciary duty" is a trust imposed on board members to make decisions that are for the good of the community and the properties and reflects an obligation to make good fiscal decisions on behalf of the members.

If the association carries a certain amount of directors and officers liability coverage (depending on the size of the association - see below), the directors "might" be able to be extracted from the lawsuit based on this law in the Davis Stirling Act:

  • (a) A volunteer officer or volunteer director of an association that manages a common interest development that is exclusively residential, shall not be personally liable in excess of the coverage of insurance specified in paragraph (4) to any person who suffers injury, including, but not limited to, bodily injury, emotional distress, wrongful death, or property damage or loss as a result of the tortious act or omission of the volunteer officer or volunteer director if all of the following criteria are met:
  • (1) The act or omission was performed within the scope of the officer's or director's association duties.
  • (2) The act or omission was performed in good faith.
  • (3) The act or omission was not willful, wanton, or grossly negligent.
  • (4) The association maintained and had in effect at the time the act or omission occurred and at the time a claim is made one or more policies of insurance that shall include coverage for (A) general liability of the association and (B) individual liability of officers and directors of the association for negligent acts or omissions in that capacity; provided that both types of coverage are in the following minimum amounts:
  • (A) At least five hundred thousand dollars ($500,000) if the common interest development consists of 100 or fewer separate interests.
  • (B) At least one million dollars ($1,000,000) if the common interest development consists of more than 100 separate interests.
  • (b) The payment of actual expenses incurred by a director or officer in the execution of the duties of that position does not affect the director's or officer's status as a volunteer within the meaning of this section.
  • (c) An officer or director who at the time of the act or omission was a declarant, or who received either direct or indirect compensation as an employee from the declarant, or from a financial institution that purchased a separate interest at a judicial or nonjudicial foreclosure of a mortgage or deed of trust on real property, is not a volunteer for the purposes of this section.
  • (d) Nothing in this section shall be construed to limit the liability of the association for its negligent act or omission or for any negligent act or omission of an officer or director of the association.
  • (e) This section shall only apply to a volunteer officer or director who is a tenant of a separate interest in the common interest development or is an owner of no more than two separate interests in the common interest development."

If the directors cannot be extracted from the lawsuit, the Association still has to defend them. What is ironic is that the directors and officers coverage will likely not cover the defense of the Association, the Board or the directors because it will NOT cover losses that are brought for failure to insure, even if it does help to extract the directors from a lawsuit. It is worth saying again because it is important: Associations cannot rely on the D&O insurance which is in place to cover board negligence when the claim is failure to insure. D&O coverage is not a PLAN B to not having EQ insurance!

There is a case that came out of Washington State several years ago called: Rubin v. Juanita Shores Condominium Owner's Association, No. 53677-0-I, Wash. App. Ct., Nov. 21, 2005. In it, a condominium's declaration did not explicitly require the owner's association to purchase earthquake insurance. Therefore, the court found that the association was not required to do so. Still, without any requirement to purchase earthquake insurance, the court noted that the association did need to "... exercise reasonable care in considering earthquake insurance..." and in my view, that means gather information, check resources, and if taking a vote, supply sufficient information to the owners to allow them to make an educated decision when voting. Even if you are not taking a vote, but deciding to purchase because you have the authority to do so, or you are simply sending out a survey to get feedback (which is what I recommend as a good practice in the vein of information gathering if you are not taking a vote), you will want to involve the owners in the decision by providing them with meaningful information as to why you are or are not spending the money on earthquake insurance.

There is so much more I could say. These are just the basics. I suggest you go on my site and read the TWO earthquake articles. One approaches it from a simpler more basic instinct level - that is the Mickey Mouse version. The other is the adult version, important as to the information gathering process.


Many publications as well as the 2016 Davis-Stirling Act in Plain English which explains all of the laws discussed above are available in the Guru Webstore. Just go to webstore "and navigate directly, to check out the articles, E-news archives and blogs first to see if you can find what you need. When ready, go to the store and see that there are tabs for the Books, Primers, Forms and Guides.


I have a private law practice in Pleasant Hill, but serve homeowners association and homeowners throughout the State of California. My practice is in large part now web based and telephone consultations are available. I have clients all over the state and am a real "road warrior".


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