2013 Oklahoma Bar Association Real Property Section – Cleverdon Roundtable Seminar

On May 10, 2013 at the Hyatt in Tulsa, Oklahoma and on May 22, 2013 at Oklahoma Christian University in Oklahoma City, Oklahoma, the OBA Real Property Section will be hosting the Cleverdon Roundtable Seminar. At each session, I will host a roundtable discussion entitled "Eye for an Eye to Love thy Neighbor: Community Association Law in Oklahoma." The Cleverdon Seminar is a unique continuing legal education experience in that it entails a lively roundtable discussion of the topic rather than the traditional lecture format. In addition to the seminar booklet, additional handouts for my roundtable discussion will be uploaded soon.

2012 Community Association Statistics

The Foundation for Community Association Research has published its 2012 statistical review. For Oklahomans, some interesting numbers:

1. The report has Oklahoma in the category of having between 1,000 and 2,000 community associations (defined as planned communities, homeowner associations, and condominium communities).
2. According to a nationwide survey of community association residents performed by Ibope Zogby in 2012, 70% rate their community association experience as positive and 22% rate it as neutral.
3. 88% of community association residents report their opinion that their association board strives to serve the best interests of their community.
4. 81% report a "good" or "great" return on their assessments.
5. 24% of all housing units exist within a community association.

The full report may be viewed here.

Matthew L. Winton, Oklahoma community association attorney.

HOA, Condo, Neighborhood Associations Training and Education: Basic Legal Issues Seminars

In June and July, I will be presenting this year's Basic Legal Issues for HOAs on two separate occasions, once again hosted by Neighborhood Alliance. These seminars focus on issues relevant to homeowners and members of mandatory homeowners and condominium associations. NA and I have partnered for these annual seminars for over five years now.

I will speak on the basics of homeowners and condominium associations and will also cover covenants, bylaws and amendment procedures. As always, we provide a substantial amount of time for a question & answer session. The first session will be on Tuesday, June 26, 2012, from 6:30 p.m. to 8:30 p.m. and will be held at Pelco Products in Edmond, 320 W 18th Street, Edmond, OK 73013. The second session will be on Tuesday, July 17, 2012, from 6:30 p.m. to 8:30 p.m. and will be held at Home Creations' Melody Banquet Hall, 2288 N. Broadway, Moore, OK 73160. For more information, or to register, please visit http://www.nacok.org/.

Oklahoma Homebuilder’s Association Luncheon. Topic: 5 Ways to Improve Community Associations

In June, I will be speaking at the Central Oklahoma Homebuilders Association's (COHBA) Developer's Council and Sales & Marketing Council (SMC) Luncheon on community association issues with the theme "HOAs don't have to be a headache." This meeting is geared toward developers, builders, and salespeople and will focus on the proper management of HOAs, how HOAs can be a positive aspect of a neighborhood, and will also cover the common mistakes made by developers and builders and how to avoid them. The program is scheduled for Tuesday, June 26, 2012, from 10:00 a.m. to 11:30 a.m. and will be held at COHBA at 420 E. Britton Road. The cost, which includes lunch, is free for all SMC Members, $20.00 for COHBA Members and $30.00 for all other attendees. Reservations are required by Friday, June 22nd at 5:00 p.m. To make reservations, please call Denise Jones at 843-1508 or email denise@okchomebuilders.com.

ADA, Swimming Pools, and Community Associations – Rule Update

ADA Pool Compliance Update

On May 21, 2012, the US Department of Justice released its final rule on Americans with Disabilities Act requirements for swimming pools. The deadline for compliance has been extended to January 31, 2013. The DOJ does not specifically address under what circumstances community association pools must comply with the new requirements. They did emphasize that permanent or fixed lifts are the standard; portable lifts will not satisfy the ADA requirements, which was one significant question raised by the initial rule. Additionally, they responded to the common misconception that any non-compliant pools would have to close. The final rule states:

Compliance with the 2010 Standards is only required to the extent that it is "readily achievable"—a term that means "easily accomplishable and able to be carried out without much difficulty or expense."

As originally published in the ADA Title III Regulations at § 36.104, the following criteria may be used to determine whether compliance is "readily achievable."

(1) The nature and cost of the action;

(2) The overall financial resources of the site or sites involved, the number of persons employed at the site, the effect on expenses and resources, legitimate safety requirements necessary for safe operation, including crime prevention measures, and any other impact of the action on the operation of the site;

(3) The geographic separateness, and the administrative or fiscal relationship of the site or sites in question to any parent corporation or entity;

(4) If applicable, the overall financial resources of any parent corporation or entity, the overall size of the parent corporation or entity with respect to the number of its employees, and the number, type, and location of its facilities; and

(5) If applicable, the type of operation or operations of any parent corporation or entity, including the composition, structure, and functions of the workforce of the parent corporation or entity.

Community associations with limited budgets may not be able to fund the installation of a permanent lift system in their pool. While some associations may have available funds, installation may not be "readily achievable" due to delays caused the currently high demand for lift systems. According to the final rule, these pools may continue to operate in spite of their non-compliant status.

While the final ruling has left many questions unanswered, the DOJ states that the extension of the deadline will allow the department to continue educating affected entities as to their responsibilities for compliance.

Does your Association qualify for a sales tax exemption?

Under 68 O.S. § 1356(53) qualified neighborhood watch organizations are eligible for a sales tax exemption for the first $2,000.00 of purchases or sales for each calendar year. The statute defines "qualified neighborhood watch organization" as "an organization that is a not-for-profit corporation under the laws of the State of Oklahoma that was created to help prevent criminal activity in an area through community involvement and interaction with local law enforcement and which is one of the first two thousand organizations which makes application to the Oklahoma Tax Commission for the exemption after the effective date of this act."

Along with an application, the Association must submit its articles of incorporation, bylaws, or other form of documentation showing the incorporators' intent demonstrating that crime prevention is one of the purposes of the Association. Additionally, the Association must include documentation indicating its affiliation with local law enforcement, as well as a description of the boundaries of the area within the Association's jurisdiction. Finally, the Oklahoma Tax Commission requires the name of the person who will be responsible for keeping records of tax-exempt purchases and sales for the Association to ensure that the $2,000.00 limit is not exceeded. The exemption card will be sent to this person.

It is important to note that unincorporated associations are ineligible for the sales tax exemption. Not only should an association incorporate to qualify for the sales tax exemption, several significant benefits result from incorporation. See, 18 O.S. §865-867, and 18 O.S. §1027E.

Further instructions and an application for sales tax exempt status are available at http://www.tax.ok.gov/btforms/PktE.pdf.

Matthew L. Winton

Condominium and homeowner association lawyer

mlw@vwlaw.net

Swimming pools, condominium and homeowner association, Americans with Disabilities Act

Ensuring Compliance with ADA Pool Requirements

Summer is almost here, and for many associations, that means it's time to start thinking about getting the community pool ready for use. This year, in addition to normal cleaning and maintenance, associations need to ensure compliance with the ADA requirements for public pools. The ADA published these guidelines in 2010, and they were scheduled to go into effect March 15, 2012, but confusion on the policies has resulted in an extension of the deadline to May 15, 2012.

Very generally, the rules require all public pools to have at least one accessible entrance, commonly a lift or sloped entry. Larger public pools must have two. Private pools are exempt from these requirements. The ambiguity lies in the classification of community association pools. Generally, community association pools are considered private. However, some associations sell memberships to the public. Others host swim meets. In these situations, the pool is being used as a public pool. For those associations hosting swim meets, a question arises as to whether the pool is considered a public pool only during times of public use, or, if not, the number of swim meets required to cause its classification as a public pool. The rules require permanent means of access, but some wonder whether temporary access might be sufficient for pools that are generally private, but host the occasional swim meet.

In summary, if an association does not sell memberships or host swim meets, its community pool is exempt from the requirements. If an association sells memberships, its pool must comply with the new standards. For those associations that do not sell memberships, but host swim meets, the correct interpretation and application of the rules has yet to be determined. Stay tuned for further updates: the Department of Justice expects to release further guidance and clarification of the rules, and is considering a six month extension of the deadline.

FHA Extends Waiver of Anti-Flipping Restrictions into 2012

"FHA Extends Waiver of Anti-Flipping Regulations Through 2012:

In an effort to continue stabilizing home values and improve conditions in communities experiencing high foreclosure activity, Acting Federal Housing Administration (FHA) Commissioner Carol J. Galante will extend FHA's temporary waiver of the anti-flipping regulations. 

With certain exceptions, FHA regulations prohibit insuring a mortgage on a home owned by the seller for less than 90 days.  In 2010, FHA temporarily waived this regulation through January 31, 2011, and later extended that waiver through the remainder of 2011.  The new extension will permit buyers to continue to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. It will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

The extension is effective through December 31, 2012, unless otherwise extended or withdrawn by FHA.  All other terms of the existing Waiver will remain the same.  The Waiver contains strict conditions and guidelines to prevent the predatory practice of property flipping, in which properties are quickly resold at inflated prices to unsuspecting borrowers.  The Waiver continues to be limited to sales meeting the following conditions:

• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
• In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the Waiver will only apply if the lender meets specific conditions and documents the justification for the increase in value.
• The Waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program."

Matthew L. Winton to present at Oklahoma Bar Association Continuing Legal Education seminar

On September 14, 2011 in Oklahoma City and September 15, 2011 in Tulsa, community association lawyer Matthew L. Winton will present materials on the topic "Drafting Real Property Covenants, Conditions, and Restrictions: Tips, Tricks, and Traps." Information at the seminar will include: condominium and homeowners association law, governing documents, drafting issues, and amendments. More information and registration may be found on the Oklahoma Bar Association website: http://www.okbar.org/cle/2011/2011-09-14seminarID1930.htm.

New FHA Condominium Underwriting Guidelines

Summary of FHA Condominium Project Approval and Processing Guide (June 30, 2011)

1. Summary. On June 30, 2011, the Federal Housing Administration (FHA) updated its underwriting guidelines for condominium projects in which mortgage loans would be placed that are insured under the National Housing Act. These guidelines and requirements are significant for Oklahoma condominiums. What follows is a summary of the new guidelines.
2. Recertification. Under the Guide, a condominium must recertify, including its financial and insurance information every 2 years.
3. Financial Documents. The financial requirements under the Guide are set out below under the Guide's section numbers:

2.1.5 Delinquent Homeowners Association (HOA) Dues

This requirement must be reviewed as part of the analysis for project approval and must also be verified as part of the loan level requirements. No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments (does not include late fees or other administrative expenses). The 15 percent includes all units (occupied, investor, bank-owned, vacant).

Exception requests may be considered on a case-by-case basis by the jurisdictional HOC. No exception requests can be processed under the DELRAPoption. FHA reserves the right to reject any exception request received. Requests may be considered as noted below. However, based on the HOC review, additional information and / or documentation may be required.

No more than 20 percent of the total units can be in arrears (more than 30 days past due) if FHA reviews the documentation at project approval and determines that tolerance of the higher percentage is warranted.

The following requirements must be met:

• The HOA provides a report for the past six months that reflects the history of unpaid assessments.
• The HOA current reserve fund balance and current operating results (documented HOA Balance Sheet and Income/Expense financial statements dated less than 90 days at the time of submission) evidences excess available funds in the amount of the outstanding arrearage.
• A review of the HOA financial statements and verification of the reserve account balance reveals that the HOA has sufficiently accounted for bad debt and arrearages.
• A current reserve study that is no greater than 24 months old supports the sufficiency of the current HOA assessments to meet the project component replacement needs.
• The HOA provides evidence of actions to collect the unpaid arrearages, including legal action, execution of payment plans, or other similar efforts. The exception terminates with the expiration of the current condominium project approval.

2.1.6 Budget / Financial Documents

Provided in the chart below are the defined financial documents required for review.

Project Type	Requirement
Proposed	Current year projected budget Bank statements may be requested
Under Construction	Current year projected budget If a project is built in legally declared phases, an actual year to date budget is required Bank statements may be requested
New < 12 months old	Current year budget for declared phases Current balance sheet Bank statements may be requested
Existing > 12 months old	Current year budget for declared phases Current balance sheet less than 90 days old at the time of submission for project approval Actual income and expense statement for project Bank statements may be requested

Review of the financial documents must determine that the budget and operating results are sufficient and:

• Include allocations / line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; and
• Provide for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10 percent of the budget; and
• Provide adequate funding for insurance coverage and deductibles.

In cases where the budget documents do not meet these standards, a reserve study may be requested to assess the financial stability of the project. The reserve study cannot be more than 24 months old. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that

the reserve study was completed.

Note: FHA or the DELRAP mortgagee may require submission of additional financial statements to complete the condominium project approval review.

2.1.7 Special Assessments

The project submission documentation must include information regarding special assessments. A signed and dated explanation for any assessment must be provided by the builder, developer, sponsor, homeowners association or management company and must answer the following items:

• What is the purpose of the assessment;
• Does the assessment affect the marketability of any of the units; Have other special assessments been required (if the answer is yes, complete explanation regarding the purpose and timing of those assessments must be provided);
• When is the assessment to be paid (i.e., required to be pre-paid or is it payable over a specified period of time);
• How is the overall financial stability of the project impacted by the assessment; and
• What impact will the assessment have on the future value and marketability of the property?

Note: The above list of items considered when reviewing and analyzing current or pending special assessments is not all inclusive; any additional

1. Insurance. As with the new financial documents requirements, the Guide provides for certain minimum insurance requirements.

2.1.9 Insurance Requirements

The condominium project must be covered by hazard, flood, liability and other insurance required by state or local condominium laws or acceptable to FHA. The mortgagee is required to thoroughly review the policy and all endorsements to ensure that the policy covers the following requirements. For proposed or under construction projects, the below insurance requirements are not applicable until the first unit within the project is sold.

Insurance Type	Requirement
Hazard Insurance (project approval)	The homeowners' association is required to: Maintain adequate "master or blanket" property insurance in an amount equal to 100% of current replacement cost of the condominium exclusive of land, foundation, excavation and other items normally excluded from coverage; If the HOA does not maintain 100% coverage, the unit owner may not obtain "gap" coverage to meet this requirement.
HO-6 (loan level)	The unit owner is required to: Obtain a "walls-in" coverage policy (HO-6) if the master or blanket policy does not include interior unit coverage, including replacement of interior improvements and betterment coverage to insure improvements that the borrower may have made to the unit.
Liability (project approval)	The homeowners' association is required to: Maintain comprehensive general liability insurance covering all of the common elements, commercial space owned and leased by the owners' association, and public ways of the condominium.
Fidelity Bond/Fidelity Insurance – may also be known as "Employee Dishonesty" or "Crime Policy" (project approval)	For all new and established projects with more than 20 units, the homeowners association is required to obtain and maintain this insurance; The homeowners association must maintain this insurance for all officers, directors, and employees of the association and all other persons handling or responsible for funds administered by the association; The coverage must be no less than a sum equal
	to three months aggregate assessments on all units plus reserve funds unless State law mandates a maximum dollar amount of required coverage. If the homeowners association engages the services of a management company, the homeowners association must require the management company to maintain this insurance coverage for its officers, employees and agents handling or responsible for funds of, or administered on behalf of, the owners association. The required coverage must meet the following requirements: Must name the owners association as an obligee; Must be in an amount not less than the estimated maximum of funds, including reserve funds, in the custody of the owners association or management agent at any given time during the term of each bond; In no event may the aggregate amount of such bonds be less than a sum equal to 3 months aggregate assessments on all units plus reserve funds unless State law requires a maximum amount of required coverage.
Flood (project and loan level)	The homeowners' association is required to obtain and maintain: Coverage equal to the replacement cost of the project less land costs or up to the National Flood Insurance Program (NFIP) standard of $250,000 per unit, whichever is less; The maximum limit of building insurance coverage of a residential condominium building in a regular program community is $250,000 times the number of units in the building (not to exceed the building's replacement cost); The homeowners association, not the borrower or the individual unit owner, is responsible for obtaining and maintaining adequate flood insurance under the NFIP on buildings located in a Special Flood Hazard Area (SFHA); and The flood insurance coverage must protect the interest of borrowers who hold title to an individual unit as well as the common areas of the condominium project;

Project approval will not be issued if any portion of the buildings and / or common elements is located within a SFHA unless the requirements of section 2.1.10 are met.

2.1.10 Determining Need for Flood Insurance

Mortgagees must determine whether the property improvements (dwelling and related structures/equipment essential to the value of the property and subject to flood damage) are located in a 100-year flood plain. If the property is in a 100- year flood plain, flood insurance is required, per Mortgagee Letters 2009-37 and 2010-43. To demonstrate and document that the property is not located in a 100- year flood plain and not subject to flood insurance requirements, the mortgagee must obtain:

1. A final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removed the property from the Special Flood Hazard Area (SFHA) location is obtained from the Federal Emergency Management Agency (FEMA); or

2. If the property is not removed from the SFHA by a LOMA or LOMR, the lender must obtain a FEMA National Flood Insurance Program Elevation Certificate (FEMA from 81-31 "elevation certificate") prepared by a licensed engineer or surveyor documenting that the lowest floor (including the basement) of the residential building and all related improvements / equipment essential to the value of the property is built at or above the 100 year flood elevation in compliance with the National Flood Insurance Program (NFIP) criteria as required in 44 CFR 60.3 through 60.6. An elevation certificate is acceptable for condominium projects that are 100 percent complete, including all common elements and amenities.

Insurance under the NFIP is not required if a LOMA or LOMR is obtained from FEMA removing the property from the SFHA.

A flood elevation certificate is not required when a LOMA or LOMR

removes the property from a SFHA.

Insurance under the NFIP is required when a flood elevation certificate documents that the property remains located within a SFHA.

Condominium & Homeowner Associations: Insurance Articles

For those needing or seeking information regarding condominium and homeowner association insurance issues, last month's Cooperator contains several excellent articles. The August Cooperator edition contains articles on:

• Association Directors & Officers Insurance
• Specifics on particular insurance clauses and their meaning
• Finding the right insurance policy for common elements and units
• How to navigate and administer an insurance claim
• Information on NAMIC, the National Association of Mutual Insurance Companies, which is the nation's largest trade and political advocacy group for property/casualty insurers

Reserve Funding

While we all know that improvements to property wear out over time, we might not realize the importance of reserve funding. A "reserve fund" is a dedicated source of assets, usually liquid, from which a homeowners association would fund necessary and needed capital improvements. To guide decisions on how the association should spend or accumulate a reserve, the board typically conducts a "reserve study." A reserve study provides a current estimate of capital improvement expenses for a given period of time, usually five, ten or twenty years. The board then allocates the "reserve assessment" to the members of the association according to their pro-rata share.

Oklahoma law does not require a homeowner association to maintain a reserve to the extent the governing documents (covenants and bylaws) fail to require a reserve. For most associations, reserve funding remains discretionary.

For example, a hypothetical association has a brick perimeter fence built to completion in year 0. For our purposes, assume the brick fence would completely disintegrate in year 30. What choices must be made? First, would the association choose to replace the fence in year 30? Would the association seek to establish periodic maintenance of the fence to extend the life of the fence if possible? Would the association fund the replacement of the fence in year 30 through a special assessment or incrementally each year leading up to year 30?

You see, even though the replacement of a capital improvement may take place many years in the future, the decision to do so affects financial decisions today. If an association does conduct a reserve study, the study will likely result in a per lot reserve assessment the association should collect and deposit on an annual basis. Or, the necessary savings may be included in the budget and included in the annual assessment.

While the topic of reserve funding may appear to revolve around money, an underlying issue is fairness. Think about the very real possibility that you buy that gently used home with great curb appeal only to find out that the swell community swimming pool needs repairs to the tune of a several thousand dollar special assessment to each homeowner. Is it fair that you should pay for those years of swimming pool enjoyment exercised by the prior homeowner? Of course, fairness would mandate that the purchase price of the home reflected the pending special assessment. But, does this actually occur?

I suppose the lesson is two-fold. First, Oklahoma homeowner associations will have to work out their own reserve funding according to their governing documents and intelligent debate. Second, Oklahoma home buyers will need to know what questions to ask when buying into a neighborhood with a mandatory association and significant common area improvements.

HOA Board member training rescheduled for April 16, 2011 at Pelco in Edmond, Oklahoma

The HOA training mentioned in this blog below has been rescheduled for April 16, 2011 at the offices of Pelco products in Edmond, Oklahoma. You may contact Neighborhood Alliance here for more information or to register.

HOA Board Member Training Event – March 19, 2011

Lawyer Matthew L. Winton, Central Oklahoma Neighborhood Alliance and the Edmond Neighborhood Alliance are teaming up March 19, 2011 for an all-day intensive HOA board training event. Participation and registration information is provided by Central Oklahoma Neighborhood Alliance at 405.528.6322 or online at www.nacok.org.

HOA Bootcamp - Saturday, March 19, 9am - 4pm
This class, presented jointly with Edmond Neighborhood Alliance, is intended for officers or residents of mandatory associations only and will feature useful tools you can immediately put into practice in your own Home Owners Association (HOA). This all day Saturday class costs $50 and includes snacks, lunch and all printed materials. The class size is limited to allow plenty of time for questions and group conversation. Preregistration required, nacok.org.

Must your condo/HOA common area swimming pool be ADA compliant?

Recent changes were made to the Americans with Disabilities Act, known as the ADA for short. It may be that due to these changes, common interest communities such as condominium and homeowner associations are required to take certain actions to be ADA compliant. While understanding and complying with the regulations may sometimes be daunting, here is a link to more information and a questionnaire: http://www.americanpool.com/2182/ismypoolsubjecttoada.html

(No referral or recommendation of any vendor should be inferred from this blog post)

WSJ December 31, 2010 Article on Assessment Delinquencies

The Wall Street Journal December 31, 2010 edition presented a front page article on the issues related to the market downturn, unemployment, and their affect on the delinquency rate of community association assessment collections. The article does well to present the opposing sides to the conflict, including the oft-cited, and always precarious, technique of "publicly shaming" delinquent owners.

Matthew Winton, community association lawyer.

Board of Director Woes: What remedies are available to the disenfranchised homeowner association member?

Often, the comment qua question arises, "My HOA board is [out of control][running amok/this place into the ground][fill in your comment here]. What can be done about it?"

This article will not discuss the legal remedies available to association members. This article does cover the corporate, or private methods available to association members for remedy of a difficult board situation.

The first step in resolving any dispute is to communicate directly with only those involved in the dispute. This direct communication does not include sniping at a board online or in emails. It likely includes scheduling time with the board to voice the complaints, even if one believes the board has tried to silence complaints in the past. Call this the "benefit of the doubt" stage. One important perspective in conflict resolution is to use the least amount of resources (i.e., paper, money, force, energy) necessary to resolve the conflict. Why have a lawyer contact the board if a personal visit from the member will resolve matters?

Direct communication is important because several results are possible by agreement from voluntary adoption of policies and procedures to voluntary resignation from the board. A result negotiated and agreed to by the parties is generally more satisfactory and binding that one imposed by an outside party.

In Oklahoma, and if the association is incorporated, the association's corporate existence was created by the filing of articles of incorporation with the Oklahoma Secretary of State's office. These articles are public record, which means copies of the articles are available to anyone, provided they pay the copying fee. It is possible to obtain the documents electronically from the secretary of state's office by searching and following the directions on the secretary's website. The articles set out the name of the corporate, its registered agent, principle place of business, term of existence, and likely other information about the workings of the corporation. It may be that the articles provide for special meetings, election/removal of directors, and shareholder (member) rights. It is in these articles that one will first look for information on how to effect change within an association via corporate procedure.

It may be that the necessary result is for removal of one or more board members. If so, it is important to understand that such a process will require a meeting of the members and vote. One would consult the articles and bylaws (if any) to determine the procedure for calling a special meeting and vote for removal. In most cases, the current board is not inclined to assist the members in calling the special meeting, so the motivated members will likely have to do the legwork themselves.

Of course, the motivated members could simply exercise their democratic muscles, announce their own candidacy before the next election and campaign for a spot on the board.

Matthew L. Winton, Oklahoma community association lawyer

Community Association Insurance: Condominium

This is the first in a two-part series on community association insurance issues. While not intended to be exhaustive, I do believe these articles will help serve you as a basis in which to evaluate your current association insurance needs.

Introduction

To some extent, community associations need insurance just like most businesses. Community associations need a variety of coverage, such as: liability/casualty, directors and officers, worker's compensation, flood, and various endorsements. However, the specific policy the association should purchase could vary significantly depending on the type of community association, the physical make-up of the project, the activities of the association, its directors, and members, the insurance requirements found within the governing documents, and applicable state law. This article discusses the different insurance policies available to community associations, along with considerations attendant with community association insurance.

Insurance - Generally

Initially, the board for an association should determine whether the association is required to carry certain insurance. Requirements for insurance may be found either in the law or within the governing documents. Even if the association is not required to carry insurance, the board should evaluate whether carrying some forms of insurance would be advisable.

Advisability may be determined by asking questions such as:

• Does the association own property or improvements at risk of loss to fire, elements, destruction?
• Do owners, invitees, and members of the public use property owned by the association or property owned in common by the owners?
• Does the association collect money from owners and spend those funds on community projects?
• Does the association have a maintenance responsibility?
• Does the association have employees?
• Are bonds in place to secure fidelity?
• Do the governing documents place minimum insurance requirements on the association?
• Does state law require the association to carry certain insurance?
• Do current lending underwriting guidelines require certain insurance?

  Underwriting Requirements

  The association's request for insurance will undergo what is called "underwriting." Underwriting is the process by which an insurer evaluates the association's insurance risk and determines whether to offer the association a policy of insurance. It is important for the association to understand the types of questions an insurer is likely to ask.

  Following is a list of questions an insurer is likely to ask when an association seeks to place an insurance policy:

1. What is the loss history of the association and its common area or structures?
2. What structures/improvements are to be covered under the liability and casualty policy?
3. Whether there has ever been any insurance coverage of the elements?
4. When the elements were constructed or put into use, what their value is?
5. Whether the project has completed the development phase, and what involvement the developer retains in the project?
6. What is the age of the development and its improvements
7. What is the legal structure and operations of association?
8. Whether potential liability areas exist within the development, such as detention ponds, swimming pools, athletic facilities, etc?

Finally, the association should expect the underwriter to request copies of all governing documents on file and any amendments, other various covenants or restrictions, financial statements like profit and loss statements or a balance sheet, and a list of directors and officers. Of course, if the record keeping of the association is in shambles, the fact will be apparent to the underwriter, who in turn will assume the association is a poor risk.

Types of Insurance Coverage

When looking to place an insurance policy for the community association, the board should consider its coverage needs. The types of coverage to consider are briefly discussed below. Other factors the Board should consider are:

1. How to value: will the policy cover actual cash value (ACV) or replacement cost value (RCV)?
2. What to value: will the policy cover just common areas and their improvements (Bare Walls), both common area improvements and Units (Single-Entity and All-in)?
3. What deductible amount to choose and whether owners may be responsible for the deductible payment in certain circumstances?

Casualty Coverage

Casualty insurance insures against the risk of property damage. It is imperative that the association have a comprehensive itemization of the property it owns and has maintenance or insurance responsibility. It is equally as important to have a realistic understanding of the property's value, so as to place sufficient insurance for its replacement in the event of destruction. Additionally, the association should periodically review these items to ensure proper coverage.

Liability Coverage

Liability refers to an association's exposure to loss as a result of a claim being brought against the association. The claim could sound in tort, such as negligence, or contract, such as breach of the governing documents. Liability insurance mitigates these claim risks.

Often, associations will cover these risks with a commercial general liability (CGL) policy. It is important for the board to understand the extent of coverage, the exclusions from coverage, and the additional endorsements available to the CGL policy.

Directors & Officers Coverage

The purpose for directors and officers coverage is to 1) protect directors and officers of the association from personal liability, 2) provide coverage for liability arising within the scope of the director and officer positions, and 3) fund corporate indemnification of the directors and officers. While no one expects perfection from directors and officers, the law does require those acting on behalf of the association to perform their duties within acceptable standards. If a claim arises questioning an act or omission of the board or its officers, a D&O policy may cover the liability, if any.

Further, as with other insurance policies, the D&O policy should provide the costs of defense of the claim, which is typically a substantial sum if litigation ensues. Depending on the policy, the costs of defense may or may not be counted towards the policy limits. It is important for the board to understand the policy exclusions, which may not cover claims for civil rights violations, claims for injunctive or other equitable relief, and claims occurring as a result of conflicts of interest.

Additional Coverage

Apart from the insurance types discussed in above, the association may have a need for other types of coverage. These needs may include:

• auto liability insurance
• workers compensation and unemployment for employees
• security guard liability, which provides assault and battery coverage
• business income insurance
• boiler and machinery
• flood insurance
• glass insurance
• inland marine insurance
• landscaping
• business records replacement

Contesting HOA decisions

After a recent OBA webinar, the following question was asked: Is it possible for a homeowner to bring an action contesting a decision by a HOA in Small Claims Court? Small claims courts would not seem to have jurisdiction based on the statute but it seems incongruous that an individual would have to hire an attorney to bring a claim for a dispute of this type.

It is true that small claims courts in Oklahoma are courts of limited jurisdiction. 12 OS 1751 provides that actions under the Small Claims Procedure Act are limited to actions for the recovery of money under $6000.00, except those sounding in defamation, and for the recovery of property under replevin. Declaratory actions and those seeking injunctive relief may not be brought in small claims court.

Regarding a challenge to an HOA action, if the intended relief is for a declaratory ruling, setting aside an election under the Oklahoma General Corporation Act, or injunctive relief, then the action must be brought in district court.

However, see the unpublished case of Robert Glenn v. Coffee Creek Homeowners Association, Inc., No.95,427, Division 4, Court of Civil Appeals, September 18, 2001, where a homeowner brought suit in small claims court ostensibly for collection of money damages, but in reality sought to change an HOA board's decision. Judge Glenn Jones wrote a fantastic opinion setting out the parameters of the rule of reasonableness.

One should keep in mind that often the least expensive and most effective method of overturning an HOA board's decision is to have a special meeting called of the membership or have a new board elected who will make the decision you want. Of course, this method requires heavier lifting than filing a petition in district court.

Constructive notice for HOA dues

Recently after a webinar for the Oklahoma Bar Association, I received a question regarding dues notices. Specifically, the question was posed, "Can an HOA rely on constructive notice for dues obligations and sue to collect delinquent dues without sending owners individual invoices?" Constructive notice (16 O.S. 16) is the rule that if notice is properly filed of record, then knowledge of the notice will be imputed to a person whether or not that person has actually viewed the notice. Liken this to the commonly heard, "Ignorance of the law is no excuse." While it may be technically correct that constructive notice will bind a person to a dues obligation, I believe HOAs should still send annual notices individually to owners. As attorneys, one way we assist clients is by reducing or negating arguments against our client's position. Having the HOA client send annual dues notices takes away the argument of a debtor that they shouldn't have to remit dues on a particular collection.