ou have probably read more in the last year than you ever wanted to read about mold, water claims, the insurance crisis, and what is happening to homeowner associations. Few of the articles give practical solutions to deal with the issues. Most alarm readers. All require/suggest that the association consult with experts. This newsletter is intended to give homeowner association boards of directors some practical information about how to take steps to be proactive. Every mold claim starts with a water intrusion issue.

What To Do When You Get The Call?

An association will probably not receive a call with a demand to fix a water leak in an association that consists of single family residences. This is because the owners are generally responsible for everything, including the roofs, walls, exteriors, windows and foundations. These are the places where water enters. Without any obligation on the part of the association, especially when it is clear to the owners, the board or manager will probably avoid getting a call demanding some kind of recourse. One could, however, get a call related to drainage issues (possibly coming from the common area) and the analysis and handling advice applies similarly with that of a telephone call relating to a planned development or townhouse, or condominium association, where the Association likely has some maintenance responsibilities. In any of those events, the board needs to make a determination as to whether the association should get involved. The association should get involved if:

• Common area is or may be the source of the problem, may be involved or threatened (such as in a condominium association where the water leak is coming through the roof, through the walls, windows, or the foundation). An association obligation may be involved (such as a planned development where the association has responsibility for roofs or the exteriors).

In any situation involving common area, of course the association has to know what is going on, even if it believes the ultimate responsibility belongs to an owner (such as for a break in a washing machine hose or refrigerator tubing or toilet overflow). In any situation involving a single family home situation, or a townhouse or unit in a planned development, the association should get involved if the leak is possibly coming from something that is the obligation of the association, such as repair of roofs or repair of siding or drainage from common areas. In many planned developments, the windows and window replacements are the owners' responsibility, as are the floors and foundations, so if water is believed to be coming through those areas, the association may be able to decline any responsibility or involvement. However, in any given situation, I believe the association is at an advantage if it sends one of its own experts in to investigate any water intrusion situation. This benefits the association because:

• The association has more information relating to the cause, which may not be ascertainable after work in done in the particular areas.
  
• The association may be able to rule out responsibility on the part of the association, but gather evidence to enforce or demand upon a homeowner to fix.
  
• The association will need to know the extent of the damage and how much of a threat the situation is to the association, and will be able to better assess it with full information.
  
• The association will be able to document its records more sufficiently, if it investigates.

In any given situation where the water is coming to the slab through the floor, the question often arises as to whether the association has responsibility and to what extent. In a planned development, unless the CC&Rs obligate the association, the owner would likely have responsibility for any leaks coming up through the slab or the floors. However, in a condominium development, the association generally has responsibility for the foundation. Still, issues come up over hardwood floors because they are expensive to replace. Of course, every question about responsibility for replacement of flooring depends heavily on what the CC&Rs; or the governing documents for the association say, what Civil Code Section 1364 says, what authority was given for installation of the floors (if any), and past practice of the association. Architectural approval may enter into things. In a condominium situation, if an owner has installed hardwood flooring without association authorization or approval that indicated the association would have responsibility thereafter, and the hardwood flooring needs to be removed to fix the problem, arguably, if the association has taken steps to protect itself (such as amended the CC&Rs; to attribute water damage to the individual owners, or otherwise), the association may be able to avoid responsibility for replacement of the hardwood floors. On the other hand, if the association has reinstalled hardwood floors in the past, failed to notify the owners that they are installing these upgrades at their own risks, and failed to take steps to protect the association, the association may have to pay the price of replacing hardwood floors when slab crack and other water intrusion areas are fixed. All of the factors mentioned above and below need to be considered in considering responsibility, and each association should depend on what its legal counsel advises, (not this newsletter-please view this as information, not the definitive answer to any particular dispute over responsibilities).

What To Do If Common Area Is Involved Or Threatened, Or An Association Obligation Is Involved

The next section suggests some simple steps if the association has determined that the matter is an owner responsibility. Those steps are:

• Investigate the situation.
  
• Make a proper demand on the homeowner to fix or make arrangements to fix the problem.
  
• Follow through and make sure the work gets done!!!

The questions in the next area of inquiry are as follows:

• Do the governing documents for the association require the board to fix the problem?
• Is there negligence to consider?
• How does the Civil Code factor into the analysis?
• If the governing documents of the association (especially the CC&Rs) are clear, they will specify whether or not the association is responsible to fix the particular area in question. More often than not, however, the documents are not clear, and the board must look elsewhere for guidance.
• Civil Code Section 1364 generally attributes responsibility as follows:

• If the Declaration (CC&Rs) provides responsibility, the CC&Rs control.
  

If the CC&Rs do not otherwise provide, in a condominium development, the Association is responsible to maintain an all common area, excluding exclusive use common area

In a planned development, unless otherwise specified in the Declaration, the owners are generally responsible for repairs to their units/lot.

What Civil Code Section 1364 does not say is that one has to look to see if specific components are addressed anywhere in the Declaration. For example, while Civil Code Section 1364 might imply that a homeowner is responsible for an exclusive use area deck, there may be responsibility in the governing documents stating that the Association is responsible for the structural aspects of the building, which might include decks, especially if they are cantilever style. Documents can be confusing on this, so legal counsel is needed in determining responsibility for specific areas, in most cases. This is critically important with regard to water leaks that have a potential to lead to mold claims.

Beside the documents and Civil Code Section 1364, I generally recommend that the Association give me information relating to past practice. For example, if the Association has fixed all decks and floors in the past, but declines in this particular situation to take responsibility, that can lead to an "inconsistent treatment" claim (involving breach of fiduciary duty for failure to treat all owners the same). Inconsistent enforcement of the CC&Rs; is the leading culprit in Directors and Officers claims, according to Chubb Insurance Group in studies/surveys that have been performed. So, past practices are certainly important.

How Are Things Different Now?

In the "olden days," associations would generally simply make a demand to a homeowner, if the Board felt it was the homeowner's responsibility to repair water leaks. If the association's insurance company was involved, associations would often simply turn over the proceeds from the insurance company to the homeowner and ask them to fix the problem. In the "olden days," associations often made little effort to follow through to make sure the water leak was fixed, trusting the homeowners (I guess). However, in this day and age, associations cannot afford to take such as a "laid back" or "trusting" attitude about water leaks. Follow-through is critical. Using the insurance proceeds, if there are any, to fix the leak (as opposed to a vacation), is critical.

How Can The Association Protect Itself?

There are several important aspects to protecting the Association with regard to water leaks. Many of them involve possible document amendments, changes and disclosures to the homeowners, and information to the community that explains the "shift," so that every homeowner has an opportunity to adequately protect themselves.

The important considerations for follow-through and the necessary protections are:

Is The Water Leak Fixed? (Gain Entry To Find Out!)

With regard to making sure the water leak is fixed, boards of directors need to be concerned with rights of entry, including inspection, the right to fix areas that the homeowners refuse to fix, and getting clearance after work is done. The CC&Rs; for the association may or may not allow right of entry. If they do not, it is important to consider amending the governing documents to provide a board with the right of entry it needs not only to inspect for water leaks or problems, but to make sure that they can get in to fix the problem if the owner doesn't fix it. Concurrent with this is the importance of being able to recover the costs if the association has to expend funds either to have the work done, or to force the owner to do it. This would come through a reimbursement assessment, and all CC&Rs; should provide for one.

Did The Owner Fail To Report The Leak In Time For The Association To Take Responsible Measures To Fix?

If an owner fails to report a leak, and it is allowed to continue for a number of years, that can lead to exacerbation of damages, and can even lead to mold claims. If the association's CC&Rs; impose an obligation upon owners to report roof leaks when they are discovered, and also provide the consequence that owners could be held responsible for extra damages if they failed to report, then owners would be more apt to let the board know when there is a potential problem. Again, the CC&Rs; should provide for a reimbursement assessment to cover extra costs if an owner or residence fails to report a water leak. The reporting issue also goes to negligence. In situations where documents require owners to repair water damage to the interior of their units, the association generally would not be responsible for those, unless there was negligence. An owner's failure to report a leak to the board could foil a negligence claim against the board. The board is not negligent until a duty arises that needs to be performed, and the Board fails in that duty. If the association does not know about a leak, it cannot fix it. CC&R; amendments may be needed to deal with the reporting issue, and the extra costs involved if an owner fails to report a problem. Without document amendments, the association can still use these arguments in court, but they are stronger if the documents reflect the obligation.

Are Owners Responsible For Interior Damage?

Generally, in a condominium, or a planned development, the documents for the association make the owners responsible for repair of interior damages. In the case of Franklin v. Marie Antoinette Condominium Owners Association, Inc., 19 Cal. App. 4th 824, 23 Cal. Rptr. 2d 744 (1993), the association actually had a provision in their CC&Rs; that required owners to be responsible for repairs for interior damage from water leaks. An owner who suffered from interior water damage sued the board and tried to get the board to pay for the damage. The court recognized that the clause making the owner responsible for the interior water damage could be upheld, so long as the association was not negligent. It recognized that no negligence was found on the part of the board. The court did make it clear that the association could not escape a negligence claim by so stating in the governing documents. However, it could escape responsibility for interior damages for water leaks, no matter what the source, since the CC&Rs; provided for that, and since there was no negligence found. Perhaps your association wants to consider amending the CC&Rs; to hold owners responsible for interior damages for water leaks. That is a big step toward protecting the Association with regard to water intrusion and mold claims.

Insurance - Who's Responsible?

Insurance factors into the equation of water leaks in a big way. Associations are looking for ways to minimize the costs of insurance premiums. One of the reasons associations get hit so hard with high premiums is the common water damage claims. A poor claims history can cause the premiums to skyrocket, and can even cause insurance to be dropped. The association, by taking some fairly simple steps to shift responsibility, can avoid bad claims history, and can effect more cooperation from homeowners. Raising deductibles is one way to help. It more or less forces homeowners to insure for loss coverage if the deductible is raised to $5,000 (as is happening commonly these days), if the homeowner wants to avoid a $5,000 payout.

In determining which insurance company - the association's or the owner's - is responsible for a water leak, again, the documents become very important. Insurance company adjusters are looking more closely at CC&Rs; these days than they ever have, to try and carve out exceptions for water leak claims, whether it be the association's insurance company, or the individual owners insurance company.

Let's start with the understanding that the homeowners pay for the insurance no matter whose name it is in. In other words, the homeowners pay for the association's master coverage, and they pay for their individual coverage. However, there is more of a chance that the association coverage costs will skyrocket in this day and age with the water leak issues, the insurance crises, and the mold claims so that is the place to focus energy in attempting to minimize premiums. If all this is explained to the homeowners in a meaningful fashion, they should understand the association's intent in shifting responsibility of the homeowners for more items, thereby allowing the homeowners to save money on association premiums. At the same time, the homeowners will have a stronger incentive to purchase insurance in order to protect themselves. Because the "world" believes, or seems to believe that associations are the "be-all" and "and-all" of responsibility for homeowners, the community does need to receive considerable information about any shifting of responsibility and the benefits of it to them, so they understand, and are willing to put out the additional money needed for individual homeowners polices. In these days, many owners believe the Association insurance covers everything anyway, so a major push to change that perception is needed.

With regard to insurance coverage, these are important factors:

• Are betterments/upgrades included in the association's coverage? (If they are, they perhaps should be excluded by a CC&R; amendment.) The association may be able to save money on premiums for master coverage if betterments and upgrades are excluded and are made a homeowner's individual responsibility. Homeowners can get individual coverage for betterments and upgrades, but they may have to ask for it. It is my understanding from speaking with different insurance representatives and board members who have purchased this coverage is that the cost is not at all exorbitant. For a homeowner condominium policy in a nearby association to my office, I understand that premiums that included liability coverage for the individual homeowner and coverage for personal property damage, deductible coverage ("loss assessment") and betterments and upgrades was between $250 and $300 per year.

• Are interior damages from water intrusion included in the association's coverage? (If they are, they perhaps should be excluded by a CC&R; amendment.) The association may be able to save money on premiums for master coverage if damages from water intrusion are excluded and are made a homeowner's individual responsibility. Homeowners can get individual coverage for damages from water intrusion, but they may have to ask for it. As stated above, for a homeowner condominium policy in a nearby association to my office, I understand that premiums that included liability coverage for the individual homeowner and coverage for personal property damage, deductible coverage ("loss assessment"), interior damage, and betterments and upgrades was between $250 and $300 per year.

The CC&Rs could provide that the association can set policy relating to question of deductibles, or make it clear that the owners are responsible for the deductibles in situations that involve their unit. Since associations can get insurance to cover these costs, they should be made aware of that.

In dealing with all these issues, it is critical for the association to do the following:

• Develop reasonable policies on handling and reporting water leak claims.


• Make sure that the CC&Rs; give the authority for the policies they have adopted.


• Make sure that the homeowners receive disclosures, disclosures, disclosures.

Disclosures, Disclosures, Disclosures

Again, in shifting responsibility to the homeowners, the association would be derelict in its duty if it did not let the homeowners know, in every way possible, that they have some responsibility if they want to protect themselves through purchase of insurance, and that they must take responsibility for damages from water intrusion and betterments and upgrades, including things like expensive hardwood flooring. The association is required to distribute an annual disclosure relating to association insurance coverage and that is first place that a notation should be made each owner's responsibility. The annual disclosure required by Civil Code Section 1365 (e) specifies that the association has to give the owners information on its liability policies and property coverage policies. The association has to include a specific paragraph that is set out in the Civil Code that explains to the homeowners that they need to consult their own insurance expert to make sure that they protect themselves. Such a disclosure should go on to include a paragraph making it clear to owners that they may be responsible for deductibles, damages from water intrusion, and betterments and upgrades, if that is the case.

If the association circulates a newsletter, I would suggest dedicating a small portion of it every month (or every time it is sent out) reminding the homeowners that they need to obtain their own insurance coverage to cover their personal property, loss assessments, deductibles, and betterment's and upgrades (if that is the case).

An individual letter to homeowners, a copy of which is to be included with any package that goes to a new buyer with an escrow demand, should set out the association's coverage in lay people's language, as well as the obligations that are expected of the homeowners, and the reasons why.

The processes mentioned herein work together to bring down the cost of insurance for the association, and eliminate terminated insurance and high costs that result from a poor claims history. Raising the deductible to $5,000 eliminates those natty $1,200 to $3,000 claims that relate to water leaks from washer hoses, overflowing tubs, etc.

To recap the overall gist of this newsletter, these are things boards of directors of associations should consider:

• 1. Paying closer attention to water leaks and the repairs, exercising rights of entry to inspect if homeowner fixes damage.
• 2. Amending governing documents to provide changes in maintenance responsibility for interior water damage, betterments and upgrades.

• 3.Specifying in the governing documents responsibility for reporting owner leaks, with a concomitant obligation on the part of the owner to pay for exacerbated damage situations that result from non reporting.
• 4. Amending documents to provide for a reimbursement assessment to cover costs expended because of a homeowner's failure to exercise their duties.

• 5. Changes in insurance responsibility in the governing documents and disclosures to owners shifting some of the responsibility to owners for higher deductibles, interior damages, betterments and upgrades.

Get Proactive: Associations need to work with their insurance professionals, managers, and attorneys to formulate good policies for gaining entry, conducting periodic inspections, following up on water leak/damage/intrusion reports, pursuing responsible parties, setting up insurance claim-making policies so that requests go through the board, adopting policies related to deductibles, perhaps raising deductibles to a higher ceiling so the small claims that lead to being dropped are eliminated, making sure owners fix problems that are their responsibility (perhaps through a follow-up policy similar to architectural control policies that call for follow-up inspections to assure that work is completed), etc., etc., etc.

You may want to look back at the Article written by Garth Leone (Insurance Broker for HOAs) and Beth Grimm that was published in the May, 2002 ECHO JOURNAL. That article sets the stage for this one - and the quest to help associations cope with the insurance crisis in California.

Beth Grimm is a community association attorney in California. She is East Bay Resource Panel chairperson, author of various publications and books about condominium living and the law, a frequent contributor to the ECHO Journal, and a frequent speaker for various HOA industry groups, and statewide Public Relations Chair for the California Legislative Action Committee (CLAC). Visit her at http://www.californiacondoguru.com for the latest and hottest issues HOAs and homeowners face every day.