What protects an individual homeowner from a catastrophic judgment against her community association?
There’s a lot of media and blog space being devoted to the question of whether the homeowners in the community where Trayvon Martin was killed could end up personally responsible for a judgment obtained against their association and perhaps lose their homes as a result. This tragedy could certainly result in a lawsuit brought against the association by Martin’s family. If it were, it could be based in part on the fact that the homeowner’s association authorized the “neighborhood watch” program which included the work of George Zimmerman, Martin’s alleged assailant. A verdict of negligent supervision resulting in wrongful death could produce a judgment against the association. Notwithstanding all of the publicity and national attention, the damages in the case, assuming a finding of liability against the association, would likely be an award of general damages—a punitive damage award against the association is unlikely on these facts. But any damages award of a substantial amount against the association could create concern among owners about their own potential responsibility. Are the individual owners exposed to personal liability in that or similar scenarios?
We have written previously on this subject and have noted that a bankruptcy filing by a community association would not likely protect owners from an association’s judgment creditors. The owners personally would not likely be parties to the litigation as the corporate status of most community associations would protect them unless they had been personally involved in the incident. But the provisions of most community association governing documents permit the association, under the right circumstances, to “pass through” debts owed to creditors, including judgment creditors, through the vehicle of assessment liens. Given those possibilities, what can owners do to protect themselves?
Proper Management and Board Oversight
It should go without saying that avoiding negligent acts in the first place should be high on everyone’s list. Properly supervising volunteers, employees and contractors who do work for the association to be sure that they carry out their duties without endangering the safety or lives of others is a paramount responsibility of every manager and board of directors. Insuring proper licensing of tradespeople and professionals is a good place to start. Background investigations and reference checks as well as regular reviews of their activities by management or by the board are a must. Requiring that all contractors be properly insured against claims of negligence brought by third parties who might be injured or damaged is critical.
There’s an old adage that says “liability flows uphill.” What that means in the legal world is that a plaintiff or judgment creditor will seek to impose liability, or collect their judgment, against anyone up the chain of responsibility. With a claim against a community association and its contractor, that chain could look something like this:
Plaintiff---Contractor---Community Association---Individual Owners
What is important is that each link in the chain carries sufficient insurance to protect not only itself from liability for its own negligence, but the next link in the chain as well. A landscape contractor maintaining the association’s common areas should insure not only itself against claims by someone who, say, slips on a wet sidewalk, but should also name its client, the association, as an “additional insured” so that the client has the benefit of the contractor’s insurance as well. These obligations are also often handled by means of contractual agreements to indemnify clients or customers, but an agreement to indemnify should be backed by insurance wherever possible. It is important that where a contractor is to name the association as an additional insured, that a certificate from the carrier evidencing this is obtained before the contractor starts work.
Insuring the various links in this liability chain is accomplished in most cases by a Comprehensive General Liability (CGL) policy which is intended to protect those insured by it, both primary and additionally named insureds, against claims for damage brought by third parties—bystanders, or others who are not in contract with the negligent party. This is different than a “D&O” policy which protects the directors and officers of the association from the consequences of their own negligence, but, as you will see, may afford no coverage for individual owners who might ultimately be responsible for a judgment against the association or its board of directors.
Property owners within a community association are protected by the layers of insurance in the chain of liability below them, and by their own individual insurance. The layers below them include the CGL policies of say, the contractor, and the CGL policy of the association itself. Each of these policies, if the particular loss were otherwise covered, would insure against that loss up to the specified limits of the policy—usually one or two million dollars as the “primary” liability insurance and possibly more if an “excess” policy had been obtained. So if an injured party sued the association’s contractor and the association, the combined limits of both parties’ general liability insurance, and any excess, would be available to cover the loss.
Let’s assume that the limits of the contractor’s policy were $2 million and the same limits for the association’s policy. In that instance, there would be $4 million available to pay the claims of the plaintiff, assuming both of those parties were found liable. If the plaintiff’s judgment or claim could be paid or settled for less than that amount, the individual owners would have nothing to worry about—there would be no need for a “pass through” to the owners by way of a special assessment. But what if the limits of the insurance available to the contractor and the association combined were not enough to satisfy the plaintiff’s judgment? What if the plaintiff had succeeded in obtaining a $5 million judgment against the contractor and the association and that amount exceeded all available insurance in the layers below the individual owners?
Loss Assessment Coverage
Individual owners generally carry their own insurance against liability and other losses by way of their condominium owner’s policy. That policy not only insures against loss by theft of the owner’s possessions and damage to separate interest property, it usually has a liability insurance component. If the owner were sued directly, that liability component could be called upon to defend the owner and pay any judgment up to the limits of the owner’s policy. But if the owner were not specifically named as a defendant, their general liability policy would likely not provide coverage for the claim. The obligation to pay a special assessment levied to recover funds to pay the judgment against the association would likely not be a covered loss under the owner’s general liability policy.
But owners who live in community associations have another option—an endorsement to their owner’s policy that will cover them against a special assessment levied to pay for a loss sustained by the association—whether due to fire, some other catastrophe or, in this case, a judgment against the association. This insurance is called “Loss Assessment” coverage and will pay a covered special assessment up to the limits of the endorsement. We say a “covered” special assessment, because loss assessment coverage would not pay, for example, a special assessment levied by the association to raise funds for a routine roof replacement.
Loss Assessment coverage can provide another layer of insurance protection for individual owners. If, as in the example above, the judgment creditor was demanding that the association pay the $1 million not covered by other insurance, the association would likely levy, or a court could order, a special assessment upon the owners for that amount. If there were 100 owners in the project that would mean an average assessment of $10,000 per owner. If an owner had loss assessment coverage of that much or more, a special assessment levied by the association would be paid by that owner’s loss assessment insurance. The cost of liability insurance has changed a lot in the past few years, but loss assessment coverage is usually not expensive. But the typical coverage limits are often too low—perhaps only $5,000. Owners who live in community associations where loss assessment coverage is available should consider raising those limits to as much as $50,000 if limits in that amount are available from their insurance carrier.
It is important that all owners carry loss assessment coverage. In essence, loss assessment coverage benefits not only the individual owner but all of her neighbors as well. When a special assessment is levied on the individual owners by an order of a court, as in this case, to collect a judgment obtained against the association by a third party, it becomes a lien against the collective equity of every home in the development. If some owners fail to pay their share, as with other association obligations, the burden then falls on the remaining owners to pick up the balance. Owners who fail to carry loss assessment coverage pose a risk to their neighbors to the extent they are unable to meet their assessment obligation from their personal funds.
If the Board of Directors of the association has done its due diligence when hiring and has properly supervised volunteers, contractors or employees; If contractors are properly insured against negligence claims and the association is either a named insured on their policies or can claim indemnity under the contract; If the association has general liability insurance in sufficient limits; and if each individual owner carries adequate loss assessment coverage, the aggregate protection offered by these various “layers” of insurance will often be sufficient to protect the equity in each individual owner’s home from an unexpected judgment or loss sustained by the association. If all 100 owners in our example carried $50,000 in Loss Assessment coverage that would effectively add another layer of liability insurance totaling $5 million. With the right combination of prevention and insurance, most community associations could sustain a big unexpected liability hit without individual owners losing equity, or their homes.