Does HOA E&O insurance cover this?

Started by KareanE • 5 replies • 1741 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

KareanE (Pennsylvania)
Posts: 3

Posted:

My association has recently identified a severe defect in a bunch of the units in the community (stucco/water penetration). They claimed that it first appeared over the past year or so and they are just beyond the timeframe of going back to the builder as builder defect.

Interestingly, when they said this at a meeting, there were about a dozen folks who said they had reported (and documented) these incidents consistently to the board and management company since 2004 and nothing was done.

Although I think the current board is great and has been diligent at going after the problem agressively, it looks that we may be up against a $2M cost to fix the problems. Evidently, had the previous board taken action and gone after the builder, we probably would have had this problem covered by the builder.

Given the responses of a lot of residents, it seems that the problem was well known for years, but the board failed to do anything. We've had a full replacement of 2 boards and 2 management companies who all knew about the situations.

The current board and management company seem to be really wanting to do what's best. But, they are stuck because we don't know where to come up with the $2M. They are looking for ideas for financial solutions. I feel bad suggesting the next line, but...

I was wondering if this is the kind of situation that is appropriate for residents to have something like a class action suit against the HOA errors & ommissions insurance to cover the damages?

Any other thoughts?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Karean,

Typically, when a volunteer Board makes bad decisions, the courts will forgive the board members and the Association for the bad decision. One could also ask why the individuals who reported the issues back in 2004 never went after the builder themselves once they realized the board wasn't doing anything to address the issue.

You may do better to go after the builder anyway.

MatthewW4 (Arizona)
Posts: 500

Posted:

Karean,

With two million dollars at stake, my first thought is you would be wise to book some time with an attorney.

Knowing little about insurance myself, I did a quick read on Wikipedia and found that E&O insurance protects your board against claims made by others.

One issue you will have to contend with is the statute of limitations. If the board and at least some homeowners knew of the problem as early as 2004 then the question arises why no one did anything. Statutes of limitations vary from issue-to-issue and state-to-state so this should be one of the big questions to discuss with the attorney. Some states start the clock when defective work was done and others do not start the clock until the defect becomes known.

Are these some form of condos or are they fee simple properties? If these are fee simple properties, it is not really an HOA issue even if the defects are common to all properties. The homeowners should have taken action against the builder whenever they became aware of the problem.

You mentioned that there was a management company involved and that at least some of the defects had been reported to them. If the MC knew of the problem and did nothing and/or withheld the information from the board you may have a claim against the MC.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

The BOD has two choices. One is the association pays for the repairs/changes. How they raise the money is another subject.

The 2nd choice is to hire a lawyer and look into sueing the original builder. If documentation can be found where complaints were made early on, this might serve as a basis that the problems were construction defects.

For the amount of money involved, I would explore legal recourse first.

If the HOA has to pay the cost and they do not have the resiouces, they have several choices to raise the money. One would be a one time assessment against each unit. Another way would be the HOA borrows the money and raise the dues to cover the pay back.

To repeat, I suggest spend a few bucks for a lawyer and explore recourse to the builder.

Hope this helps.

MatthewW4 (Arizona)
Posts: 500

Posted:

Quote:

Posted By JohnC46 on 05/01/2013 6:28 AM
If documentation can be found where complaints were made early on, this might serve as a basis that the problems were construction defects.

It would also serve as the basis for a statute of limitations dismissal as it would prove that the association knew of the problem as early as nine years ago and chose to do nothing. Finding written complaints from 2004 in the association's records would be the defense attorney's dream come true.

As I understand it, there was a major change in the way stucco was formulated and applied several decades ago. Many old-timers continued to use the old construction methods with the new materials and the result was that massive amounts of water leaked in behind the stucco and rotted the wood structure underneath.

Under the doctrine of laches, the court may dismiss a lawsuit when the plaintiff knew he had a cause of action, delayed taking action without explanation, and the passage of time aggravated the damages. The builder will argue that by remaining silent when it knew there was a problem the association caused the damage to escalate from a mere re-stucco job to major structural defects.

CarolR11 (Colorado)
Posts: 2,563

Posted:

Matthew wrote: "Finding written complaints from 2004 in the association's records would be the defense attorney's dream come true." This is all too true based on the construction defect litigation our HOA went through. In CA, the statutes clock starts ticking from the time a construction defect is first observed. The statutes had "run" on a $480,000 defect here. Fortunately the final settlement gave us enough to replace the item, which is in progress right now.

We had another defect that needed immediate attention to the tune of $1 million. We'd hired our defect attorneys by then, and they suggested two options. (1) An emergency special assessment, which would not have required owner approval, or (2) a loan. Owners voted for the loan. Though a reserves item, we didn't have enough in our reserves accounts to cover the replacement of the component.

So, Karean, have funds been set aside into reserves to eventually replace the stucco that your HOA can use? The nature of your defect sounds as if it truly does need immediate attention. Is there any chance that the stucco is still under warranty?

Were any repairs made to the stucco issue in those early days? (But even if the developer undertook the repairs, this does not mean this will help you get a settlement.)
-----------------------

As others have suggested, you need attorneys to advise you whether the statutes of limitation have indeed run out. They may or may not advise that your association take legal action against the management companies, who may, in any case, have had contracts that protect them.

But, did you have an HOA law firm that knew about this defect? If so, your association may be able to go after that firm for not alerting the Board(s) of statute of limitation issues. There are a few attorneys who specialize in representing clients in this area of the law. I, frankly, would be very suspicious if your HOA attorney was originally hired by the developer.
----------------------

As far as your own Boards of Directors are concerned, as Matthew & Tim point out, most states do protect directors when they have practiced due diligence and did not act (or fail to act in this case), for illegitimate reasons, e.g., getting payoffs from the developer to stall so that the statutes could run (out of time).

--------------------

Finally, how old is you HOA? How many units? Detached homes or condos? Or?

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here