Newbie question - Insurance

A few of our 7 directors, including myself, are new to this arena. The topics on this site have been an invaluable resource for guidance, correction and affirmation of interpretations. Thank you.

We are a small 'frontier' (that means 20 miles of bad road .. past 'rural') subdivision in New Mexico. 144 lots. $50 YEARLY assessment. Our subdivision roads are unpaved and can become impassable during monsoon season or after a heavy snowfall/melt. A 4WD is required for year round access. The association owns a grader that is operated by a volunteer resident landowner. Roads are the association's #1 obligation (governing docs) & expense (gravel and gasoline). Currently the blade is serving as 'the brakes' for the grader. Drop the blade and you stop! We're pretty self sufficient out here. Resident landowners will do the labor, the expense lies in the part(s). The newest directors noted that new brakes have been on a 'wish list' for over 5 years.

Annual meeting - Question #1 - How can a volunteer grader operator release? himself from personal liability?
A long time director stated they checked into it before and 'it's too expensive'. Keeping in mind that our best expected annual income currently hovers around $6000.00, I have to agree. Is there another option? Would a Liability Waiver fill the need? I have found conflicting reports online regarding effectiveness and specifics. (i.e. signed by whom? Notarized?). Or, is this a non-issue? (Our association carries NO insurance of any kind.)

It seems that every single question opens the door to 5 more questions:

While checking on past grader maintenance & repairs and seeing 'Brakes' on a 5 year old wish list, the BoD questioned the treasurer on how much of the checking account balance is for 'reserve' grader funds and how much of the balance is 'reserve' water well funds. The treasurer was unable to answer this question. Directors asked if there was a 'limit', 'cap' or 'goal' amount for either of the 'reserve' funds. The treasurer was unable to answer this question. Directors asked what the 'reserve' funds were being 'saved' for. Maintenance? repairs? a new grader? a new well? The treasurer was unable to answer these questions.
I haven't read a thing in the HOA Act, nonprofit corporation statutes or our governing documents that give direction on 'reserves'.
Is a competent 'structure' for reserve accounts warranted or required? If yes, is this something the board should consider adding to our bylaws?

My next topic: The associations checking account is in an out of state bank. If/when we have to set up a new, in-state account, understanding any 'reserves' requirements and 'target amounts' will be helpful.

thank you!

Yipes.

First off, without directors and officers insurance, the board members become personally liable in the event that the HOA is sued. No one should ever put their personal assets at risk in order to serve on a community association board. In addition, the individual homeowners also become personally liable if someone is hurt on the commonly owned property and sues. Your HOA needs insurance, yesterday.

You also have homeowners performing work for the association. Our attorney says that if we choose to have homeowners perform work for us (and he recommends that we don't), then we must carry full workmen's comp insurance, along with all of the other liability insurance that we always carry. You could try getting a release of liability from the worker, but I don't know if that would hold up in court if you are sued. A chat with an insurance agent who is familiar with the needs of an HOA is in order.

If the board believes insurance is too expensive, wait 'til they see how much it costs to not have it when you need it.

Re: reserve funds, I tried Googling New Mexico and reserve requirements. The most recent source I found was from 2012 that stated there were no requirements for a reserve study or for funding reserves. I wouldn't rely on that, though. In my neck of the woods, the reserve requirement is referred to as the "let's stop them from doing something stupid" law. It was passed after too many associations got themselves into serious financial difficulties because they couldn't afford necessary, big-ticket items that need to be replaced (roads and roofs, for example). If an association does not want to fund their reserves in accordance with their latest reserve study, the homeowners must vote to approve the lack of funding each year (I refer to this as the "let's do something stupid anyway" law, although an association may have a legitimate reason not to fund their reserves temporarily).

So having a reserve fund is usually a good idea, but it really depends on the extent of your commonly owned property, the nature of the maintenance you need to do, and how easily homeowners could handle a worst-case special assessment to make repairs. That's a discussion for the directors.

Tammy

As said, your BOD need D&O insurance as of yesterday.

Reserves money is typically held pending its need for "future spending" generally defined by a Reserve Study. As an example, "grader brake replacement" might well be defined in a Reserve Study. Not saying you need a Reserve Study but taking money out to replace grader brakes is valid.

An uninsured, volunteer operating the grader is of concern to me. This has to be addressed with insurance and/or a release. This issue nneds legal advice.

Tammy,

Do not serve on the board in these circumstances without D&O insurance.

I don't think you need to break things down that specifically. Our latest reserve study produced a spreadsheet that broke things down by projected spending per item per year over the next 30 years. However, our actual reserve accounts lump all the money together (our funds are spread over a few banks so that we maintain FDIC insurance on all funds). We use the reserve study spreadsheet to determine how much money we will need each year. Money that won't be needed for a few years is invested in CDs and similar things, with a cushion of funds in a money market account in case something unexpected happens. We review the current reserve study projections each year at budgeting time, and we have a new study done every 3-5 years to make sure our projections are up-to-date. You may or may not need to do this - I'm in a condo community that has a greater percentage of common areas, many more individual units, and more complexity in general - thus the need for more hands-on managing.

Operating funds (things you'll need to spend this year on routine maintenance) are kept separate from the reserves, although they can be held in the same bank. I believe this is the norm for association finances. Ohio has a lot more requirements attached to reserve funds, but that may not be the case in your state. However, it's easier to spend wisely if you get into the mindset of "money we can spend right now" and "money that must be saved for the big ticket items". Separating accounts helps you do this.

I can understand the old-timers' reaction to a newbie asking all these questions. Sometimes it's justified, other times it's not. The wise director needs to distinguish between these two and act accordingly. "We've always done it this way" should be an invitation to assess whether "this way" is meeting the association's current needs. I suggest scaring the pants off them with a description of what can happen without insurance. If it doesn't scare the pants off them, then they really do not know what they're doing.