What HOA Directors Should Know When Making Decisions Not to Have Earthquake Insurance

The recent 7.0 earthquake in Alaska has brought to light the importance of homeowners associations having proper insurance coverage when a catastrophic event occurs. Unfortunately, it is often not until after the catastrophic event occurs and the losses become realities, when those affected by the lack of having insurance coverage for the event (i.e. earthquake or flood insurance) learn the ramifications of decisions that were made not to spend the money for the insurance coverage.  Such a scenario is now playing out in the River’s Edge Condos located on the northern bank of Eagle River in Anchorage Alaska, where the 7.0 earthquake that struck on November 30th has caused considerable damage and left properties uninhabitable. (See Sean Maguire, December 10, 2018, article entitled, “Homeowner Association didn’t have quake insurance, residents of condemned Eagle River condos say”).

Association directors have an obligation to act in the best interests of the association and its members. The fulfillment of directors’ responsibilities necessitates making well-reasoned and informed decisions and the “business judgment rule” that association directors rely on for protection against liability requires sufficient investigation of the matter at hand. By making well-reasoned decisions and acting in good faith, directors will limit the potential liability of the association, and their personal exposure to liability.

Frequently, association directors are under the mistaken impression that they are always protected against personal liability by state statutes and/or provisions in their association’s governing documents that are designed to shield the individual volunteer officers and directors from personal liability for their acts as an officer or director of their homeowners association. While it is correct that there are state statures and provisions in governing documents that are designed to protect the volunteer officers and directors of the association against personal liability for their actions as an officer and/or director, there are conditions that generally apply to such protection, such as: (i) the act or omission was performed within the scope of the officer / director’s association duties; (ii) the act or omission was performed in good faith; and (iii) the act or omission was not willful, wanton, or grossly negligent.

Although keeping HOA dues low is a valid concern of an association’s directors, artificially suppressing dues at the expense of the safety and stability of the association’s infrastructure is not a “good faith” course of action, let alone sound business judgment. The association as a whole was organized to manage the development and the board can, and should levy assessments to fulfill that management obligation.

Maintaining proper insurance is an important element in association management. At the very least, for directors attempting to avoid individual liability, the board must make a reasonable inquiry into obtaining coverage and make responsible and informed decisions regarding such policies. When it comes to making decisions about carrying earthquake insurance, association directors must: