RIPPLES FROM
CHAMPLAIN TOWER COLLAPSE
Interest  remains high about what happened in the deadly collapse of the condominium highrise in Florida and how it might apply to associations in California.
Associated Press. On Tuesday, I was interviewed by a reporter from the Associated Press about how the disaster will ripple across the United States. I think it's very likely legislatures will be compelled to adopt new laws regulating highrise construction, maintenance obligations, and reserve funding. In addition, older highrises may find themselves under intense scrutiny with deferred maintenance suddenly made a priority.
In the interview, I noted that the Champlain Towers Association's problems shifted into a new phase. In the aftermath of the deadly ’94 Northridge earthquake, associations I represented suffered severe financial strain when owners stopped paying their assessments and simply walked away from their units. I believe members of Champlain Towers will stop paying their assessments, the towers will never be rebuilt, and the Association will be dissolved.
In addition, I suspect the Association's insurance carriers will balk at providing coverage because lack of maintenance, which the association knew about, led to the collapse. Eventually, the property will be sold and what little money the land brings will be distributed to members, all of whom lost everything in the disaster.
Nationwide Research Project. I pointed out that aging infrastructures are a growing problem for a significant percentage of associations in California and the rest of the nation. The problem is such that the Foundation for Community Association Research convened a task force to examine the problem. I am a founding member of the Critical Issues Think Tank that recommended the study and a member of the Aging Infrastructure Task Force that examined the issues related to system failures in common interest developments.
The results of our multi-year project, which surveyed associations across the U.S., compiled information and analyzed it, was published last year--12 months before the collapse of Champlain Towers. The data in this timely report identifies many of the problems experienced by the doomed highrise.
Board Negligence.  Negligent boards who defer maintenance have created costly situations for their associations. I've represented many associations that were forced to impose huge special assessments on members (up to $75,000 per unit) because prior boards failed/refused to properly fund their reserves and repair common areas. The majority of issues reported by those who responded to our survey were water intrusion in windows and siding, deteriorating balconies, failing plumbing, electrical problems, and failing roofs.
You can read the results of the survey in "Breaking Point: Examining Aging Infrastructure in Community Associations."
Leaking Podium Decks. I  read your column this morning on Surfside and wanted to remark that there are a lot of buildings in California that have similar problems--podium decks that leak into garages below.
I've spoken with half a dozen of my fellow waterproofing professionals and we all agree that leaking podium decks are prevalent throughout California and subject to the same problems that Surfside had--water infiltrating concrete which corrodes the rebar, causing it to expand and concrete to fail.
Podium decks with failed waterproofing are extraordinarily expensive to repair. We have seen the same infighting among board and members that you described at Surfside over the cost and methods to repair. Unfortunately, boards will spend money on elaborate sheet metal channels underneath a cracked leaking podium deck rather than spend money to fix the problem.
Surfside will change everything just like the Berkeley balcony collapse did. It's a tragedy that it takes 150 people to die before things get done. -Bill Leys, The Deck Expert, AWS Consultants
Insurance Issues. I just read your comments on the Surfside Condominium collapse and have a question concerning insurance. Would a normal condo policy cover the loss or would they consider it an "Act of God"? For safety reasons, authorities took down the remaining building. Does insurance cover this loss? –Larry D.
ANSWER: Because it involves insurance, I passed the question to Ryan Gesell of the Cline Agency Insurance Brokers. This is his response:
Acts of God. Property policies only cover losses due to covered perils listed on the policy. While it’s true there are policies that cover what we would typically consider an “Act of God” like an Earthquake or Flood, it doesn’t appear that the cause of the initial collapse of this building was the result of a covered peril under the Special Form property policies. We haven’t seen a copy of the policy that this Association maintained, but it’s likely they had a Special Form policy which is designed to cover the typical losses you’d see in a condominium building (fire, lightening, explosion, windstorm, sudden water damage, etc.) subject to the exclusions on the policy.
Insurance Adjusters. Obviously, this loss will be scrutinized extensively, and the adjusters assigned to the loss will no doubt be scouring the policy language for what their duty is to the insured after the reports are finalized stating the official cause of the collapse. According to initial reports, the collapse has been attributed to structural damage due to poor building design and poor drainage on the pool deck and planters. Poor building design is not a covered peril. Condominium master policies were not designed to protect against a loss like this. They don’t rate for it in their premiums, and the policy will almost certainly have language excluding coverage for this type of loss.
Cost to Rebuild. And, unfortunately, the cost to rebuild those portions of the building that were brought down intentionally to prevent further loss of life will also not likely be covered as again, it wasn’t the result of a covered peril. Furthermore, we don’t expect that there will be any collectible insurance for the unit owners under their individual HO-6 policies for the Additional Living Expenses of moving into a hotel. All H0-6 carriers are different and will have their own policy language, but typically they would only cover those types of expenses if the loss of the primary residence was the result of a covered peril under the policy.
General Liability and Umbrella Policies. That said, we would expect that the General Liability and Umbrella policies the Association maintains to step in and pay the expected liability claims brought by the families of those poor folks that perished in the collapse. We’d expect those carriers to pay up to the policy limits, as the lawsuits are likely to be significant. Beyond that, the individual owners may be held liable for any awards in excess of the collectible insurance coverage.
Financial Hardship. It's a very sad set of circumstances indeed. Sad for those that lost their lives, for the families of those that died, and for the owners that survived that will likely face financial hardships as a result. In summary, unless the investigation reveals facts that are currently unknown and the loss is attributed to a covered peril on the policy, we don’t expect there to be any collectible insurance for the rebuilding of the structure.
D&O Policy. The D&O issues are also extremely interesting. Here’s a circumstance where you’d expect the current board members as well as directors and officers going back a decade or more to be named in lawsuits alleging their actions (or in this case, the failure to act) led to the building’s untimely demise. Unfortunately, D&O polices contain bodily injury and property damage exclusions which are designed to ensure the D&O policy does not inadvertently duplicate the coverage provided by the underlying general liability (CGL) polices.
Thank you to Ryan Gesell, CIRMS, CMCA, Vice President, Cline Agency Insurance Brokers for providing this information.
Audit Disclosures. What did the auditor know, when did he|she know it, when and how was it disclosed in the financial statements? If an audit or review was performed on the Champlain Association (apparently owners can opt out of such Florida requirements for up to 3 years), then immediately upon issuing a $15,000,000 estimate of the cost to cure the building issues the loss and related liability should have been recorded on the Association’s GAAP compliant financial statements.
If this loss was not recorded on the HOA’s books such that the members could grant their “informed consent” to the situation, I am thinking that the HOA’s CPA and related volunteers and professionals are at serious risk of malpractice.
CAI should develop the best accounting and reporting practices for HOAs across the country because what is going on now is misleading, fails to reflect economic reality, and inconsistent with current liability recognition standards. -Donald W. Haney, CPA, MBA, MS(Tax)
Politics. I am surprised you took such a political stance in answering a simple question regarding ADUs. I was put off by your answer. -Daniel H.
RESPONSE: Owners can't bury their heads in the sand and pretend politics don't effect our industry. When governors and legislators constantly make terrible decisions that disrupt our communities, someone needs to speak up. Turning garages into rental units and building another one in the yard is one of those short-sighted decisions that will have a long-term negative impact on communities. Senate Bills 9 and 10 are two more bills that will destroy property values and strain HOA resources if passed into law. Politics are all around us. Being polite and not engaging in the fight is not an option. When boards of directors make terrible decisions, you replace them. The same is true with politicians.
YouTube Videos. Adrian - Kudos on another excellent explaining video on the HOA process that breaks it down into understandable and basic bite size pieces. Thanks for putting on YouTube. I have subscribed. Perhaps more newsletter recipients should know about ability to subscribe to your YouTube channel. -Leland B.
RESPONSE: Leland, thank you for the kudos. We have a growing library of videos as well as a large and growing subscriber base on our YouTube channel: HOA Legal Issues.
THE PURPOSE OF AN ASSOCIATION
 The next in our series of 2-Minute Videos is timely in light of the Champlain Towers disaster.
Our video describes the purpose of an association--why are they created and what are they supposed to do? What role does a board of directors play in managing an association?
 Watch: Why Do Homeowner Associations Exist?
| DISCLAIMER. Our newsletter provides commentary only, not legal advice. Boards need to retain an attorney to review all the facts and give a legal opinion on the issues they face. We serve as corporate counsel to California associations only. Request a proposal to represent your association.
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