Real Estate & Property Law

Uninsured HOA Funds - Who Pays For the Losses?

An interesting question came up at a legal resource panel this morning. Hopefully most everyone knows that many D&O policies for Boards of HOAs carry an exclusion of coverage for failure to insure, meaning, for example, that if an HOA fails to carry earthquake insurance and the Board or HOA is sued by someone who bears a loss because of that failure, the D&O Insurance would likely decline to provide a defense for the Board or HOA, or coverage for damages.

So, the question is "Does that play out the same way in the case where a Board invests the HOA money in an uninsured account, or the deposits exceed the FDIC insurance limits of $100,000 for the corporation, the bank goes bust, and the HOA loses part of its investment?

I would say "you betcha."

With the cavaet - the facts may have bearing one way or the other. What comes into play are factors like: does the policy language specifically identify types of insurance contemplated, or identify generally coverages such that the uninsured accounts fall into the category? Are there cases in the jurisdiction that play out this scenario to rely on? (I know of none in California but remain to be enlightened.) Was the decision not to get the insurance within the hands of the Board or was it determined by a shortage of available coverage in the marketplace, or was it simply a voluntary termination of or failure to get coverage based on the cost?

As we know, FDIC insurance does not cost money outright; it is there for every FDIC insured investment product. I believe that makes it even more eggregious to ignore the value of it (but maybe that is just me). Granted, the accounts may not be the highest interest bearing accounts .... but

The answer is an unequivocal yes - anticipating the next question to be - does the Board have a duty to protect the association funds?

Full post as published by California Condo & HOA Law on August 01, 2008 (boomark / email).