Regular versus Special versus Emergency Assessments
There has a big uptick in assessments for associations due to higher insurance premiums, repairs required due to balcony inspections and just unexpected and unfunded projects. Preferably, a board has socked away enough money from regular assessments (monthly dues) to pay for these expenses, but increasingly, that is not the case. Many boards have not kept pace with inflation which effects the cost to replace or improve common areas, and almost all were unprepared for the skyrocketing insurance costs. We have personally seen insurance rates double or triple for some associations.

Regular Assessments
This is both the monthly dues, which a board can increase annually 20% without a vote of the community and this increase can be used for any purpose, and the board can also charge each owner 5% of the total gross expenses without a vote, but these funds must be use for a specific purpose. For example, you live in a 50-owner community and your monthly dues are $300. The board orders a reserve study and discover that their percent of the “fully funded” reserve level has dropped from 35% to 20% and due to increased insurance and utility costs, they are not contributing any money to the reserve accounts. The board could vote to increase the monthly dues to $360 and then bill each owner $180 (50 owners x $300 = $15,000 x 12 = $180,000/50 = $9,000/50 = $180). But what if the board must fund a large project for which there are not sufficient reserves or funds on hand to pay for it? They would consider a special assessment.

Special Assessment
The bar is much higher to institute a special assessment. Let’s say the community in the above example, 50 owners paying $300 a month in dues, needs $200,000 to reroof the properties. They have $300,000 in reserves dedicated to this project but can’t start the work without an additional $200,000. They would need to have a super-majority of the owners (66%+) approve this assessment. To reiterate, not 66% of those who vote, but 66%+ of all owners. If approved, the board may agree to have owners pay overtime, for example over a 2-year period or $167 per owner per month ($200,000/50 = $4,000/24 = $166.66) or in a lump sum. To state the obvious, this is not always easy to accomplish. Many owners may not live in the community and have traditionally not paid much attention as an owner to the community. Not voting is as damaging as opposing the special assessment. But what if a large bill must be paid or otherwise the community may be in jeopardy of a threat to either people living in the community or to assets of the association? For example, the cost of insurance doubles but there are not enough funds on hand to pay that bill, a vote for a special assessment fails and the insurance could lapse and expose the association to litigation should someone get injured while at the community. The board may have to pass an Emergency Assessment.

Emergency Assessment
If there is an emergency, the board can pass an assessment on to the owners without a vote of the members and by a simple majority vote of the board. In the Davis-Stirling statutes, there are three instances where an Emergency:

  1. A court order to address an extraordinary expense.
  2. An extraordinary expense where there is a threat to personal safety on the property or necessary to repair or maintain the common interest development.
  3. An extraordinary expense to repair or maintain the common areas that could have not been reasonably foreseen by the board when preparing and distributing the annual budget.

In our example with the insurance for the community doubling, the board may have anticipated a nominal increase in their insurance expense when budgeting for the year, but there is no way they expected their insurance bill to double. Before passing this expense on to the owners, the board is required to pass a resolution explaining the necessity of the expense and why the expense was not or could not have been reasonably foreseen and this resolution must be distributed to the members with the notice of the “emergency situation” assessment.

How to Keep a Board Director Free from Personal Liability
One of the fears of serving as a board director, is becoming the target of a personal lawsuit. You are willing to sacrifice your time and share your expertise but are less excited about personal liability. The fact is, if you don’t take certain actions, or more importantly, make decisions that are in clear conflict with your role as a board member for a corporation, even if your corporation is your non-profit association, no matter how small, you may put yourself at personal risk.

Know Your Fiduciary Commitment
This is paramount. Too many board directors believe they answer to the owners, vendors or management company. The fact is, they owe their fiduciary duty to the corporation. What is the corporation? That is non-profit corporation better known at the association they are serving. What are the assets of the corporation they are protecting? That would be the common area assets as set forth in the governing documents. They don’t have a fiduciary responsibility to keep dues low, in fact, they would be contrary to their fiduciary responsibility. They must show duty of care and loyalty to that corporation and not only maintain and protect the assets of the association but anticipate future repairs and replacements of those assets by having adequate reserves on hand.

Show Good Business Judgement
There is case law that protects a board member who decides, even if it the wrong decision, if they show good business judgement and made a decision any reasonable person in a similar situation; would make. If you show good business judgement, you are insulated from frivolous lawsuits and your directors’ and officers’ insurance will protect you. You are not legally required to make the “right” decision, but the best decision. For example, after hearing from three vendors on providing termite service, and weighing cost, service and reviews, you select one of them. Unfortunately, that vendor ends up providing terrible service and owners are upset. You are personally protected because you vetted a few vendors, discussed with the other board members the options, and picked the vendor you thought best for the job. You showed good business judgement. But let’s say the community needed tree trimming and your cousin, with no tree trimming experience or insurance in place, is out of work and you decide to him or her. If that person injured themselves or someone else, that decision was self-serving and a poor one and you could expose yourself to legal liability because your directors’ and officers’ insurance provider may choose not to defend that claim because of your actions.

Be Fair about Fair Housing
Even if you show the proper fiduciary responsibility and consistent good business judgement, you must adhere to the laws of California and respect all the fair housing laws. Treat each owner equally and apply rules and regulations equally to all owners. If you discriminate an owner or tenant, and there are 17 protected classes in this state, you may be subject to a fair housing law violation, and the first fine, without a warning, is $21,140. If in doubt, talk to your attorney. But if it is evident to the fair housing authorities that you have discriminated against one of these classes, your insurance will not protect you.

Keep Directors and Officers Insurance
Unfortunately, anyone can sue anybody, even if without merit, in our country. California is no exception. If an owner wants to sue a board member for doing their job, and hires an attorney to press their claim, you want your insurance company to step in and do their job. Directors and officers (D&O) insurance is a type of liability insurance that protects a company’s directors and officers from personal financial loss if they are sued for their actions while serving as company leaders. D&O insurance can also benefit the association reimbursing it for defense costs and settlements resulting from lawsuits. If you follow the statutes, remain steadfast in protecting your community as a fiduciary, then your D&O insurance is there shield you from personal liability.