community association risk management

The Ins & Outs of Community Association Risk Management

by Joel W. Meskin, Esq., CIRMS, CCAL, MLIS

Recently, I had the privilege to speak to a lovely group of volunteer board members at a Midwest CAI Chapter seminar. The seminar was entitled: “What’s My Line: Will the Real Community Association Risk Manager Please Stand Up?” The seminar is basically a college level seminar course squeezed into an hour and a half regarding Community Association Risk Management. In this article, I attempt to further distill the key points of the seminar to further assist board members and community association managers to successfully manage the risk of the association.

I have insured over 80,000 community associations nationwide and have touched, in one way or another, between at least 5,000 and 6,000 director and officer claims. In addition, I have seen pretty much every other type of claim or lawsuit confronting associations; however, I stopped saying a long time ago that I have seen it all. Almost every day, we see things that the most imaginative minds could not make up. In insuring these community associations, and in reviewing the claims, I have discovered a common core of most community association challenges, claims, disputes, and lawsuits.

First, unit owners do not read the association governing documents (declaration of covenants, conditions and restrictions, by-laws, and association rules) before they buy a unit in a community association. Accordingly, many unit owners do not understand what community association living is all about, including what “rights” they have given up in exchange for the “benefits” they obtain from the association managing the common elements. As a result, many issues arise because of unit owner’s unfulfilled expectations, or rules they were not aware of prior to becoming a “mandatory” member of the association. This always reminds me of the bumper sticker that said: “America, love it or leave it.” They further do not understand as is clearly set forth in association by-laws that they have given a group of their neighbors, who they may or may not know, or who they like or do not like, the authority to manage the association which is in place to protect the unit owner members’ two greatest assets, their property value and their lifestyle.

Second, unit owners do not understand the “business judgment rule” which is how the conduct and decisions of the elected voluntary board members are judged. In brief, in the absence of “fraud”, a “conflict” of interest or direct violation of law, no court is likely to overturn a board decision even if it is “wrong”, “stupid”, or contrary to common sense. A majority of claims come from those who never have time to volunteer, but have plenty of time to complain. These are the same people who do not take the election of association board members seriously and do not have time to vote.

Third, the elected voluntary board members very often themselves do not read the association’s governing documents. [inconceivable!] If you read any set of governing documents, although they may not use the term “risk manager,” the role of the board is to “manage” the association’s common elements. In other words, protect the assets of the association by enforcing the covenants, conditions, and restrictions. How can this be done if they do not read the documents that tell them what to do? As my wife says to me, “Why don’t you just as for directions, or follow the instructions before you put the IKEA bookshelf together?” There is never time to do it right in the first place, but there is always time to fix it.

Finally, the volunteer board members turn the job into something more than it is or does not understand their duties and obligations. The board is a “body” of elected individuals who meet pursuant to the by-laws and make management decisions and then delegate how the decisions will be carried out. The board members are not employees! Each member has one vote and decisions are discussed, debated, and determined in a board meeting. Discussions regarding issues outside of the board meeting is a violation, including emails between and amongst board members. The delegated matters are delegated to an employee, a community association professional. When a matter is delegated to a board member, it is delegated to them as a volunteer and they must carry it out like anyone else pursuant to the authority given by the board. Failure to stick to these precepts will give rise to unintended consequences.

Each one of these factors can be prevented and in doing so can lead to the reduction of many issues that prevent a successful association. Boards need to avoid turning the volunteer position as a board member into something more than it is.

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