Lending Restrictions

Worried about what trouble your future Board might create?  A great way to lock in good governing habits is with a bank loan.  Yes, a bank loan.  All those restrictions for an Association loan guarantee that no funny business will be happening under someone else’s watch.  Just make sure the loan includes the following:

The 'proxy put'   This provision allows the lender to immediately call the loan due if a majority of the Association's Board of Directors becomes filled with 'non-continuing Directors' that were not approved by the original Board members.  Take it a step further to a 'dead hand proxy put', which prevents current Directors from bestowing 'continuing director' status to any new directors seated via a contentious election.

Governing Amendment   The lender holds veto power over any changes to community regulations.  That smoking ban will just have to wait.

Annual Audits   No, the treasurer did not pay for that Porsche with community funds.  Conspiracies are a thing of the past, when you’re required to have a CPA touch the books every single year. 

Insurance coverage    No corner-cutting here.  Great way to ensure that D&O insurance, fidelity, and workers comp coverage - the three coverages that typically get neglected - are fully in place.

Self-Managed?  No way.  That lender is going to have the last say on any changes in professional management.  And self-managed always turns out to be more costly in the long run.

Minimum Annual Budget   Yep, put the kibosh on all those crazy candidate promises of ‘lowering assessments’.  A related requirement keeps wastrels from draining your reserve funds.

First priority asset status   This allows the bank to have first dibs over any money or property the Association holds or might hold in the future.  Since HOAs rarely actually own real estate, the next best thing is having rights to all future assessments paid by homeowners.

Collections  The days of “going easy” on deadbeats are over.  Your banker expects the community to hit delinquent behavior with both barrels.  Absolutely no write-offs of debt without prior approval!  Best of all, if the delinquency rates slip above 10%, the note is called due.

Cross Default   Not cross-dressing, but close.  If the Board stiffs the plumber, it’s an automatic bank loan default.  It is also a default for any other creditor to have the ability to elect a majority of the members of the Board.

The point is this:  Requirements like those above have ramifications most of us never guessed existed, so be careful navigating past potential problems.  When your community obtains a bank loan for a major renovation/repair project, be sure your attorney is heavily involved. 

Protect Yourself

Through the years this blog has covered several aspects of Board member liability.  One additional item for your consideration is the use of indemnification agreements.  These provide a more inclusive protection than what you might find in State statutes or your community's governing documents.  These agreements contain detailed procedures and time frames - and clarify the types of claims covered.  If you decide to utilize this option, consider clarifications in the following areas:

Expenses.  Protect yourself against expenses connected with any proceeding, by expanding the definition of “Expenses” to cover items often excluded in a D&O policy:   fines & damages, experts’ and arbitrators’ fees, bonds, settlements, and income taxes resulting from payments.  Proceedings should include any threatened or pending legal proceeding such as investigations, discovery requests, and administrative proceedings.

Fees-on-Fees.  Directors are not necessarily entitled coverage for legal costs needed to sue the Association to enforce your indemnification rights - be sure this is added! 

Insurance.  Require that the Association have its D&O coverage audited to obtain the highest quality insurance available in the homeowner association industry.

Express coverage for negligence.   An all-inclusive provision may be voided because it is overly broad.  Be sure that your agreement explicitly covers all negligence except gross negligence.   Here are a couple of court cases that talk about this quirk in Georgia law:  Service Merchandise Co. v. Hunter Fan Co   "Georgia courts never imply an agreement to indemnify another for one’s own negligence in the absence of express language.”    Satilla Community Service Board v. Satilla Health Services, Inc   "Contracts indemnifying one against the consequences of his own negligence are not favored, but will be given effect where the intent is expressed in plain and unequivocal terms." 

Procedures and Timing.  The agreement can require that the Association, when settling a claim against you, include an unconditional release from all liabilities relating to the proceeding, along with an acknowledgement that you deny all wrongdoing.  Require all indemnification payments be made within 30 days, and all advances within 20 days of a written request.   In the event of an adverse ruling, you can appeal, and be indemnified for all expenses.  Include a presumption in favor of indemnification, that you have met the applicable standards of conduct allowing for indemnification, and that a judgment, settlement, or criminal conviction does not create a presumption against indemnification.  And impose a reasonably short period on any claim that the Association might have against you.

It is important that you require immediate money advances to cover defense costs, regardless of whether you are the subject of a lawsuit, investigation or witness subpoena, with coverage continuing for your legal expenses - even after you leave the Board.

The above is not to be considered legal advice, and you should consult with a legal professional before acting. 

CAUTION: Insurance Ahead

"That's what insurance is for."   Uttered by a Board member after several 300-pound marble blocks plummeted from the sides of his condominium tower. 

What sounds like a punch line for a joke will punch a hole in your financials with this attitude.   A visit by the Association's attorney and insurance broker is vital so Boards can see how coverage is stripped away in these situations.  Insurance is not a 'Get out of Jail' card when you turn a blind eye to dangerous situations. 

Such coverage is provided with the understanding that you take steps to avoid having to use it.  A review recent lessons learned shows what happens if we’re not careful:

Confirm that you are only using top-rate insurance providers. Mountainside Holdings v. American Dynasty Surplus Lines   In this situation, the umbrella insurer (the one providing additional money beyond the limits of the regular liability insurance) did not have to pay when the primary insurance went bankrupt.  The additional coverage would only have kicked in if the underlying coverage had actually been paid out.   

Check your policy for 'consent-to-settle' restrictions.  Piedmont Office Realty Trust, Inc. v. XL Specialty Ins. Co   In Georgia, proceed carefully when settling claims against where policies include consent-to-settle and no-action provisions.  In this case, the umbrella carrier for the D&O (Directors & Officers) coverage refused to cover for the full settlement amount, since it had previously already agreed to only contribute $1 million.  The client settled a suit for $4.9 million, and then tried to claim this amount against the umbrella policy, saying the carrier unfairly withheld consent.  The appeals court said that settling without first obtaining consent means you forfeit coverage and are barred from suing. 

The clock doesn't stop if years pass between 'same claims'.  W.C. and A.N. Miller Dev. Co. v. Continental Cas. Co   An adversarial proceeding held years ago had enough similarities to a lawsuit brought years later to effectively be the same claim. A claim doesn't need to be covered in your insurance for it to be classified as an “Interrelated Wrongful Act” and be treated as a single claim.

Always notify your insurer the first time round.  Hamman-Miller-Beauchamp-Deeble, Inc. v. Liberty Mutual Agency Corp   A broker received letters from an attorney claiming that a client suffered damages due to the broker's negligence. The broker waited until he was served with an actual lawsuit almost two years later before notifying his insurer.  The broker argued that the attorney letters didn't constitute a claim triggering reporting requirements. The court disagreed, since the letters said the broker was “legally responsible for...damages” making this a demand for damages.  

Don't take any action outside of your Board duties when dealing with the Association.   The Langdale Company v. National Union    This Georgia case reemphasizes the need to clearly operate only within your Board capacity.   Not having a clear delineation allowed the insurance carrier to claim a Director was operating in an uncovered capacity.  Because of this, the insurance could not be tapped by the corporation or other Board members to cover expenses.

Insurance companies are in the business of making money, so review the insurer terms with an expert to make sure you understand when you can and cannot rely on such coverage.