2.1  A key study enabled a way forward with respect to wildfires

On November 15, 2020, a report was released entitled Application of Wildfire Mitigation to Insured Property Exposure⁶, compiled by three organizations: Center for Insurance Policy Research, NAIC; Risk Management Solutions, Inc.; and Insurance Institute for Business and Home Safety.

Risk Management Solutions prefaced the report as follows:

“This report, and the analyses, models and predictions contained herein (”Information”), are compiled using proprietary computer risk assessment technology of Risk Management Solutions, Inc. (“RMS”). The technology and data used in providing this Information is based on the scientific data, mathematical and empirical models, and encoded experience of scientists and specialists (including without limitation: earthquake engineers, wind engineers, structural engineers, geologists, seismologists, meteorologists, geotechnical specialists and mathematicians). As with any model of physical systems, particularly those with low frequencies of occurrence and potentially high severity outcomes, the actual losses from catastrophic events may differ from the results of simulation analyses.”

The NAIC preface read as follows:

“The National Association of Insurance Commissioners (NAIC) Center for Insurance Policy and Research (CIPR) presents independent research to inform and disseminate ideas to regulators, consumers, academics and financial services professionals. This study represents the opinions of the author(s) and is the product of professional research. It is not intended to represent the position or opinions of the NAIC or its members, nor is it the official position of any NAIC staff members. Any errors are the responsibility of the author(s).”

This definitive study should enable insurance carriers to reopen reasonable coverage for homeowners based upon empirically- and scientifically-derived characterizations of risk and evaluation of property circumstances for insurance applicants, in the context of mitigation actions they have committed to. This is a primary objective for HOAs.

2.2  Task force created in one state

An insurance task force was organized in California in early 2021 by Community Associations Institute’s (CAI) California Legislative Action Committee (CAI-CLAC). (I’m a CAI-CLAC ambassador and supporter.) This intrepid team has been exploring options to address the crisis, commenting on proposed regulation, attending hearings and meeting with staff at the Department of Insurance. It is at the forefront of addressing the crisis and may well serve as the primary influence for legislators in acting upon our proposed legislation.

2.3  California Department of Insurance has identified key actions

In California, Insurance Commissioner Ricardo Lara has been very responsive and proactive in working with state agencies, the governor’s office, the CLAC Insurance Task Force, carrier representatives and citizens groups and is sponsoring legislation to address the crisis. The Department issued a press release on September 7, 2022 that described actions⁷ thus far:

“Commissioner Lara directed the Department of Insurance to write regulations to protect consumers and improve market competition after hearing first-hand from consumers about their frustration with insurance companies that did not consider mitigation in their rating plans. Following town hall meetings in more than 38 counties and an extensive “Safer from Wildfires,”investigatory hearing in 2020, Commissioner Lara took what he learned from Californians to shape these rules that will promote a fair, transparent, and safer insurance market. In October 2021, Commissioner Lara shared an initial version of the text of regulation. Following further public input, Commissioner Lara formally proposed his regulations in February of 2022.

The regulation incorporates “Safer from Wildfires,” a new framework of wildfire safety measures created in January by a first-ever partnership between the Department of Insurance and the emergency preparedness agencies in Governor Newsom’s Administration, including the California Department of Forestry and Fire Protection (CAL FIRE), the Governor’s Office of Emergency Services (CalOES), the Governor’s Office of Planning and Research, and the California Public Utilities Commission.

“Home Hardening retrofits, along with Defensible Space significantly increase a home’s chance of surviving a wildfire,” said Chief Daniel Berlant, CAL FIRE Deputy Director of Community Wildfire Preparedness & Mitigation. “Using the latest fire science and recent wildfire data, these retrofits and landscaping requirements provide a strong path to structure survivability. CAL FIRE is currently funding over three hundred million dollars in local wildfire prevention projects to prepare communities against wildfire, but we know it will take every resident doing their part to ensure California is fully protected.”

Regulations will drive down costs and create transparency for consumers

Once approved, the regulation will require all insurance companies to submit new rates that recognize the benefit of safety measures such as upgraded roofs and windows, defensible space, and community-wide programs such as Firewise USA and the Fire Risk Reduction Community designation developed by the state’s Board of Forestry and Fire Protection, which currently includes the counties of Los Angeles, Santa Barbara, and Butte as well as cities and local districts.

Transparency is another important benefit of this regulation, by requiring insurance companies to provide consumers with their property’s “risk score” and creating a right to appeal that score.”

2.4  Carriers still have not settled upon consistent practices

Grace Gedye of CalMatters, a non-profit news organization that bills itself as a source for “Nonprofit, nonpartisan state news,” fairly characterizes the state’s objective in the title of her article, California wants to force insurers to reward homeowners for fireproofing homes.⁸

Gedye aptly examines real-world examples of non-sensical practices by carriers that ignore mitigation of hazards they cite as reasons not to ensure or renew. She characterizes the state’s proposed regulation revisions as follows:

• Make the models or tools they use to assess wildfire risk public, and require that companies send individual policyholders their wildfire risk scores on a regular basis.

• Explain to policyholders what specific factors influenced each consumer’s score, what they could do to lower their score, and how much they can expect to see their premium go down if they take the actions outlined by the insurance company.

• When setting prices, insurers would have to take into account whether a homeowner or commercial property owner has reduced a property’s wildfire risk by taking specified steps, including clearing vegetation from under decks and installing fire-resistant vents.

• When setting prices, insurers would have to take into account whether a home is in one of three types of fire risk-reduction communities, such as Firewise.

The latter requirement would be enabled by a new certification created by the state Board of Forestry and Fire Protection.

2.5  Contact your representatives when these measures come up for a vote

These important measures would finally make it possible for homeowners to take steps to reduce risk. And they align well with HOA regulation objectives below. I urge our industry strongly support these measures and make our views known to our district representatives and state senators when up for vote.

2.6  Some insurance solutions borne of wildfires can be applied to storms

The genesys of the insurance crisis for HOAs in California was wildfires; thus has been the focus here. Some proposed legislation could be adapted, however, for tornados and hurricanes, particularly with respect to hardening of homes and structures through conformance with construction codes intended specifically for resistance to storm damage. Flooding presents a spectrum of more difficult factors beyond the scope of this proposal. HOA regulation discussed below, however, would be applicable to all HOAs.

3.1  Accelerating risks from climate change warrant regulation for both carriers and HOAs

Till now, regulation focus has been mostly upon carriers. But vagaries and permanance of climate change also warrant elevatated risk management by HOAs. And unlike insurance carrier regulation, HOA regulation hasn’t yet been proposed.

Persistent issues with HOA risk management also factor into carriers’ coverage decisions and until now have not effectively been addressed. I’ve personally participated in deliberations with directors untrained in risk management and witnessed avoidance of directly addressing and mitigating risks. I’ve seen decisions taken to simply accept higher premiums with no one inquiring as to reasons or possible mitigation. In one case, a board president urged simply accepting higher premiums, rather than accept the attorney’s advice to bring swimming pools into compliance with local code and pay less in premiums, citing her personal preference for the aesthetic appearance of swimming pools with no fences around them. Apathetic directors went along seemingly as it disposed of the agenda item and the meeting wouldn’t go long.

Below I’ll discuss this reality for HOA boards and reasons for it. The analysis also will show why some of those same factors also prove deliterious to other aspects of HOA governance.

Finally, I’ll explore a proposed solution and model legislation.

3.2  What are homeowners’ associations?

What is a homeowners’ association (HOA), also referred to as a community association, and why do we keep hearing so many stories about problems with insurance, disasters and recurring issues involving them?

Homeowners associations in America appear to have originated in the early twentieth century,⁹ sometimes created as a means for homeowners to exclude people of other races from their neighborhoods. Ownership in these common interest developments bound both the association and homeowners to a document describing covenants, conditions and restrictions (rererred to more commonly as “CC&Rs”). This structure facilitated marketing, maintaining and selling of lots or units by developers. It also enabled administration of localized regulatory functions useful for maintaining appearance standards and property values. Legacy racist provisions originating in the earliest of such associations were deemed unlawful by the supreme court in 1948 and the position codified in the 1968 Fair Housing Act.

Figure 2: Most homeowners’ associations are a non-profit corporation variant with provisions borrowed from Government Code, creating an entity with conflicting features that hamper success as either a corporation or a democracy.

Today cities progressively require developers to create HOAs to alleviate city burden for maintaining streets and regulating architectural changes and maintenance. Over 74 million Americans reside in 358-thousand homeowners’ associations — condominium communities, cooperatives and other planned communities.¹⁰ These associations typically take the form of a non-profit corporation, operated by volunteers elected by homeowners to serve as directors.

3.3  A close examination reveals vulnerabilities and weaknesses

When homeowners’ associations began to proliferate in the late 1960s, issues quickly surfaced compelling legislators to create a governance hybrid, operating as a non-profit corporation variant imbued with some features of a democracy. While this form may have been sensible, the effect was to deprive it of elements essential to a healthy democracy or healthy corporation.

3.4  Why homeowners’ associations are inherently failing businesses

While the heading may appear hyperbolic, a close examination of the legal construction of homeowners’ associations reveals critical vulnerabilities rarely discussed.

Most homeowners’ associations are corporations, a form wherein success normally is affected by market forces and caliber of governance. However, this corporate variant was reshaped as a mini-democracy, divorced from market forces while retaining corporate form. The effect is to impose constraints that — by common business standards — virtually ensure it will fail as a business.

Such constraints are among what the Commerce Institute lists as the top three “Reasons why businesses fail.”¹¹ And remaining constraints of a corporation doom it to struggle as a mini-democracy as well. (See Additional shortcomings legislation fails to address.)

1. Insufficient market

   Insufficent market is the number one reason why businesses fail. How many people do you know who purchased their homes based upon their examination of the required HOA disclosure documents and quality of HOA governance? Other than maintaining standards for exterior appearance, there are few obvious incentives for directors to attend to improvement of informed governance to increase property marketability. Moreover, corporate opacities not present in local, state and federal democracy may further mask dysfunctional community association governance.

2. Cash shortage

   Moral hazard¹² is an economic principle wherein risk takers have no incentive to exercise great care inasmuch as they perceive few negative consequences for such behavior. Directors are told insurance will cover their actions and community associations may simply increase dues or levy special assessments when short on cash. This may mask avoidable expenses caused by mistakes by inexperienced oversight.

3. Inexperienced oversight

   Whereas directors of most corporations usually are drafted as candidates by virtue of distinguished performance and accomplishments in their industry, community associations are highly unusual inasmuch as many directors are asked to join merely because no one else had volunteered.

   Lack of director and member education remains the most obvious failure factor remaining addressable by our industry and legislators.

Homeowners’ associations fail in all three of these categories for business failure.

This proposal will address all of these factors. We’ll explore why realities of community associations defy common legislative fixes, causing many problems to persist. Then we’ll explore draft model legislation that addresses those differences, with potential to meaningfully improve caliber of governance. Proposed changes likely would have widespread benefits not only for community associations but also for industry education providers, management companies, attorneys, reserves specialists, structural engineering firms and insurance companies.

3.5  Dearth of directors

Figure 3: Pool of willing, qualified candidates varies with community size

Populations of most towns and cities usually are sufficient to enable competitive elections and town- and city-councils with talents in disciplines applicable to operating their governments. However, the comparatively small population of most homeowners’ associations often means a dearth of board candidates.

Whereas campaigns for town and city office generally publicize relevant qualifications of candidates, often there is little or no campaigning in community associations. And few voting members are aware of candidates’ backgrounds because their obligatory statements often include little more than an expression of appreciation for support along with the number of years in residence. As reluctant members cajoled into running, directors may have little incentive to learn about their duties or responsibilities for operating their corporation.

3.6  HOAs with ill-prepared directors are the rule — not the exception

Whereas citizens of a town do not own their town, members of community associations do collectively own their community assets and bear responsibility for maintaining them and for protecting and enhancing property values. They elect directors of their non-profit mutual-benefit corporation to oversee this.

Few new directors are provided any significant, structured orientation from an authoritative source regarding duties in their new role. And misunderstandings by under-informed directors and members can have profound, negative and costly effects on the lives of community members.

In my decades of experience with HOAs I’ve found well-meaning volunteers in a neighborhood setting often remain unaware of their corporate duties and tend to conduct meetings almost like a neighborhood club — within a social context wherein decisions are heavily influenced by uninformed sensibilities and impulses of those present, with little or no due diligence, investigation, consideration of best practices, state regulation or standards of governance intended to protect broader interests.

Members remain unaware of the costs to them reflected in higher dues due to lack of attention to risk management and informed oversight of their association.

3.7  Volunteers often unaware of duties for risk management

Untrained volunteers often are blind to duties acquired as fiduciaries, including that of risk management. Deferred maintenance, structural inspections, fire hazard mitigation and neglect to consider potential impacts upon owners have caused costly, high-profile damage and litigation. We have all seen and read about consequences of failed governance of community associations — from petty irritations of hapless administration of architectural rules, to massive fire destruction and devastation of a community and lives lost.

3.8  Even with availability of director education, directors remain uninformed

Even if a well-trained volunteer is elected and advocates for established best practices and legal compliance, such informed advice is often disregarded with deference given to an opposing director’s longevity or assertiveness, or to expedience or politics. Statutes and case law may as well not exist unless multiple directors are aware of them. Often, only when a second director reinforces and validates a director’s advice as deriving from an authoritative source, does the dynamic change; only then are directors apt to heed the advice.

To improve board performance in community associations, we must find a way to increase community association members’ participation on boards and ensure broader exposure of directors to best practices, statutes, and case law.

3.9  Mandated education or licensing could hobble recruitment

Certification to an established baseline of knowledge and continuing education to maintain minimum standards is mandated in Business and Professions code for attorneys, physicians, real estate professionals and a myriad of other vocations with the potential to affect consumers’ welfare. HOA directors also may profoundly affect HOA members’ interests. Even so, while performance requirements exist, education requirements making directors aware of them are conspicuously absent.

Consider this argument against making director education compulsory through legislation to require licensing:

I believe mandated education and/or licensing would indeed discourage potential directors. A few states, like Florida, did try a licensing model.

3.10  A flawed model

We can learn from the Florida model, which loosely followed consumer protection licensing requirements, ostensibly requiring training of community association directors to minimum standards. However, presumably to address the objection that licensing would discourage potential volunteers, the legislature created what I believe to be a fatal loophole that effectively nullified the program’s purpose: A director could circumvent training or passing an exam simply by certifying in writing to the secretary he or she had read the governing documents and agreed to uphold them.

While this may have been a compromise to enable bill passage, it may have been fatal to the purpose of informed governance and the requirement for structural inspections and effective reserves maintenance. Resulting lapses may well have contributed to Florida’s 2021 Surfside condominium collapse.

In May, 2022, Florida effected legislation, SB 4-D, to address reserves studies and inspection requirements. However, it appears little was done to enhance community association directors’ education and it remains unclear if the certification requirement is essentially cosmetic as the loophole persists. To the extent it places increased burden upon community association directors, it may further exacerbate recruitment challenges.

5.1  Funding required

Costs for administration of the program should be minimized by reliance upon technology to automate, as has been successfully demonstrated in professions certification programs. Potential program benefits to HOAs should far outweigh costs for this program. Predicating program existence upon a requirement for supporting legacy paper-based processes could result in a lamentable lost opportunity.

Our model legislation should help states to enable this industry-sponsored self-regulated BCCAD, without having to budget for additional state agency infrastructure. However, I propose state insurance commissioners consider assessing a very modest fee to insurance carriers to help support operation of the Director Certification Board, as they should be rewarded by reduced claims by associations who have made the effort to become risk-aware and proactive in reducing exposure.

Until we have further discussed and fleshed-out specifics for this proposal via our forum and industry conferences, a detailed operations plan with projected costs cannot yet be included. Eventually one may be added in a new appendix.

5.2  Model legislation required

Model legislation for this program is located under Summary of state legislation required to enable program

6.1  The COMPETENCE education program

The education program overseen by BCCAD would be known as the COMPETENCE program, an acronym for Community Oversight and Management Principles Education To Engender Community Excellence. (This acronym also complements the preferred means of attaining certification — through the Competency Based Education method¹⁴.

The state would not require community association directors to participate in the COMPETENCE training or to be certified; thus, community associations may continue to operate as they have without fear of a requirement that might discourage members from volunteering. However…

• Those associations that decline to participate likely will continue to bear costs of high insurance premiums (if insurance for them is even available) and costs of uninformed oversight.

• There would be other incentives for those associations that encourage their directors to participate and become certified. (See Multiple broad benefits.)

The program would allow any association member of a residential common interest development to attain a certification as Certified Community Association Director by passing an examination on essential rudiments of community association risk managment and oversight. Certification would be maintained by accumulating continuing education credits.

This would ensure consistency with legal requirements (for California, Civil Code § 5105-a-3) that any association member be eligible for candidacy and provides equal footing for non-directors to attain certification that may affect perceived qualifications as board candidates.

Any member’s certification status under this program would be verifiable via a website, as for verification of licenses and certifications for professionals and service providers (for California, those operating under Department of Consumer Affairs regulation).

6.2  Multiple broad benefits

Benefits described below — particularly those involving reduced costs for the association affecting dues — may motivate CID boards to press directors to engage in the program and maintain their certifications and association ratings that would merit such benefits. Thus, association members may be motivated to vote for those candidates who are certified to maintain qualifying status and thus help control dues.

6.2.2  Possible lower insurance premiums for associations with higher ratings?

Insurance companies have long recognized the value of educating customers to reduce casualty costs. This program should result in more directors with demonstrated knowledge of risk management, best practices and current law. An informed Board should be less likely to neglect critical load-bearing structural inspections or prescribed fire hazard mitigation program, under-fund reserves, fall askew of the law and incur unexpected legal expenses or special assessments. As such education could lower risk and insurance premiums — typically one of the largest budget items for CIDs — this could provide a compelling motivation for boards to promote education among their directors and make certified candidates more attractive to dues-paying members.

The BCCAD could work with insurance providers to demonstrate how such a program could reduce risks and encourage offers of discounts on premiums for those associations that can maintain a certain rating.

6.2.5  Increased membership for community association educators

Should we succeed in having legislation passed to create an organization such as the BCCAD, community association education organizations likely would see a substantial increase in membership. Those already at the forefront — CAI, ECHO, FCPP and CACM — particularly should benefit given their established prominence.

6.3  Other benefits of the program

6.3.1  May help bootstrap volunteer recruitment

As legislation would mandate publishing of the board’s rating and the certification status of candidates, association members should become increasingly aware of the potential cost of insufficient participation on the board by qualified members and the effect of directors’ education on dues, likely to induce increased participation.

Also, the need and techniques for recruitment, training, motivation and retention of volunteers should be part of directors’ education within this program. Thus, while it may be naïve to anticipate director education will completely solve recruitment issues, my experience has shown that awareness of the need for such activities has made a difference in both quantity and qualifications of volunteers.

6.4  Ratings system restores missing feedback loop, improving governance

Once a realtor tells an HOA member trying to sell their home that it will be difficult getting a good price because the association’s BCCAD score is so low, that board and the seller’s neighbors likely will hear about it — quickly and loudly. Members will quickly grow to appreciate the rating system and learn to vote for those candidates who have become certified — or become certified themselves and volunteer as educated directors. Over time, quality of HOA risk management and governance should increase steadily, garnering more of these benefits.

7.1  Initial certification

An individual seeking initial certification must pass an exam to demonstrate knowledge of essential rudiments of risk management, CID law and governance best practices.

7.1.1  Regarding stringency of requirements for director certification

Figure 6: Example certificate for a member and/or director who completes training and maintains continuing education requirements on rudiments of community association risk management and governance

Director testing requirements are modeled somewhat after California Business and Professions Code §11502 — Certified Common Interest Development Manager Criteria. However, whereas testing for manager certification represents an opportunity for vocational and income advancement, testing for volunteers’ certification has the potential to be a barrier for essential director recruitment — already difficult for many community associations. Therefore, requirements for director certification would be less stringent, e.g., akin to how a common driver’s licence test might contrast with a commercial transport driver’s certification exam.

The number of questions and required percentage of correct answers would be determined by BCCAD with industry input, the objective being to ensure knowledge of risk management and CID oversight fundamentals while not discouraging participation by unpaid volunteers. The policy may be adjusted over time as results are gauged and as required to meet this objective. An example policy might be the following:

• Initial certification would require correctly answering 70% of a panel of questions, for example, 35 of 50 questions. One option to be discussed is whether such exam should be open-book to encourage review of any material about which the applicant may be uncertain. In such case, there might be a one-week time limit for completion.

• A failed exam may be taken over until successful, with a minimum 24-hour waiting period to encourage review of training materials. Multiple versions of the certification exam may be prepared and used to allow for repeat testing, discourage teaching the test and better ensure a fair assessment of knowledge.

• Classes and presentations may precede the online exam, however, a candidate also may learn through alternative means more accommodating for a working adult, such as articles, books and online courses.

• Upon successful completion, certification status would be recorded into the database, accessible online. The applicant would be notified by e-mail and a PDF certificate generated for optional download.

These example policies may be modified as experience is accumulated.

7.2  Maintaining certification

Figure 7: Example exam question

An example policy for maintaining certification might be the following:

To maintain certification, one must accumulate a minimum of eight continuing education credits (CECs) every four years from date of initial certification. At least 50% of those credits must derive from material covering state law or legal topics, authored or approved by an attorney practicing CID law in the state.

Given that CID directors are unpaid volunteers, this program strives to achieve a balance of incenting meaningful education without overly burdensome requirements that may discourage volunteer recruitment. We also recognize individuals’ learning styles vary and allow for this in awarding certification and continuing education through these methods:

• Formal in-person classes — Attending in-person BCCAD-qualifying classes or presentations offered by institutions such as CAI and ECHO. No exam would be required for classes attended in-person although the instructor would be encouraged to distribute a written summary of key points.

• Online courses — Taking BCCAD-approved online courses and correctly answering a minimum of 70% of questions in an online quiz.

• Published articles — Reading articles in periodicals published by BCCAD-approved institutions such as CAI and ECHO and answering correctly a minimum of 70% of questions in an online quiz.

7.3  Technology-centric to minimize costs and issues

Inasmuch as the program’s creation and existence may be predicated upon efficiency and minimal budget impact, emphasis will be given to applying technology for

• Testing — Certification examinations would be taken online to minimize impediments to certification and program administration costs and to ensure uniform, timely and reliable registration and management of certification and crediting. Reasonable allowances may be made to accommodate partner organizations’ testing methods.

• Courseware and continuing education materials — Educational institutions who wish to make their publication articles available for continuing education credits would be provided guidelines and instructions for including QR codes that readers can scan that will take them to a website for convenient quiz verification and credit registration.

7.4  Determination of credits

Credits and practices described herein would be subject to adjustment as we learn from experience.

Each unit of continuing education credit would be equivalent to exposure to one of the following:

• 15-minutes of substantive class instruction of BCCAD-qualifying material.

• 1,000-words of substantive BCCAD-qualifying written material followed by correctly answering a minimum of 70% of questions on the material in an online quiz.

8.1  The rating formula

For purposes of discussion and development, an Excel spreadsheet is available for download at HOAInsuranceProject.org. It is formatted so as to enable modifying both the formulas as well as trial input parameters to gauge effects. Suggested changes can be submitted using the website’s Contact form, which allows uploading edited files.

A rating is intended as a generalized indicator of health and quality of risk management and oversight of a community association. Inevitably, any such formula will be subjective as contributors to its construction represent a spectrum of perspectives and priorities. Also, an association’s health is determined by far more factors than can be readily identifiable and integrated within a practical formula. Therefore, a prominent disclaimer should accompany its presentation that it should not be used to influence decisions of consequence.

The rating formula may be adjusted by BCCAD from time to time as experience guides and new relevant factors become apparent.

The current draft formula recognizes the following two factor classes:

1. Priority factors

2. Weighted factors

8.1.3  Rating calculation example

Figure 9: The current draft rating formula is available for review, experimentation and for suggesting modification. It can be downloaded at HOAInsuranceProject.org.

8.1.4  Displayed rating vs. precision rating

8.1.4.1  Displayed rating

The above rating result would be rounded to, for example, 4.2 for the star-rating display on the BCCAD website and downloadable report in both stars and number format as in the example.

Figure 10: Rating graphic would be limited to two significant digits

8.1.4.2  Rating precision

While the calculated rating would be rounded to two significant digits for display with the star rating, a full floating point value would be used to further differentiate community associations when calculating ratings for purposes such as Top 1,000, Top 500, Top 100, etc., placement. Such ratings may further incent directors to maintain their certification as such ratings might be used by insurance companies in evaluating risk factors and by real estate professionals when promoting property sales.

8.2  Effective date of rating

The community association’s rating exists independently of any action taken by the BCCAD. While a printed rating may be made available by the BCCAD, based upon factors registered at the time of output, its value is deemed effective immediately following any change in any factor in the calculation formula.

10.1  State legislation highly recommended to promote health of community association

The state of California already has legislation that addresses much of the following and has been highly successful

• engage a professional reserves study firm every three-to-five years to physically inspect physical infrastructure, determine estimated remaining life, projected repair and replacement costs, and specify a dollar amount that must be contributed on a regular basis in order for such funds to be available when needed.

• engage a structural engineer to conduct inspections every five-to-ten years of critical load-bearing structures, such as balconies, external stairways, elevators, and determine estimated remaining life, projected repair and replacement costs, and specify a dollar amount that must be contributed on a regular basis to ensure such funds are available when needed.

• require community associations to provide certain information used in the formula by which their ratings can be calculated pursuant to this program.(For California, this would mean adding a sub-paragraph (12) to Civil Code §5405(a).)

10.2  General Legislation for Community Associations

For states that have not yet passed extensive legislation, I suggest examining statutes passed by other states in a reference index compiled by Community Associations Institute.

Inasmuch as California was early to adopt comprehensive legislation for common interest developments in the early 1980’s, which has since been refined, restated and proven, I suggest reviewing that first. Its primary code for Common Interest Developments is also known as the Davis-Stirling Act. California also has substantial Corporations Code specifically for Non-profit Mutual Benefit Corporations, including community associations.

10.3  Before and after — A comparison between existing and proposed

10.3.1  Before

Figure 11: This illustrates how a typical community association government lacks essential features and feedback mechanisms present in town and city government.

Compare this with the next illustration depicting proposed restoration of features and feedback mechanisms.

10.3.2  After — Community association with legislatively restored feedback and guidance

Figure 12: This illustrates effects of restoration by proposed legislation of missing, essential feedback mechanisms absent today in most community associations. They incent community associations and their directors to elevate sophistication of governance through directors’ and members’ education of risk management, legal obligations and best practices to achieve community excellence.

This description and proposal for a state-sanctioned program to promote participation and education for community association boards is being circulated within the industry for discussion. Comments and suggestions are welcomed via our forum at HOAInsuranceProject.org.