Q&A: Making an insurance claim can be far superior to initiating internal HOA litigation

Question: I am a board director for a large association that is plagued with major plumbing leaks, bursting pipes and pressure regulation problems.

About three years ago, one of the upper units had a sink supply-line burst, resulting in water damage to that unit and the one below, which happened to be owned by another director. Independent plumbing experts for the insurer of the upper unit owner and the insurer of the association both determined that the upper unit owner was not negligent because the source of the problem was common-area property.

Given the substantial damage to the lower unit, the association not only quickly repaired the common area property but also the damage to the director’s lower unit. This was consistent with past practices.

However, unbeknownst to the other board members, the director secured association funds for an upgrade to his unit that was conducted while repairs were being made. The director later said the upgrade was completed cost effectively, and by raising the value of his unit raised the resale value of all units in the complex.

The board now wants to get compensation for the association, but given our history of plumbing problems, the majority is reluctant to file a claim with our insurer lest it result in higher insurance premiums.

Incredibly, some directors are even mulling over making a demand to the upper unit owner for the total cost of the repairs, including the upgrades conducted on the lower unit — a figure amounting to the tens of thousands of dollars. Meanwhile, the association attorney is encouraging the board to sue the board director who owns the lower unit for the upgrade funds he should not have received.

As a minority director, I’m wondering what I can do to help resolve the problem.

It seems to me that suing the upper unit owner is not only patently unfair but a sure loser in court if the owner gets even a halfway decent attorney. If we sue anyone, shouldn’t it be the lower unit owner, even though the board is reluctant to sue one of its own members? Perhaps we should just make a claim to our insurer for all the documented damages, and simply write off the funds spent on the upgrade?

Answer: Before making a decision on whether to sue, it is part of your due diligence obligation as a director to perform a cost-benefit analysis for every proposed action the association plans to take.

In this situation, the association’s own attorney advises suing the board director for reimbursement to the association. Instead, and without any legal basis, the majority directors are considering a lawsuit against the upstairs titleholder! If experts for two insurance companies all determined that the upper unit owner is not at fault for the damages, then the majority on the board are clearly failing to act reasonably in considering initiating that lawsuit.

If the association pursues the upper unit owner through litigation, that owner may decide not only to vigorously defend himself, but also to file a cross-complaint against the association and the board for improperly spending money to benefit a board director.

The board should have been advised that the potential for liability to the association and the titleholders is increased due to the fee-shifting nature of HOA litigation. If the association sues the upper unit owner and loses, which is quite possible, then the association will be forced to reimburse the prevailing owner for his or her legal fees and costs. Such fees might need to be passed on to all the owners, and they may predictably question why they are being specially assessed to prosecute a case against another owner — especially one with seemingly no legal justification.

Rather than starting the discussion with potentially baseless litigation, you and the rest of the board should look into reimbursement from the association’s insurance carrier even if it might result in higher premiums. Any amount not covered because it was extraneous and essentially a gift to the lower unit owner should be reimbursed by that board director as an improper appropriation of association funds. If that director will not submit to a reimbursement then litigation may be necessary to recover those funds. But don’t forget, even that litigation could result in special assessments levied against all titleholders if the case doesn’t go as planned.

Prior to making the decision to litigate, it is the board’s duty to consult with experts regarding the problems and pros and cons of entering into that type of litigation and then to present its findings to the homeowners for their input. In the end, though, it is not the titleholders who make the decision to litigate, it is the duly elected board.

Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 ornoexit@mindspring.com