WHEN DISASTER STRIKES

How to financially prepare for wildfires, floods, earthquakes and other natural disasters and their impact on associations.

By Darren M. Bevan, Esq. and Raihane A. Dalvi, Esq.

California has a history of natural disasters including wildfires, floods, and earthquakes. These disasters may cause unanticipated damage or destroy entire communities or a portion thereof. Oftentimes in the aftermath of these disasters, associations are asking what it will take to rebuild and what options are available.

Many associations are not financially prepared to deal with the aftermath of a disaster due to insufficient insurance coverage, reserve funds, or other funds to cover the rebuilding costs. When an association is damaged or destroyed and there is insufficient funding, a board may levy a special assessment.

Boards of directors may levy special assessments to fund the cost of minor repairs; however, if there are substantial rebuilding costs due to major damage or destruction, a board’s statutory authority to levy special assessments will be limited. In this regard, California Civil Code §5605(b) prohibits boards from levying special assessments which in the aggregate, amounts to more than 5% of their association’s budgeted gross expenses for that fiscal year unless a majority of a quorum of the members approve the special assessment. An association’s governing documents may have more restrictive limitations on its board’s authority to levy special assessments, so it is important for boards to review their governing documents and check for any additional restrictions.

A board may also levy an emergency special assessment if there is an “emergency situation.” The Civil Code defines an emergency situation in several ways. Pursuant to California Civil Code §5610(b) and (c), an “emergency situation” exists if there is an extraordinary expense that is necessary to maintain or repair all or part of a development that an association is responsible for. If either of the following circumstances exist: (1) there is a threat to personal safety on the property, or (2) the expense could not have been reasonably foreseen by its board when preparing and distributing the annual budget report, there is no statutory cap on emergency assessments and membership approval is not required. That means that the 5% limitation in Civil Code §5605(b) for special assessments do not apply to emergency assessments.

Alternatively, an association may look to a bank loan to finance the cost of repairing or rebuilding all or part of their development. It is important to review the association’s governing documents for any restrictions regarding its ability to borrow money. Generally, bank loans are secured by the association’s ability to collect assessments from their members. Associations that secure a loan to fund major rebuilding costs will likely need to repay the loan by increasing regular assessments or levying special assessments. Assuming that the total special assessments exceed the 5% limitation in Civil Code §5605(b), member approval is required, except in the case of an emergency as provided for in Civil Code §5610.

In some cases, such as in the aftermath of recent wildfires, natural disasters can decimate entire communities. When an association is severely damaged or destroyed to the point where the value of the remaining property is outweighed by the cost of reconstruction, an association may not find it practical to rebuild its development (as financed by either special assessments or a loan). Under these circumstances and subjected to any restrictions in their governing documents, associations may consider a partition lawsuit to sell their development in order to resolve and settle obligations of the association and its members. Once the court approves the “partition,” a court-supervised process occurs where the association’s common area is sold, and the proceeds are divided among the members.

As detailed above, associations have different options when dealing with the aftermath of a disaster; however, boards can take steps to help prepare for and mitigate disasters before they happen.

To prepare for a disaster, boards must investigate their exposure to natural disasters such as wildfires, floods, earthquakes, landslides, and others. As part of this investigation, boards can retain experts to determine their community’s vulnerability and what measures can limit their risk. For example, associations located in heavily forested areas prone to wildfires may be advised to mitigate their risk by clearing flammable debris and cutting back vegetation from their community’s perimeter. As another example, older condominium buildings in earthquake-prone areas can undergo seismic retrofitting as advised by the appropriate experts.

Additionally, boards of directors must review existing insurance policies with their insurance professionals and attorneys to ensure sufficient insurance coverage against relevant disasters. When reviewing their insurance, boards should get an appraisal for the cost to rebuild in order to ensure that their current coverage limits are sufficient. Boards should also review their governing documents to determine what insurance their association is required to obtain. A board’s ability to obtain additional insurance coverage, such as for earthquake, flood, or landslide protection, is limited by their association’s budget, statutory limitations on increasing assessments, and governing document restrictions.

As a reminder, boards should take the time to review their “Damage and Destruction” and “Dissolution” clauses in their governing documents. These clauses typically address the damage or destruction of common area elements, rebuilding costs, insurance, and membership approval requirements regarding reconstruction or dissolution.

Once a board has investigated their exposure, taken necessary measures to help mitigate any risk, reviewed their insurance policies, and obtained additional insurance coverage as needed, it should take the time to educate its members of the association’s disaster preparedness. Such communication will lead to greater transparency and understanding of the association’s efforts to prepare for natural disasters.

Darren M. Bevan, Esq.

Raihane A. Dalvi, Esq.

Darren M. Bevan, Esq., and Raihane A. Dalvi, Esq., are attorneys with Baydaline & Jacobsen LLP and have worked for the industry for 18 years and 4 years, respectively. They specialize in general counsel and work out of Sacramento.