It’s no secret than when condominium owners or co-op owners are faced with a special assessment, sometimes tempers flare. In fact, Amy Gunderson of The New York Times gives this example in her story Special Assessments: When Your Board Wants More of Your Money:
Bill Raphan, who runs the Fort Lauderdale branch of Florida’s Office of the Condominium Ombudsman, called special assessments “one of the most complained-about issues that come into our office,” which often acts as an intermediary between condo association boards and homeowners.
The board of a Miami condominium recently invited Mr. Raphan to explain a special assessment to a group of homeowners, he said. At the meeting, tempers quickly escalated. “Someone got so angry, he pulled a gun,” said Mr. Raphan, who was immediately escorted safely from the building (he does not know whether the man with the gun was arrested).
For those who may not be aware, condos and co-ops often levy special assessments to fund specific building projects that can’t be paid with the building’s current cash reserve or maintenance charges. And when a co-op shareholder or condominium owner receives the notice of a special assessment, the initial reaction is frequently anger such as the gentleman in the above example who pulled a gun. Now I have never heard of such a strong reaction, but I know many who’s initial reaction of anger quickly dissipated when they understood what there money was going to be used for.
A special assessment — a fee approved by a homeowners association or a co-op or condo board to cover items not provided for in the budget — can often be a controversial, unpleasant and expensive surprise, especially to a second-home owner, who may not be around enough of the year to be aware of all the issues. But there are some steps buyers can take to protect themselves, or at least limit the possibility that they will be hit with unexpected and costly assessments:
- Speak up before assessment is voted on.
- Read the Board minutes to determine possibility of future work/assessments.
- Ask the management company of any plans for future assessments
- Consider building location and whether or not insurance premiums will increase (like in Coastal areas)
- Consider buying in a new building which is less likely to assess for the obvious reason that there shouldn’t be any need to repair or replace anything.
- If assessed, negotiate a payment plan.
As far as special assessments and there ties to building insurance premiums and ultimately the effect this has on the shareholder/homeowner, I asked an expert. Bruce R. Swicker of EARHART LEIGH ASSOCIATES, INC. says a person who has less than $25,000 to $50,000 in loss assessment coverage is foolish given how incredibly inexpensive this coverage is. What does this mean for the shareholder/homeowner? Mr. Swicker shares with us his perspective on this article and proves that it’s imperative to have proper insurance and the best way to insure that you have done so is to work with the "proper’ insurance agent who understands the ins and outs of different coverages.
Most of what this article is discussing involves what might be termed "voluntary" or "elective" assessments for capital improvement projects such as the construction of the community center. Other assessments for things such as major repairs, while less "elective" in nature are really maintenance issues, and thus would not fall within any insurance coverage.
To trigger loss assessment coverage, the event giving rise to the assessment must be a covered peril under the policy itself. For instance, the collapsed retaining on the Henry Hudson wall would be – on its own – a potentially covered claim under the unit owners policy, so therefore the assessment made by the association to cover that major claim would, in turn, be covered.
These things can, sometimes, get a bit hazy, such as when the lack of proper, ongoing maintenance to, say, a roof, then turns into a major claim after a heavy snow or rainstorm. Is it a "sudden & unexpected" loss, or failure to properly maintain the property?
Thus, a key issue for any unit owner or prospective buyer – as you know only too well as both an owner and a real estate broker – is to be sure that adequate reserves are being set aside. This can become tricky when dealing…for example…with a complex made up of many elderly residents on fixed incomes. The board members are usually made up of similar individuals, and they may believe that their primary goal should be to keep the monthly common charges as low and affordable as possible, which can lead to inadequate reserving. Could this lead to a derivative claim under a D&O policy (Directors and Officers Policy for Board Members) for negligence – or even self-dealing – on the part of the board? I suppose it could, though whether the D&O carrier would cover the alleged shortfall is questionable – but they would pay for the defense of the board members. After all, the association’s own D&O policy is not intended to act as a backstop for the association’s own inadequate reserving strategy.
Round and round and round this goes. Each situation is heavily fact-specific, though any unit owner who carries less than $25,000 to $50,000 in loss assessment coverage these days is just foolish, particularly since the cost is so small.
Moral of the story: Make sure your homeowners policy has loss assessment coverage and for all other special assessments, remember that your money is almost always going to a project in the building that must be addressed…if not, don’t vote for the assessment, but be prepared to pay. Not unlike the single family homeowner who has his/her roof blown off, heating system go up, or a leaking basement, a co-op or condo resident need not think they are immune to the maintenance required to make a building fit for habitation.