Question: We live in one of 25 deed-restricted homes in a development in San Diego. The homeowners association board hired a management company without a vote of the homeowners. The board then went on a spending spree, forced three large special assessments in less than 18 months and claims it still does not have enough money to operate the place.
The biggest expense is our insurance. When the management company was hired, it got the board to cancel our longtime policy with an A++ rated carrier. It convinced the board that the carrier was only an A.
The board has never met our insurance agent-broker, yet it was told by the management company to purchase all its policies from her.
Even though the firm's contract states it is not liable or responsible in any manner regarding the association's insurance, it has been extremely active in our insurance matters.
Its contract also states that it will automatically open an "insurance reserve" and that the company will have sole signature authority on that account. The firm convinced our board that it is an expert on "risk management, including required insurance coverage."
I believe that the management company is making insurance decisions on our policies based on the amount of kickback it receives from the insurance broker it referred us to rather than what is best for our association. Can the management firm do this?
Answer: Management companies are prohibited from "transacting insurance." According to California Administrative Code section 2193.3 (b), if your management company "recommended, advised or urged applicants for insurance coverage, potential applicants for insurance coverage or policyholders to buy particular insurance policies or to insure with particular companies or insurers," it has broken the law.
Because such actions are "directly related to solicitation, negotiation, or effecting the sale of insurance," they require licensing under Insurance Code Sections 1631 and 1635. Even "explanations or interpretations of, and offering of opinions or recommendations on, insurance coverages, exposures, limits, premiums, rates, deductibles, payment plans, or any other insurance contract, or potential insurance contract, terms" under this code, are against the law without a license.
For many years, insurance was an association's biggest expense. Today, many boards report that management company fees have overtaken the expense of insurance.
Such fees may exceed any so-called savings achieved by a company's recommendations to switch insurance carriers.
Some companies receive "rewards" for referring business to certain insurance brokers but, depending on the circumstances, "kickbacks" as such are not completely illegal in California.
Once the association has canceled the prior carrier's policy, it is next to impossible to be reinstated. In some cases, associations have been left with no insurance.
The real losers are the homeowners whose money buys the insurance. Instead of the premium savings being returned to homeowners or their association, the money goes into the pockets of the broker, the management company and, in some cases, board members, who think there is nothing wrong with accepting a "gift" for referring business.
Your association should immediately amend its management contract to delete the unlawful clauses. Obtain unbiased recommendations on the association's policies and restructure those policies only if absolutely necessary, not just to save a few dollars.
If you are uncertain, discuss your management company contract with an expert in the Department of Insurance, as it pertains to the requirements for a valid license.
The most important document homeowners can demand from the board is an unabridged copy of all the association's insurance policies.
Individual homeowners should obtain their personal policies from reputable insurance companies, with enough coverage to protect against the possibility that the association may be uninsured.
Stephen Glassman and Donie Vanitzian are the co-authors of "Villa Appalling! Destroying the Myth of Affordable Community Living" (Villa Appalling Publishing Inc., 2002). Please send questions to: P.O. Box 451278, Los Angeles, CA 90045 or e-mail your queries to: NoExit@mindspring.com.