One of the more challenging aspects of taking over management of condominium associations is the reeducation necessary for boards and owners. And the area with the biggest pain, and likely biggest reward, is in the area of putting responsibility where it lay.
As we discussed in the last article on repairing damage to units, the misconception is that everyone in the condominium project shares equally. This is true in general but hardly ever close to reality in the particulars. It is true, in general, that condos carry insurance on the property. What is not true is that the condo policy covers the unit owner. And yet, the three most recent condo projects we took over management for have been using community money to pay for damage which was the responsibility of the unit owner because the unit owner lacked adequate insurance.
Why? You might ask. The primary reason is that most boards are afraid of the conflict. Because the board does not want conflict, management avoids conflict. This leads to those moments where requests for service come in and management dispatches it, receives the bill and pays it – and yet the service itself was not a community expense.
We have two of these situations in a big . In both cases, the owner had inadequate insurance. Each association have a $10,000 deductible. Both cases the damage was less than that amount. In both cases the board agreed to pay for the damage, even though the association was not a party to the claim. Each had more than $8,000 of community money paid out to benefit a single owner. Both associations were wrong.
It is no different, by the way, than the situation we confronted in the last article. For an individual owner, the costs are $8K but when spread out over the entire ownership base, the cost comes to only $60. Naturally, who wouldn’t want to only have to contribute $60 to repair damage that would otherwise have decimated your finances?
It’s elegant, simple and wrong.
Just because your association likely has the deep pockets doesn’t mean that it should pick up the tab for these items. Your owners must be held accountable for their own choices. And that means holding owners accountable for their own insurance coverage – or lack of it.
I am not here to lecture on the concept of risk shifting and insurance. The point for today is, your association is not the backstop insurance for your owners. This becomes a slippery slope, where once you are seen as providing cost support for non-insured damage, then every owner will start moving towards less insurance coverage. Think about it: if that policy costs the owner $2,000 a year and yet they only have to kick in $60 for their portion of the self-insurance, why would they get insurance coverage? Especially if the risk to them is less than 1%?
Remember, the association’s money isn’t theirs. Directly. So what if it costs the association $8,000 to repair insurable damage? It amounts to that $60 each for the owners. In the owner’s mind, it is part of the assessment so they don’t give a thought to it. But as a board member, you need to remember that this $8,000 really isn’t part of the assessments. If you allow this, you are using funds set aside for community benefit and using it solely to help an individual. Your community isn’t benefitting.
And yet the chorus will sign at the top of its lungs that you are wrong if you start trying to be sensible about what is, and isn’t community expense. The community benefits by ensuring that the unit is habitable. The community has an implicit contract to spread all the costs to everyone who lives there. The CC&R’s say that the association is responsible for all the costs in common, which includes things like insurance and taking care of the water lines which benefit only a single property. And here you are, a volunteer, trying to make sense of this and make decisions for the benefit of all, not the few. But it is hard and so you turn to your manager, who…
gives you that deer in the headlights look and says they will support whatever decision you make but other associations they manage, when faced with this, pay the claim because the board feels it is the right thing to do.
I wish we could make it easy on you. You are likely facing inertia carrying forward from prior boards making the decision to pay when they shouldn’t have. You might even be close friends with one of those affected by the claim and who will face a huge hit because their insurance was inadequate. Or, you might even feel that, like the case from the other day, that the association should pay because the expense is so great that it could bankrupt people and, after all, the association really is responsible for the framing, isn’t it?
But keep in mind, that the association doesn’t really exist, except as a tool to accumulate resources to pay for common expenses. To pay for damage people believe is not their personal responsibility, you have to assess all the owners – that is, you must assess the owners to cover those expenses. Or, you can use one of the myriad escape clauses in your CC&R’s which allow you to shift the cost to those who benefit the most from the expenditure of common funds. But it is tough to do this.
So, here is a suggestion. You should pool the expenses your condo association incurs which are to the benefit of fewer than all owners. At the end of the year, the board should call for a special assessment to recoup that money from all the owners. Tell them that this is the cost of their wanting to socialize all incidental costs of living in a condo community. It is a compromise that might be palatable to the condo board of directors and some of the unit owners – especially those who benefit. At least it is not allowed to enter your budget and see a constant, steady increase due to these costs continuously going up. Perhaps the owners will get sick and tired of the special assessment and demand that these costs stop being paid for by the association. More likely than not, they will replace your board with new people who will want to simply bury it in the current operating budget – starting the cycle all over again.
At C.O.R.E. Services, we focus on preventing the misuse of association money so that owners can have confidence in their board. The boards are dedicated but typically outsource the management who often do not understand the vital role of systems dedicated to rooting out the risks of fraud. Our services are designed to help the board and owners rely upon their accounting and financial statements to help with the decisions surrounding their community and home. You can find more information about us on our website.