California’s New Election Law Presents Significant Insurance Coverage Challenges for HOAs

By:  Ryan Gesell, CIRMS, CMCA and Timothy Cline, CIRMS


CALIFORNIA’S SENATE BILL 323 may have begun as a well-intentioned piece of legislation designed to provide uniformity, oversight, and transparency to the Association’s election process.

Unfortunately…

Compliance with the new requirements may prove cumbersome for many associations, and the liability exposure that it creates needs to be at the forefront of every board’s consideration as they work to adopt procedures to comply.

Compliance will be quite a hassle from a procedural standpoint, but even more concerning are the claims that will inevitably erupt (including claims for non-compliance), presenting huge challenges for D&O policyholders and the insurance carriers issuing that coverage.

THE PAST

Prior to the passage of SB323, whether or not the Association and community manager were provided protection by the Association’s D&O policy for election-related challenges was largely reduced to two simple issues:

ISSUE #1) Had the definition of “insured” on the D&O policy been broadened to include not only the Board, but volunteers (assisting with the election) and the community manager? Surprisingly, there are some very well-known carriers with a large presence in the HOA community who still fail to extend coverage to the community manager on their D&O form.

ISSUE #2)  Did the policy form include coverage for “non-monetary” claims? Most challenges to elections are launched by plaintiffs who are not seeking a financial reward; they’re simply seeking to “right a wrong.” (In other words, they are demanding a “non-monetary” remedy.) And yet, defending an Association from such a challenge can be expensive. Again, not all policies include this coverage.

The broader D&O policies in the industry, however, have long included both of these coverages, and a Board that had one of these policies could reasonably expect that there would have been coverage for a claim resulting from the election process. That’s no longer the case.

GOING FORWARD

Effective January 1, 2020, there is a finite list of individuals who the Board of Directors, at their discretion, may appoint to act as the “Inspector of Elections.” SB323’s list attempts to make the selection process simply routine, but obtaining assurance that these “Inspectors” and/or the Board have the appropriate insurance in place, is anything but routine. The list of acceptable inspectors includes:

  1. A volunteer poll worker with the county registrar of voters
  2. A licensee of the California Board of Accountancy
  3. A notary public
  4. Volunteer member(s) of the Association (with no connection at all to the Board – must be 1 or 3 volunteers)
  5. Professional Inspectors of Elections
  6. CPA Firm not under contract with the Association
  7. Management Company not under contract with the Association

VOLUNTEERS

Of the list of acceptable options, only one of them would likely be covered by the Association’s D&O policy: the Volunteer Member(s) of the Association. Some carriers have indicated that they would provide coverage for members of the Association that are serving as Inspectors of Elections, provided that these individuals are specifically identified in the minutes as “Volunteers” and provided that the policy includes coverage for Non-Monetary Claims.

But again, since every carrier is different and may have a different take on this, you’ll want to confirm with your broker. And as we start to see claims for these volunteers, we may begin to see exclusions arise in the coming years, specific to Inspectors of Elections.

Most immediately concerning, however, is that there would clearly be NO coverage under the Association’s D&O policy for any of the other acceptable inspectors. And given the extensive list of duties that the Civil Code now requires these inspectors to perform, is it reasonable to expect an unpaid “volunteer” member of the Association to complete these duties with efficiency and accuracy, within the required time limits, without any formal training?

As insurance professionals, we recommend that our clients hire professional vendors to shift liability away from the Association and onto the experts that are trained to perform the work needed. Given that only one of these entities seems likely to already have the expertise needed to perform these duties, our first inclination would be to recommend hiring a Professional Inspector of Elections company to handle the process. However, many such companies have language in their contracts that requires the Association to indemnify them from potential liability. And since the D&O policy wouldn’t extend coverage to these Inspectors, the Board could find themselves paying for the Legal Defense of these experts, should a claim arise.

That said, there are insurance policies available for Professional Inspector of Elections companies.  And some policies offer the option of adding the associations they service as Additionally Insured.

Of concern to some communities might be the cost associated with hiring such a vendor, as well as whether they will be able to reach quorum at the meeting that the inspector attends.

SUMMARY

From a Best Practices standpoint, we would feel confident recommending the Professional Inspector of Elections option, provided that the company a) doesn’t have an indemnification clause in their contract, and b) has their own insurance in place.

If that’s not an option, check with your agent/broker to see if your D&O policy a) covers “non-monetary” claims, and b) includes “volunteers” in the definition of who is an insured.  Lastly, if you are using one or more volunteers, remember to specifically name them as your Inspector(s) of Elections and as “Volunteer(s)” in your Board Meeting Minutes, prior to the election.

The new requirements of SB323 may not be a welcome addition to the Civil Code, but now that they’re here, immediate steps need to be taken to protect the Board, the Management, and the Community from the potential liability pitfalls that will inevitably arise.

2020-02-24T08:29:23-07:00