To Kill a Lawsuit

Risk Reduction and Avoiding Litigation

“Best way to clear the air is to have it all out in the open.”

-Atticus Finch
(To Kill a Mockingbird)

You might be surprised to hear a lawyer say litigation is not always the best course of action. You might be equally surprised to hear that in order for litigation to be an option, other paths and remedies should be exhausted first.

Let me use an example. I have many chef friends, one in particular can make the best Paella I have ever tasted and it is arguably her best dish. However, at her restaurant, Paella is not the only thing she serves. Why? Simply put, Paella is not for everyone. Some people can’t eat shellfish, some people don’t like rice, others don’t like spice. Similarly, litigation is not for everyone or every association.

In the context of homeowner associations, when does litigation make sense? It is when the association has exhausted its not adversarial remedies? Should it be used only as a prophylactic measure to prevent a suit from being filed by another individual? Or should it simply be used when a particular association decides it is in their best interest to do so? Well, it depends.

All of us who are members of this industry owe our clients, members and agents a duty to provide what is in the best interest of their given community. We cannot give advice or recommend a course of action unless we can educate ourselves as to what the association’s particular needs are. For instance, an association with no hedges would not hire a hedge trimmer.

In addition to choosing whether an association should pursue litigation, there are measures they can take to avoid being sued as well. Most instances involve litigation and associations will deal with one of the following: (1) enforcement of the CC&Rs; (2) property damage; (3) personal injury or (4) construction defects. In order to protect against personal injury and property damage claims it is vital that the association have the proper insurance required by law and within the CC&Rs. In order to avoid litigation with a developer over improperly constructed building components the association can engage in a non-adversarial approach in an attempt to avoid litigation.

Know Your Insurance and What Your CC&Rs Require

“For time and the world do not stand still. Change is the law of life. And those who look only to the past or the present are sure to miss the future.”

-John F. Kennedy

The insurance requirements for condominium associations flow out of California Civil Code section 5805. Under this section it was the Legislature’s intent to protect owners in a common interest development from personal liability when a tort occurs in a common area at the property, (think tripping on an uneven sidewalk or falling off a playground due to a failure to maintain). Under section 5805 (1) and (2), the association is required to have general liability insurance that is at least two million dollars if the association is 100 units or smaller and three million if it is greater than 100 units.

However, most associations broaden this coverage considerably and add additional required policies under their CC&Rs. The first line of defense for an association to avoid a lawsuit is to obtain the insurance required by the CC&Rs. These will likely include coverage for the following: (a) public liability; (b) fire and casualty; (c) floods; (d) fidelity; and (e) other policies that the association chooses to obtain.

However, knowing what policies are required in not likely enough. You need to make sure that those policies are actually written to provide the type of coverage and meet the policy requirements outlined within the CC&Rs. For example CC&Rs typically use language that require policies compliant with limits accepted by Federal National Mortgage Association (commonly referred to as Fannie Mae).

If there is not adequate coverage or there is a lack of a policy all together, this allows for the insurance carrier to deny coverage, which can rise to a lawsuit. Failure to provide coverage as outlined in the CC&Rs gives the individual owners or association members a direct action against the association for failure to abide by the CC&Rs.

As many of you are aware, under California Civil Code section 5975, the prevailing party in a lawsuit to enforce the CC&Rs may recover their attorney fees. This makes avoiding a lawsuit even more important. In summary to avoid such a lawsuit each association needs to make sure of the following items: (a) they have a policy that fulfills the requirements under California Civil Code section 5805; (b) they have policies that comply with the requirements within their particular association’s CC&Rs; and (c) that they have confirmed that those policies meet the requirements within the CC&Rs.

“I don’t know that there are any good short cuts to doing a good job.”

-Sandra Day O’ Connor

Pre-Litigation Procedures, Non-Adversarial Claim Resolutions and Alternatives to Litigation

Like the requirements for insurance, most CC&Rs outline a claims process that an association must engage in prior to filing a lawsuit against a developer. Typically, this claims process involves serving a notice and allowing both the claimant and the respondent the opportunity to inspect and make repairs. If this initial process fails to resolve the claim, typically the CC&Rs will require some form of mediation or alternative dispute resolution.

What is important to note is that counsel for the association may often times extend this non-adversarial approach to claims by entering into a stipulation with opposing counsel. Entering into a stipulation extends the period of time to resolve the claims without the need to file a lawsuit. This stipulation will seek to put into place: (a) joint inspections of the issues identified ; (b) the exchange of documents and insurance information ; (c) meetings with counsel and experts to discuss these findings; and (d) mediation (s).

There are many reasons why this works. This process allows for a focus on the construction deficiencies early on, rather than the legal posturing required to initiate a lawsuit. This non-adversarial approach encourages an open exchange of information and investigation(s). The result is that the parties can determine what they agree or disagree on. For instance, if damage is shown to the deck framing throughout a complex and the parties agree this is the case, then there is no need to litigate that issue. Rather than focus becomes the scope and cost of that repair. While it may require more work early on in a case than the traditional approach of filing a lawsuit as soon as possible, it can streamline the process and allow for resolution faster.

Hire the Right People

Finally, it bears mentioning that one of the best ways to avoid litigation is to hire the right people. Brokers, managers, attorneys and vendors that work with associations have all certainly been exposed to lawsuits, and therefore know what induces them. Furthermore, they can advised based on their experience what measures a given association can take to avoid litigation.

When you do your homework before problems arise, you can reduce risk and avoid potential issues before they become legal challenges. So, work with your insurance broker to confirm that the association’s coverage is appropriate and adequate; work with legal counsel to head off any issues that may arise from the developer before they get out of hand; and, hire subject matter experts to guide the association in the responsibilities that the association has to provide for the corporation and its members.

Dylan D. Grimes ESQ.
ANGIUS & TERRY LLP
dgrimes@angius-terry.com