HOA Board Risk Management

I recently received a call from a community association about their recreational facility. Our conversation formed the basis of a case study on Board "risk management" that is applicable to other associations.

Here’s the scenario: This upscale community maintains a clubhouse and multi-pool facility. In addition to social events, the members can take advantage of aquatic classes of various kinds. While access to the pool area is restricted and controlled, there has been a growing concern by the Board that the association may not be providing adequate pool safety by way of lifeguards. On the other hand, the payroll costs for lifeguards is significant. What’s the proper/legal/moral/cost effective thing to do? Hmmm, a quandary on the horns of a dilemma...

All Boards will face difficult decisions at some point. The most important part of a decision is not the outcome as much as how it was arrived at. For insignificant points of policy or budget, the process may be as simple as a motion carried by the majority. For other issues, such as our case study, it behooves the Board to break it down into its component parts. As the saying goes, "If you truly want to understand something, just try to change it."

The lifeguard issue can take on other forms, like security guards and parking patrols. 

The Board needs good information to come to a reasonable decision. So, what are the major points to consider? Some are no nonsense, strictly business while others are emotional and morality based. 

Let’s look at a few:

Governing Documents. Before you go too far down the road of radical change, always check your governing documents and the state statutes to see what the association is obligated to do. If you are still unclear, consult with a knowledgeable attorney. If the proposed new service is not required by documents or statute or ordinance, the Board is blazing new trails. This isn’t necessarily wrong but the Board needs to examine the issue more closely than otherwise before coming to a decision.

Insurance Risk. Insurance is a way of life in America and no community association should leave home without it. Take matters like this one to your agent and get a written reply as to what the current policy will or won’t protect against before and after the proposed change. Either the association is on solid ground insurance-wise or it may need additional coverage.

Cost. The cost of additional services, like lifeguards, is significant. When spread out over hundreds of homeowners, however, the sum may not be unmanageable for each owner. Here, the economic status of the homeowners plays a big part. Is your community composed mostly of fixed income retirees, working professionals or young struggling families? Ability of the homeowners to pay should be a big part of the decision.

Benefit. Who will benefit from the service? The majority, most or a few? Governments provide services for minority interests that are paid for by the majority under the theory that the more affluent have a social responsibility to care for the less fortunate. In community associations, the majority rules. This may mean that the minority’s needs go unmet.

Ethics. It gets sticky trying to argue safety issues. No one wants anyone to get hurt and a caring Board wants to do the "right thing". This is certainly understandable. The question seems better asked, "Who’s responsible for providing the protection?" Historically, each citizen had the primary responsibility to care for those things or people that were held dear. Should the association step in and be more effective than an individual with a vested interest? Talk this one through before moving to other considerations.

Future Obligations. Entering into a new or expanded service sets the stage for many years to come. Something that didn’t formally exist in short order will become an "amenity," an expectation. Amenities are difficult to undo even when their need or usefulness has long since passed. The Board needs to carefully consider future financial ramifications of decisions made today.

Legal. On the one hand, the association needs to provide "reasonable" protections for its owners. On the other hand, by providing lifeguards, guard services and the like, some courts have held that owners, guests and even trespassers are relieved of personal responsibility when injury is suffered. Questions come up like: If it is valid for the association to provide lifeguards during normal pool hours, is it also reasonable for the association to have to provide a guard service in off hours to keep people from jumping the pool fence, swimming and drowning? These things have a way of growing beyond their original intended scope.

Homeowner Involvement. For sweeping issues or increases in cost, it is reasonable that the Board inform and give a voice to the homeowners. While the governing documents may not require it, it makes practical sense. Faced with the conflicting aspects of our case study, a homeowner meeting specifically called to discuss the issue is appropriate. At that meeting, all arguments should be presented and homeowner opinion solicited. If the proposal is to fund a new service and the majority of owners disagree, the Board can either agree, go against the tide or step down and be replaced. Whatever the case, the record will show that the Board did its homework by soliciting professional and homeowner input. In short, the Board used "due diligence" in coming to its decision.

Are there risky issues to deal with in your community? Remember that you are not alone in sorting them out. The effective Board is a team effort whose sum is greater than its parts. By taking advantage of collective experience, risky business can become business as usual.

Reach out to us if you have questions about HOA risk management and how we can help.