Owners are paying for nonexistent insurance

Question: I asked for copies of our homeowner association master insurance policies for three years, in particular the association’s fidelity bond. (A fidelity bond insures against financial losses caused by dishonest acts of the board.) The board and management gave me excuses and stall tactics. I was left no recourse but to file a complaint with the California Department of Insurance. The department investigated and found that one insurance company we’ve been paying no longer exists and no fidelity bond policy existed or exists for our condominium complex.

After I learned we were paying for nonexistent insurance policies, I pressed the board to see the records and demanded reimbursement of my share of the policy payments. The board’s lawyer wrote to tell me I could not see the books and to “stop interfering with association business or risk paying the association’s losses because of my interference.”

Both my lawyer and accountant told me these were not healthy management and financial indicators and to cut my losses. Immediately, I sold my West L.A. condo of more than 35 years.

When the escrow company requested the board complete a Homeowners Assn. Information Statement sheet, the president forwarded the request to the management company to complete. The form asked: “Does your association have a fidelity bond? Provide copy of fidelity bond to escrow company.” Management wrote “yes” next to fidelity bond but never provided a copy. Escrow closed without receiving a copy of the bond and the buyer is unaware that no bond exists.

For decades, this board has been playing dumb. Isn’t this illegal, and am I liable to the buyer of my unit?

Answer: Deed-restricted titleholders of property in a common-interest development have certain rights. Civil Code section 1363(f) allows titleholders access to “records, including accounting books and records and membership lists.” Civil Code section 1365(e)(2) imposes a legal obligation on the board to disclose to members whether any insurance policies, including fidelity insurance coverage, have “lapsed, been canceled, are not immediately renewed, restored or replaced, or if there is a significant change, such as a reduction in coverage or limits or an increase in the deductible,” and titleholders must be notified “if replacement coverage will not be in effect by the date the existing coverage will lapse.”

Civil Code section 1365(e)(4) requires that the association provide a copy of the association’s insurance policies when an owner requests it.

The board’s failure to obey the law subjects each member to individual liability in the event of an insurance claim. Knowing that insurance was not in place, stating that it was and collecting assessments to pay for that phantom coverage is conversion -- funds collected for a purpose for which they were not used and not returned -- or fraud or both and may be a crime.

Buyers rely on an association to compile escrow documents truthfully. Misrepresentation by the board or its management agent that fidelity bond insurance was in place when the unit was purchased subjects each individual board member and the management agent to risk for damages. In the event either is sued, insurance companies have the right to deny coverage in cases of fraud or criminal acts.

That the board knew it was misrepresenting the truth, but did so anyway with the intent of deceiving the new buyer and its own titleholders for the purpose of collecting more funds, likely constitutes fraud.

File a report at your local police department for funds taken from you for the nonexistent policy. Send copies of your escrow documentation along with the letter from the Department of Insurance to the attorney general and Department of Real Estate requesting an investigation and prosecution of those who participated in the fraud.

Every deed-restricted homeowner can request and obtain copies of the association insurance policy pursuant to the Davis-Stirling Act section 1365(e)(4). If a request for the association’s insurance policies is ignored or not complied with immediately, download the “Request for Assistance” form from the Department of Insurance site at www.insurance.ca.gov and file a complaint noting that time is of the essence.

Attorney threats against a homeowner for interfering with association business when the owner is exercising legal rights are outside the bounds of ethical conduct, and California courts have made that clear to at least one association law firm. Report such conduct to the California State Bar using a complaint form on their website at www.calbar.ca.gov.

Please send questions to: P.O. Box 11843, Marina del Rey, CA 90295 or e-mail your queries to: NoE[email protected].