Mitigating Risk: How Lawsuits Affect an HOA

Serving as a board member can be a rewarding experience as you work to better your community and uphold its values. There is never a dull moment with association housekeeping!

Accompanying the duties of board membership, liability proves a slippery slope that could appear complicated and overwhelming if you find yourself facing a potential lawsuit. Liability often lingers in the guise of fine print. However, equipping yourself and your board with the right tools can help prepare for unprecedented situations.

One of the best instruments in tackling lawsuits is awareness. You may be wondering, “What are some of the most common reasons for lawsuits?”

ACC requests, assessments, and violation disputes all contribute to the most common association lawsuits. A homeowner may want to fight a rejected improvement request, an escalated account with an outstanding past due balance may warrant foreclosure, or a violation citation may prompt a homeowner to seek compensation. Be careful how you respond as you don’t want to subject yourself or the association to slander or defamation liability. Defamation is injuring someone’s reputation by communicating false information about that person. The best way to do this is minimize the use of adjectives or references to an individual and to be objective by using facts and evidence.

You may also be wondering how lawsuits affect your association. The impact can be widespread. For example, in 2014, homeowner began operating a short-term rental (e.g., Airbnb) business out of his home an HOA near San Antonio, Texas. The association believed the homeowner was violating the deed restrictions by engaging in a commercial, rather than a residential, use of property. However, according to the court, the verbiage in the governing documents was too vague for Tarr’s short-term rental to be a violation. Since his house had a residential purpose, the restrictions could not stop the short-term rentals. For more information on this case, a San Antonio Express-News article can be found here.

Tarr’s case exemplifies that violation enforcements should be approached by acknowledging and pursuing explicit verbiage from governing documents, so it proves important to familiarize yourself with your own association’s restrictions. While the court ultimately sided with the homeowner, the issue of short-term rentals has since reached local and state government to address how to handle short-term rentals. An ongoing “battle of the Texas bar” has left governing officials struggling with short-term rentals, but some legislation regarding short-term rentals has been created to protect both associations and homeowners alike. The Austin Code influenced by this case can be found here, but check your own city ordinances for more information.

The short-term rental lawsuit influenced how similar situations in other associations can be handled in the future, ultimately reshaping the short-term rental industry as a whole, at least in Texas. Consult your association’s governing documents, along with local and state laws, to learn how to handle short-term rentals in your association.

Ultimately, you are probably concerned with your association’s bottom line when it comes to the varying effects of lawsuits. Below are a couple of examples of other lawsuit outcomes:

  • Decreased home value. Lawsuits may alter the image or reputation of an association, which can decrease home sales and value. Potential buyers may be hesitant to purchase a home in a community involved in a lawsuit.
  • Monetary loss. Lawsuits may increase insurance rates, with upsurges in deductibles and insufficient coverage dependent on the severity of each individual case. Additionally, legal fees not covered by insurance are a costly byproduct of lawsuits.
  • Insurance impact. A lawsuit may cost your association in the short and long term. It may also cost the board members individually if you don’t have proper Directors and Officers insurance. A lawsuit often results in increased insurance premiums and even being dropped by your insurance carrier, which further exposing your association to future liability.

While the above results may not be as reverberating as the Tarr v. Timberwood Park short-term rental case, it is still important to consider the range of effects a lawsuit can have on your association and, more importantly, how to productively handle them.

So, how can you prepare for and mitigate lawsuits?

Never fear, help is here! Lawsuits may seem intimidating, but they can be avoided, when plausible. Three main pillars can help reduce the possibility of lawsuits:

        1. Protect your board and association with adequate insurance coverage, ranging from commercial property insurance to workers’ compensation. If you are unsure about how to approach obtaining insurance, one company that can help is Blue Lime Insurance Group, a broker with experience in condominiums and planned communities. See here for their advice about umbrella insurance as a defensive measure for lawsuits.
        2. With knowledge comes power! Safeguard your board and association through familiarizing yourself with applicable laws and governing documents. To further your education, you can seek board member training programs, such as Boardline Academy. From lessons that focus on dissecting governing documents to an entire course dedicated to risk management, programs such as Boardline can equip your HOA board with the knowledge to protect itself and help it thrive. See here for their expertise on lawsuits against board members.
        3. Risk management. Both insurance and education contribute to the overall process of managing risks. When you engage in risk avoidance, risk mitigation, insurance, and/or risk retention, you can more effectively prepare for and mitigate lawsuits.

Though it may seem difficult at times, you and your board can undertake lawsuit preparation and mitigation, and the good news is you do not have to handle the task alone! Rely on the association’s legal counsel, property management company, insurance broker, and the board’s collective capabilities to regularly review the governing documents, insurance coverage, and government legislation to equip your association in the face of lawsuits.