Boards of directors now know that they can break the CCRs, act fraudulently and illegally, and have nothing to worry about, because if a homeowner sues, the board will call on the association insurance carrier to defend them.

If the homeowner wins after much expense and travail, the insurance carrier will pay. If the homeowner loses often from sheer economic exhaustion the board then goes after the homeowner for attorney fees and costs.

Because the cards are so heavily stacked against the homeowner, many homeowners choose not to file suit and instead, let the board get away with, at times, very grievous wrongs.

So, how has association insurance turned from being a shield into a sword? There are a number of closely interlocking reasons.

1. The first is the monopoly power of Chubb Insurance. Chubb, operating under a variety of names, controls approximately 80% of the homeowner insurance market nationwide.

It has done this through acquisitions and the use of very questionable business tactics. For instance, as part of its marketing plan, it offers to provide coverage at either no charge or, at most, a nominal extra charge for the associations management company.

This is insidious for at least 2 reasons:

a. The homeowners are now paying to cover the possible misdeeds of one of their vendors. This is not only a very strange business practice (what company pays for the insurance coverage of one of its vendors for possible misdeeds against the company?), but it now leaves the management company no incentive to abide by its legal and ethical obligations to the association because the association insurance will protect it.

b. As most boards rely heavily, if not exclusively, on the advice of its management company regarding what insurance carrier to choose, management companies now have a conflict of interest when they recommend Chubb insurance, because the management company stands to gain from that recommendation. In fact, it can be fairly argued that Chubb offers this management insurance precisely to induce management companies to recommend Chubb.

As far as is known, no other insurance company offers a similar management rider. The pot is further sweetened by Chubbs promise to defend even past actions.

Chubbs monopoly power then has great, detrimental impact on homeowners. Using management companies as its sales agents, Chubb has been able to corner and dominate the market. This vast power is now used against homeowners because of Chubbs alliance with the association litigation industry.

2. Chubb markets its product exclusively through the Community Associations Institute (CAI).

The tie is so close that Chubb includes an application for membership in CAI in its own application materials. CAI is, of course, dominated by the association litigation industry. These lawyers and their allied management companies are well known for stirring up litigation against homeowners, either by initiating it directly or inviting it by allowing and even encouraging violations of the CCRs by boards. This unholy alliance between the lawyers and Chubb works to destroy fundamental rights of homeowners for the financial gain of both Chubb and the lawyers. Clearly, homeowners have a right when they buy a home not to be sucked into some litigation meat grinder.

3. Chubb, as part of its marketing strategy, promises to defend boards of directors, no matter what.

The cadre of association lawyers has jumped on this with glee. When boards of directors violate the CCRs and homeowners threaten to sue, association lawyers only too gladly counsel the board to let the homeowner sue. They have multi-billion Chubb behind them. For the homeowner, it is David v Goliath time and the sad reality is that Goliath usually wins, and it is the homeowner's premiums and reserves that are paying for Goliath.

4 In addition, Chubb in its policies commits to a duty to defend the board even when it will not cover for liabilities.

If it wins, it will go after the homeowner for attorney fees and costs. If it loses, the homeowners may have to use their reserves to pay the prevailing parties, attorney fees and costs. It has been reported that Chubb defends illegal acts by boards. This not only encourages boards to act illegally, but it creates a potentially serious financial liability for the homeowners if it loses.

5. Chubb has created a powerful marketing alliance of board members, management companies and lawyers by, in many observers' opinon, offering CHUBB guaranteed legal fees and what are in effect bribes.

For example, Chubb as part of its policy offers $100,000 in Accidental Death and Dismemberment Insurance to every active board member for $100 a year. It requires no reporting or auditing, requires no physicals, has no age restrictions and pays benefits in addition to any other insurance. In the event of death, the $100,000 does not go to the association, but to the board member's family. To modify a famous phrase, never has so much gone to so few!

SOLUTIONS

New societal and economic relations demand new legal frameworks to handle them.

Homeowner associations have sprouted largely unchecked across the land, and are now a very powerful force to contend with. It is currently estimated that there are at least 40 million Americans living in homeowner associations , 6 million in California alone.

It is clear that the individual homeowner is no match by him or herself for these economic juggernauts. As society has seen fit to provide significant protections for individuals in many other areas of American life from the stock market to credit card companies to automobile repairs so now it is time, in fact well past time, for similar protections to be afforded to homeowners in associations when they pay for association insurance.

Fundamental to this reform is the requirement that association insurers such as Chubb have some fiduciary duty to individual homeowners.

The escape hatch which Chubb has consistently used in face of homeowner criticism is that their only duty is to the association and its board of directors. Whatever the validity of this argument, it does not address the new reality which planned developments have thrust on homeowners for at least 3 reasons.

1. When homeowners buy into a planned development, they neither think nor expect that they are buying into a business. They are buying a home.

Hence, to foist models of fiduciary duty derived from and possibly applicable to business situations, simply will not work in the new socio-economic relationships which planned developments have spawned. The homeowners pay for the insurance under the belief and reasonable expectation that it will augment, not diminish, the value of their home life.

The sad, and at times, terrible experience of many homeowners is that this insurance becomes a tool to terrorize them, to threaten their livelihood, and in some cases, to drive them from their homes. This cannot be a justifiable aim of insurance in society. Hence, society through its legislature has to ensure that insurance in this new form of communal living protects homeowners from manifest abuse.

2. Boards of directors act as a new layer government without any of the safeguards which governmental codes provide to the individual citizen in his/her interactions with other layers of government.

For example, a recent case in Fullerton clearly demonstrated how a board of directors held a completely invalid election. The only recourse for the homeowner was to file a lawsuit. After spending thousands of dollars, the homeowner won.

If this had been a city, county or state election, the homeowner would not have been forced to file a suit. There are governmental agencies and codes which govern elections, but not in homeowner associations. In short, there is no level playing field in homeowner associations.

Boards possess almost absolute power, and it is well known what Lord Acton said about absolute power. As a corollary, to allow insurance companies to defend these boards no matter how badly and flagrantly they act, is to invite corruption of the worst kind.

3. The litigation industry has long roamed the land in search of every niche and dollar. Until relatively recently, an individuals home did not appear prominently on the legal radar screen. In the past 20 years, this has changed dramatically.

Lawyers now recognize that the vast reserves of associations are a wonderful source of revenue. They have recognized that most boards of directors are completely at sea in the tangled web of CCRs and state regulations.

They thus scare boards to rely on them almost totally. Furthermore, to enhance their position, they help those board members who are seeking to profit from the association pot in the many and varied ways that this is possible. Lawyers reassure boards that association insurance will pay the bill if a homeowner sues.

Hence, there is a profound need for fundamental reform in the field of homeowner association insurance. The first step would be to hold legislative hearings to allow all the dimensions of this problem to be aired. Then, an appropriate legislative remedy could be fashioned.

Players like Chubb will, of course, mount a full court press, but that only confirms the depth of the problem. The above is not meant to lay out the full story on this issue. That is a long, long task. Rather, it is intended to lay an initial conceptual framework by which the current situation can be understood.

c

• California Homeowners again ask California Senate Insurance Committee to Investigate CHUBB Insurance and CHUBB-CAI lawyers
• December 14, 2000

• Homeowners Picket CHUBB Insurance Offices in Newport Beach, California
• July 20, 2000

• California State & Consumer Services Agency promises to investigate litigation flood and snacthing of homes for legal fees in homeowner associations by CHUBB Insurance-CAI lawyers
• July 24, 2000