“Greetings from Santa Rosa! Our community was fortunate enough to have most of the homes in our subdivision spared from damage during the devastating Tubbs fire of 2017. However, a few of our neighbors were directly impacted and unfortunately, they have not been able to rebuild their homes. While our Association did not experience significant increases in insurance rates until the policy renewal in 2021, we were hit with a sudden cancellation of our Farmers policy and had to replace it with coverage that tripled in cost. Rather than dipping into our healthy reserves to cover the expenses, we were hit with emergency assessments. This raises the question: why couldn’t we use our reserves until insurance rates come down?”

In recent years, California has suffered significant wildfire damage, making it increasingly difficult for insurance companies to offer policies to communities at risk. Admitted carriers are heavily regulated by the Department of Insurance, limiting their ability to charge high premiums. This has led many HOAs to purchase insurance from the non-admitted surplus market, where prices can skyrocket due to supply and demand. However, HOAs are required by their governing documents to purchase insurance and failing to do so can result in liability for the association and its board of directors.

If an HOA cannot afford the high insurance premiums, they can temporarily borrow funds from reserves to meet short-term cash flow requirements or other expenses. This must be done with guidance from legal counsel and certain procedural requirements must be satisfied, including providing notice to the membership and offering options for repayment. A special assessment may be utilized to restore the borrowed reserve funds, but special assessments greater than 5% of the HOA’s annual budget require membership approval.

Fortunately, Civil Code section 5605 exempts boards from the membership approval requirement in situations where a special assessment is needed to address an emergency expense that could not have been foreseen during the budget planning process. However, HOAs should consult with legal counsel before imposing an emergency special assessment to understand its implications on future budget planning.

For more information regarding the wildfire crisis in California and the effect on HOA property insurance, have a listen below to The HOA Show, EP20: A Discussion of California Wildfire Insurance Issues with ASM Marc Levine (November, 2021).