8M // Real Estate & Home Builders Guide // January 2018
Resident fears HOA may declare bankruptcy after lawsuit
By Ilyce Glink
and Samuel J. Tamkin
Tribune Content Agency
Q
: Our homeowners association (HOA)
has been sued. I have been reading
that it is not likely the HOA can declare
bankruptcy if it loses the lawsuit. Articles
I’ve read about in Florida mention
bankruptcy would not be possible until
all the underlying value of individual
properties have been liquidated and used
to satisfy the HOA debts. In the worst
case scenario, it appears possible all
individual homeowners could lose their
homes if the HOA management makes
some very bad decisions. What’s your
take on this?
A
: It’s quite unusual for an HOA to
be placed in a situation where it has
to file for bankruptcy. On contractual
matters, those issues don’t give rise to
liability problems. You might have to pay
damages if your association breaches a
contract, but those damages would not
cause an association to fail. More likely,
Duke
Warner
Realty
the association would have to levy a
special assessment or borrow funds to
pay for the wrongful termination of a
contract.
On the other hand, a liability problem
could be a real concern to an association.
To avoid liability issues, HOAs typically
carry liability insurance and other insur-
ance coverages. So, if something happens
on the property and someone is hurt,
the HOA has liability insurance to cover
for that issue. If a member of the board
absconds with money or does something
that harms a third party, the association
should have insurance coverage for those
actions as well.
We don’t know what you’re concerned
about, but if your association has liability
insurance and errors and omissions
insurance and other coverages that are
required in the state in which the HOA is
located, your association should be fine
financially. We have seen HOAs carry at
least $1 million in liability insurance, and
many other associations now carry even
more coverage than that.
You’d need to assess what the issue
insurance coverage to settle the suit. If the
plaintiff seeks more than the insurance
coverage, the homeowners might have to
pay up in a special assessment to settle
the case. The intricacies may depend on
the state, the type of case and varying
circumstances, but we could envision
the plaintiff pursuing the case further in
an attempt to extract more money from
the association, including trying to go
after any reserves or other bank accounts
owned by the association.
For more information, you should
talk to an attorney that focuses his or her
practice in condominium law or common
ownership associations.
Ilyce Glink is the creator of an 18-part
webinar+ebook series called “The
Intentional Investor: How to be wildly
successful in real estate,” as well as the
author of many books on real estate. She
also hosts the “Real Estate Minute,” on
her YouTube channel. Samuel J. Tamkin
is a Chicago-based real estate attorney.
Contact Ilyce and Sam through her
website, ThinkGlink.com.
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is and what sort of liability that issue
carries for the HOA (and the owners) and
determine whether you have insurance
coverage for that issue. Your association
has been sued. Now the question is
whether the defense of that case has been
given to the HOA insurance carrier for
defense. If the defense has been tendered
and the insurance carrier is working on
the defense, you may be fine.
We don’t know why you’d think
that the association would end up in
bankruptcy. Is the situation you are in so
severe that you fear that insurance will
not cover a judgment that may be handed
down by the judge? If so, your HOA
board may have underinsured its liability
coverage. If that’s the case and the
judgment that’s handed down is greater
than the insurance coverage carried, the
next step may be for the attorneys for the
association to negotiate a settlement with
the plaintiff for the amount of insurance
coverage.
If the negotiations don’t work, then the
question would be whether the plaintiff
would accept the full amount of the
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