“Charged with New Laws – Electrically and Financially Speaking”

LHC NEWSLETTER VOL. 10, VOL. 3

 

“CHARGED” WITH NEW LAWS – ELECTRICALLY AND FINANCIALLY SPEAKING – HERE’S A SUMMARY AND SOME PRACTICAL TIPS FOR YOUR ASSOCIATION.

By David A. Loewenthal and Barbara A. Higgins

Loewenthal, Hillshafer & Carter, LLP

 

Although our new year started with some torrential rains, there are some ways to navigate and protect your Association from some of the new laws streaming downhill from Sacramento.  Of course, no one has a crystal ball to predict just how the Courts will interpret the new laws or rule upon any case where these laws come into play, but we can use some practical insight and legal experience to help guide Associations down the path of prudent fiscal responsibility, good judgment, and financial maintenance.

Let’s first talk about a subject dear to all members – money, specifically Association finances and safe money management.  In comes AB 2912, a CLAC sponsored bill designed to protect against fraud, embezzlement, or other dishonest acts by Associations’ managing agents, directors, officers, and employees from having too much discretionary or unilateral power to manage or transfer funds which could negatively affect an association’s monetary health and the bottom-line.  Unfortunately over the last decade many associations in our region have been the subject of such malfeasance by unscrupulous management companies.  This bill amends Civil Code Sections 5380 and 5500 and adds Civil Code Sections 5501 and 5502 and 5806 to deal with this serious problem.  We will discuss some of the more significant aspects of these new laws.

Existing law requires the HOA board to review financial documents and statements related to the HOA’s accounts on at least a quarterly basis, unless the HOA’s governing documents require more frequent review. This new law changes the frequency of review from at least once a quarter to once a month, and adds new requirements about exactly what to review.

Under Section 5500, unless the governing documents impose more stringent standards, the Board now needs to:  review, on a monthly basis, a current reconciliation of the Association’s: operating accounts, reserve accounts, the current year’s actual operating revenues and expenses compared to the current year’s budget, the latest account statements prepared by the financial institutions where the association has its operating and reserve accounts, an income and expense statement for the association’s operating and reserve accounts, the check register, monthly general ledger, and delinquent assessment receivable reports.

There is some flexibility in this monthly review requirement. Pursuant to Section 5501, “the review requirements of Section 5500 may be met when every individual member of the board, or a subcommittee of the board consisting of the treasurer and at least one other board member, reviews the documents and statements described in Section 5500 independent of a board meeting, so long as the review is ratified at the board meeting subsequent to the review and that ratification is reflected in the minutes of that meeting.”  If a subcommittee is used, which is typically not a quorum, then the Board need not give written notice of the meeting.  The Board will just need to ratify the written report or minutes of the subcommittee concerning its financial document review at the next noticed Board meeting

Since the new law prohibits transfers greater than $10,000 or 5 percent of the total combined reserve and operating accounts, whichever is lower, without prior written Board approval (Section 5502), it is important to consider how that impacts an Association on a day-to-day basis.  If an Association has an ongoing month-to-month consistent transfer of money from the operating account to the reserve account, do they still need to meet monthly to authorize in writing those regular transfers?  What if the Association needs to make regular equal monthly payments to pay off, for example, a construction loan that falls within the monetary transfer requirements?

Under those scenarios, an annual Board resolution authorizing in writing the monthly payments for a specific time period within the fiscal year, should be sufficient to satisfy the requirement.  This would alleviate the need (and burden) for the Board to meet monthly, just to authorize the same reserve or loan payments each month.  The risk of a fraudulent transaction under those circumstances would be low as long as the Board was familiar with all of the supporting records (such as loan or reserve reports).

With the possible exception of the scenarios above, other routine or occasional payments, that fall within the monetary transfer parameters, to contractors, vendors or other third parties who may or may not work for or provide service to the Association on a regular basis will require written Board approval each time?  Since the new law is designed to safeguard against fraud and embezzlement, the Board of Directors or subcommittee will need to meet monthly for reviewing these types of charges and authorizing payment.  Being a fiscal watchdog can only help protect the Board and development as a whole.

Under Section 5806, unless the governing documents require greater coverage amounts, the Association shall maintain fidelity bond coverage for its directors, officers, and employees in an amount that is equal to or more than the combined amount of the reserves of the association and total assessments for three months.  This section is not talking about D&O insurance.  A “fidelity bond” essentially means that the Association is purchasing insurance that covers fraudulent or dishonest (“fidelity”) actions of employees, plus non-employee theft.

The Association’s fidelity bond shall also include computer fraud and funds transfer fraud. This part of the bond protects against illegal transfers and thefts from Association accounts typically committed by dishonest third parties who hack into the computer or bank accounts.  If the Association uses a managing agent or management company, the Association’s fidelity bond coverage shall additionally include dishonest acts by that person or entity and its employees.  Associations may very well require their management companies to carry fidelity bond coverage for this very same purpose, which likely will become a cost of doing business.

The Senate Judiciary Committee comments provide insight into the statute including the following:  “Notably, such a bond requirement would not, in itself, deter fraud or embezzlement.  It would, however, help to ensure that if an association does become a victim of fraud or embezzlement, the homeowners will not be left holding the bag as a result. In that regard, this provision of the bill may be the most important component in terms of providing concrete protections for homeowners. As a practical matter, moreover, requiring associations to maintain bond coverage may lead to tighter controls on association finances, since a bonding company is likely to require such controls as a precondition for providing the coverage.”

Another new law of interest to many is SB 1016 – Electrical Vehicle (EV) Charging Stations, codified into law as an amendment to Civil Code Section 4745, and which also added, Civil Code Section 4745.1.   As everyone knows, California is a “green”, very pro-environment, anti-fuel emissions state, so it should come as no surprise that “it is the policy of the state to promote, encourage, and remove obstacles to the use of electric vehicle charging stations”.  (In fact, the foregoing quote derives from the text of the law.)  This is the third time in the past seven (7) years, the California Legislature has modified our laws controlling EV Charging Stations within HOA communities. The last time, the purpose of the amendment was regulatory in nature, to provide the Associations with the ability to impose “reasonable restrictions”, while still allowing homeowners the option of installing and using EV Charging Stations. While the price of electric vehicles has been steadily decreasing, the accessibility of EV changing stations continues to be an issue, especially in HOA communities, as noted by the Senate Bill Policy Committee.

Effective January 1, 2019, the law was amended to expand the scope of homeowner rights to install EV charging stations in their “units”, as well as in previously allowed areas of a designated parking space including a deeded parking space, a parking space in an owner’s exclusive use common area or a parking space that is specifically designated for use by a particular owner.  Realistically, this may include interior garages if considered part of the unit, or spaces within grant deeds which are considered a part of the residential unit ownership.  The provisions of these Code sections apply regardless of whether the EV charging station is in the unit’s garage, or a portion of the common area where the owner has an exclusive use/dedicated parking space, or in the common area subject to an authorized licensing agreement.

“For purposes of these sections, “reasonable restrictions” are restrictions based upon space, aesthetics, structural integrity, and equal access to these services for all homeowners, but an association shall attempt to find a reasonable way to accommodate the installation request, unless the Association would need to incur an expense.” (Legislative Counsel’s Digest for SB 1016).  Fortunately for Associations, Section 4745(f)(1)(D) was amended to clearly state that a homeowner must also pay for the costs of installation of the station, as well as electrical usage, regardless of where the Association allows it to be placed.  Under Section 4745(f)(2), as previously amended, homeowners are also responsible for any damage, repairs and maintenance of the charging stations until removed, as well as any damage to any affected common areas, and this remains in effect It is notable that insurance requirements of homeowners installing EV charging stations were relaxed (or made more confusing) by the new amendment.  The previous $1,000,000 homeowner liability coverage policy requirement has now been replaced with no specific or minimal required amount of coverage.  The requirement for the Association to be named as an additional insured has also been deleted from Section 4745 (f)(3).  This is a bit of a discrepancy because it is still referenced in Section 4745 (f)(1)(C) wherein it states: ‘Within fourteen (14) days of approval provide a certificate of insurance that names the association as an additional insured under the owner’s insurance policy in the amount set forth in paragraph (3).”   (Emphasis added).

It’s quite possible that “clean-up” legislation will be done in the near future to clarify the additional insured issue, and also because there is no insurance “amount set forth in paragraph 3”.  For now, it seems that an HOA is within its legal rights to require that it be named as an additional insured in a homeowner’s insurance policy – Section 4745(f)(1)(c).

In furtherance of the above, in reviewing the legislative history and discussions regarding the modifications to the Electrical Vehicle Charging Station legislation, not surprisingly, the issue of lowering the insurance requirements was specifically discussed including the previously existing $1,000,000 requirement.  The discussions centered on the fact that when the insurance requirement was enacted in 2011, this was before the time that EV charging stations became more commonplace.  In the eight (8) years since the inception of the statute, the legislature has determined that the $1,000,000 insurance requirement provided very little useful purpose and rather acted as an “obstacle to installation of charging stations.”  The Electric Vehicle Charging Association wrote as follows:  “Not only is $1,000,000 higher than normal for a homeowner liability policy, but the insurance market itself has failed to follow through in offering this kind of coverage.  This has left residents without options for insurance coverage, preventing them from installing an EV charging station at their home in a multi-unit dwelling.”

Overall, proponents of the changes to the EV laws believe that by eliminating the statutory minimum $1,000,000 of coverage would help remove a significant barrier to EV charging stations while still maintaining some liability coverage or protection for the Association.

 Based upon the legislative history associated with the amendment, association’s may wish to consider creating its Rules and Requirements for liability insurance at $500,000 since it is less than the previous $1,000,000 requirement but still affords significant insurance coverage to the Association.  Of course, enforceability of the minimum insurance amount may ultimately be the subject of a challenge.

Section 4745.1 was added to the Civil Code this year in order to extend the provisions of Civil Code Section 4745 governing EV charging stations so that the law also covers “TOU” (“time of use”) meters.  An “EV-dedicated TOU meter” means an electric meter supplied and installed by an electric utility that is separate from and in addition to any other electric meter and is devoted exclusively to the charging of electric vehicles and that tracks the time of use when charging occurs. The new law clarifies that an “EV-dedicated TOU meter” includes any wiring or conduit necessary to connect the electric meter to an electric vehicle charging station. (See Civil Code 4745.1 (f)).  The Association must process applications for EV-dedicated TOU meters in the same manner as they would for the installation and use of charging stations, except the same insurance requirements do not apply.  The same type of “reasonable restrictions” apply to the TOU meter installations and usage as would apply to an EV charging station.  The state of California promotes and encourages their installation and usage with reasonable restrictions allowed.

It is recommended that Associations adopt “reasonable” guidelines and requirements for implementing these laws into their application and authorization processes.  This could include a written maintenance and ongoing insurance obligation agreement in the form of a covenant to run with the land so that it is recorded and is binding on the current owner and all future owners.

As always, it is advisable that Associations consult with legal counsel well-versed in HOA law when developing guidelines, procedures, and rules to comply with these new laws.

*  Originally published in Channels of Communication (first quarter 2019).