Screening | Rembaum's Association Roundup

October 1, 2022October 14, 2022

Condominium Unit Owner Insurance – The Risks of Not Purchasing Insurance for Your Unit

Condominium Unit Owner Insurance

The risks of not purchasing insurance for your condominium unit

Do you think you do not need condominium insurance because your condominium association has it? You would be so very wrong if you do! It has happened more times than I can count—the supply line that feeds the toilet ruptures in the upstairs unit while the owner of the unit is out of town, the upstairs unit owner forgot that he or she started to fill the tub and it overflows, or the upstairs unit owner ignores a broken toilet, all of which result in water flowing down into the unit below. Next thing you know, the remediation workers arrive and start ripping out the soaked, damaged drywall in the units below and after cutting holes in the drywall use their industrial-sized blowers to dry things out to prevent mold.

Meanwhile, the downstairs unit owners want to have a “word” with the upstairs unit owner to discuss who is going to pay for the repairs. They demand a copy of the upstairs unit owner’s insurance policy. The owner of the upstairs unit where the leak occurred smiles and explains, “The condominium association has insurance. They’ll take care of it.” Right? Wrong! Even if the condominium association has the duty of repair to portions of the damaged property, typically the damaged common elements, the upstairs unit owner is not off the hook because both the condominium association and its insurance company can often “subrogate” their financial damages against the upstairs unit owner and so, too, can the downstairs unit owners and their insurance companies. At the end of the day, the upstairs owner who caused the damages could have significant financial liability. (In plain English, to “subrogate” a claim means that one party goes after the other for their financial damages for having caused the damage in the first place.)

So, now that I have your attention, most especially if you are a unit owner who does not have insurance for your unit—in the example described above, not only can the upstairs unit owner bear significant financial liability, but even their condominium unit is at risk of being foreclosed to satisfy a judgment against them—and there is no homestead protection! Because the upstairs unit owner decided not to purchase insurance, he could actually lose his unit in a foreclosure. The following explanation is why:

By way of oversimplification, the Condominium Act, more specifically, §718.111(11)(f), Florida Statutes, requires the condominium association to insure everything that the unit owner is not responsible to insure. The unit owner is responsible to insure

… all personal property within the unit or limited common elements, and floor, wall, and ceiling coverings, electrical fixtures, appliances, water heaters, water filters, built-in cabinets and countertops, and window treatments, including curtains, drapes, blinds, hardware, and similar window treatment components, or replacements of any of the foregoing which are located within the boundaries of the unit and serve only such unit… the association is not obligated to pay for any reconstruction or repair expenses due to property loss to any improvements installed by a current or former owner of the unit or by the developer if the improvement benefits only the unit for which it was installed and is not part of the standard improvements installed by the developer on all units as part of original construction, whether or not such improvement is located within the unit.

But, however, the unit owner’s insurance policy, typically referred to as an “HO-6 policy,” not only includes coverage for the items set forth above plus other personal items, but also includes liability coverage for having caused damages to the condominium property.

§718.111(11)(j)1–2, Florida Statutes, makes patently clear that

A unit owner is responsible for the costs of repair or replacement of any portion of the condominium property not paid by insurance proceeds if such damage is caused by intentional conduct, negligence, or failure to comply with the terms of the declaration or the rules of the association by a unit owner, the members of his or her family, unit occupants, tenants, guests, or invitees, without compromise of the subrogation rights of the insurer.

The provisions… regarding the financial responsibility of a unit owner for the costs of repairing or replacing other portions of the condominium property also apply to the costs of repair or replacement of personal property of other unit owners or the association, as well as other property, whether real or personal, which the unit owners are required to insure. (emphasis added.)

Furthermore, also pursuant to §718.111(11)(g)2, Florida Statutes,

…unit owners are responsible for the cost of reconstruction of any portions of the condominium property for which the unit owner is required to carry property insurance [set out above], or for which the unit owner is responsible, and the cost of any such reconstruction work undertaken by the association is chargeable to the unit owner and enforceable as an assessment and may be collected in the manner provided for the collection of assessments pursuant to § 718.116, Fla. Stat. (emphasis added.)

§718.116, Florida Statutes, is the unit fore-closure section of the Condominium Act which explains the steps necessary to foreclose against an owner’s unit for failing to pay assessments.

In condominium living, the general rule is that the party who has the duty of purchasing insurance for a particular portion of the condominium property also has the primary duty to repair the damages to such portion regardless of fault (unless the condominium association has opted out of that regime by a vote of the unit owners, which is a rarity). But, simply because the condominium association has insurance and may have that primary duty of repair after the insurable casualty event, that does not mean that the negligent unit owner that caused the damage will not be the primary target for reimbursement for expenses incurred by the condominium association’s insurance company or by the condominium association for its deductible and related expenses. The same concept applies for the downstairs unit owners, who could seek reimbursement from the upstairs unit owner for any necessary expense incurred because the upstairs unit owner was negligent.

There are typically two parts to the HO-6 insurance policy, the primary coverage for personal losses and the other for liability coverage. Condominium associations should consider amending their declaration to require every unit owner to have both personal and liability coverage, and at a minimum, liability coverage. Your condominium association should discuss this requirement with the condominium association’s insurance agent as well as review the possibility of amending the declaration of condominium with legal counsel.

Anytime a condominium association experiences a casualty event, in addition to reporting the claim to the insurance carrier, usually through the condominium association’s insurance agent, the condominium association should be in touch with its legal counsel to explore all the different aspects necessary to both repair and reimburse the condominium association for its financial losses. At the end of the day, owning a condominium unit and not having purchased insurance is similar to taking a rowboat out on a rough sea day without life preservers.

September 6, 2022September 6, 2022

Crime Pays: HUD Takes More Action to Protect Some But Not All Felons

CRIME PAYS | HUD Takes More Action to Protect Some But Not All Felons

What you need to know regarding owner and tenant applications

Imagine this: Harold Homeowner is selling his house located in your community association. Billy Buyer makes application to the board to purchase the unit. However, he is denied because he is a felon with a dark past. Next thing you know, your association is under federal investigation for Federal Fair Housing violations and exposed to tens, if not hundreds of thousands, of dollars of fines. If you think this can’t happen, think again!

Generally speaking, people with criminal records are not a protected class under the Fair Housing Act of 1968. The Act made it illegal to discriminate against people from renting or buying a home, securing a mortgage, or seeking housing assistance on the basis of race, color, national origin, religion, sex, disability, and familial status. On April 4, 2016, HUD’s Office of General Counsel published a memo titled “Guidance on Application of Fair Housing Act Standards to the Use of Criminal Records by Providers of Housing and Real Estate-Related Transactions.” Then, on March 31, 2022, President Biden declared April 2022 as Second Chance Month, emphasizing the importance of helping persons who have had criminal involvement reenter society, reunite with their families, and find stable and safe homes. Just days later on April 12, 2022, HUD Secretary Fudge issued a memorandum instituting an agency-wide effort to review HUD’s programs, its funding recipients, and program participants to ensure they “are as inclusive as possible in favor of individuals with criminal pasts.” Excerpts from the June 10, 2022, HUD memo follow:

“Disparities throughout the United States’ criminal justice system are well established and persistent. Blacks represent roughly 13 percent of the total U.S. population but account for roughly 27 percent of all arrests. In 2019, the incarceration rate of Black males was 5.7 times that of White non-Hispanic males, while the incarceration rate of Black females was 1.7 times the rate of White non-Hispanic females. A recent study also reflects that Hispanics are incarcerated in state prisons at a rate that is 1.3 times the incarceration rate of White non-Hispanics. In addition, updated data shows that individuals with disabilities are also disproportionately impacted by the criminal justice system. Research shows that these disparities cannot be simply attributed to certain groups committing more crimes and are better explained by biases in the criminal justice system. These disparities extend to housing. Housing providers frequently employ policies or practices that exclude individuals with criminal involvement from housing, which should raise red flags for investigators.” [emphasis added]

On April 4, 2016, HUD’s Office of General Counsel issued its Guidance on Application of Fair Housing Act Standards to the Use of Criminal Records by Providers of Housing and Real Estate-Related Transactions. This guidance described how to assess claims of illegal discrimination under the Federal Fair Housing Act. It applies to a wide range of entities covered by the Act, including private landlords, management companies, condominium associations or cooperatives, third-party screening companies, HUD-subsidized housing providers, and public entities that operate, administer, or fund housing or that enact ordinances that restrict access to housing based on criminal involvement. HUD advises that using criminal history to screen, deny lease renewal, evict, or otherwise exclude individuals from housing may be illegal under the Fair Housing Act under three different theories of liability:

i) discriminatory intent,
ii) discriminatory effects, and
iii) refusal to make reasonable accommodations.

Discriminatory Intent: Claims that a housing provider has used criminal records or other criminal history information to discriminate intentionally in violation of the Act should be investigated in a manner similar to other allegations of intentional discrimination. Criminal records or other criminal history information may be a pretext for unequal treatment of individuals because of race, color, national origin, disability, or another protected characteristic.

“Examples of evidence that would support a finding of reasonable cause to believe that disparate treatment occurred include (not an exhaustive list):

- - - A housing provider routinely advises Native American applicants about a criminal records screening policy but does not advise White applicants about the policy.
    - A housing provider applied a criminal background screening policy to a Black applicant but did not apply the policy to a White applicant.
    - A housing provider rejected a Hispanic applicant based on his criminal record but rented to a White applicant with a comparable criminal record.
    - A property manager discouraged a Black applicant with a criminal record from applying, saying the individual’s record would likely lead to a rejection, but encouraged a White individual with a comparable criminal record to apply, saying that it was possible the record would not turn up and offering the White individual an application form.
    - A housing provider evicted a Black tenant who was convicted of a crime but did not evict a White tenant who was convicted of a similar crime.
    - After learning that an applicant was previously homeless and hospitalized for treatment of a mental health condition, a management company departed from its standard procedures and conducted a criminal background screening of the applicant.
    - A locality applies a crime-free ordinance requiring the eviction of criminally involved residents in a neighborhood with a significant Black or Hispanic population but does not apply the ordinance in neighborhoods that are predominantly populated by White households.”

DISCRIMINATORY EFFECT: [author’s note—These are disparate impact claims, meaning the housing provider did not mean to intentionally discriminate, but the effect of the decision resulted in discrimination.] Claims that a housing provider’s policy or practice concerning criminal background screening or other criminal history information creates an unjustified discriminatory effect in violation of the Act should be investigated using the analysis described in the 2016 Guidance. The three steps to a discriminatory effects analysis follow.

“Investigators must gather evidence regarding whether the challenged criminal history policy or practice actually or predictably results in a disparate impact on a protected class. This involves 1) identifying the housing provider’s relevant practices or policies, both written and in practice, and 2) identifying statistics which show whether the identified policies actually or predictably result in a disparate impact on a protected class.

If a policy denies tenancy to anyone with a felony arrest or conviction over the past 10 years, the investigator should focus on felony conviction and arrest data over the past 10 years for the relevant populations. For example, data showing that Hispanics consist of 20 percent of the respondent’s applicants but 70 percent of those excluded due to a criminal record policy is evidence that the criminal record screening policy has a disproportionate impact on Hispanic applicants. Data showing that Black individuals comprise 65 percent of the housing provider’s tenants, but 95 percent of those evicted under a policy to evict based on an arrest indicates that the policy to evict for an arrest has a disproportionate impact on Black tenants. If the policy is necessary to achieve a substantial, legitimate, nondiscriminatory interest, investigators should gather information and analyze whether the same interest could be served by another practice that has a less discriminatory effect. If so, respondent’s defense fails.” [emphasis added]

Relevant individualized evidence might include the facts or circumstances surrounding the criminal conduct; the age of the individual at the time of the conduct; evidence that the individual has maintained a good tenant history before and/or after the conviction or conduct; and evidence of rehabilitation efforts.

FAILURE TO MAKE A REASONABLE ACCOMMODATION: “For example, a reasonable accommodation to a criminal background screening policy or practice may be required when there is evidence that the individual’s disability contributed to the criminal conduct at issue, and there are mitigating circumstances that eliminate or significantly reduce the risk of harm to others or property, such as improvements resulting from previous on ongoing therapy or treatment. (The Fair Housing Act provides that the current illegal use of controlled substances is not considered a disability under the Act. Additionally, the Act does not protect a person whose tenancy would constitute a “direct threat” to the health and safety of other individuals or result in substantial physical damage to the property of others, unless the threat can be eliminated or significantly reduced by reasonable accommodation.) The housing provider thus must have reliable, objective evidence that a person with a disability currently poses a direct threat that cannot be significantly reduced before excluding them from housing on that basis.”

Many questions result from this particular theory of liability. Is HUD saying that if the felon had a recognized disability under the Act that contributed to criminal behavior then the criminal behavior should be overlooked? At a minimum, it should be considered by the housing provider. The June 10, 2022, HUD Memo concludes with “TIPS from HUD” as follows:

“PRIVATE HOUSING PROVIDERS SHOULD CONSIDER NOT USING CRIMINAL HISTORY TO SCREEN TENANTS FOR HOUSING. If housing providers choose to use criminal background screening policies or practices, they should consider taking the following steps to avoid potential violation of the Fair Housing Act:

- - - Have a written criminal background screening policy that is made available to all applicants.
    - Ensure the housing provider can justify their policy with reliable evidence showing that it actually assists in protecting resident safety and/or property.
    - Ensure that any policy considers the nature, severity, and recency of criminal conduct.
    - Avoid the use of third-party screening companies that utilize algorithms.
    - Before making an adverse decision related to an applicant’s or tenant’s criminal involvement, provide the applicant or tenant with the criminal record, indicate which specific part of the record may form the basis of an adverse decision, and give the applicant or tenant the opportunity to correct inaccurate information or explain extenuating circumstances related to that record.
    - Conduct an individualized assessment that considers relevant mitigating information beyond that contained in an individual’s criminal record, as this is likely to have a less discriminatory effect than categorical exclusions that do not take such additional information into account. Relevant individualized evidence might include: the facts or circumstances surrounding the criminal conduct; the age of the individual at the time of the conduct; how long ago the criminal conduct occurred, evidence that the individual has maintained a good tenant history before and/or after the conviction or conduct; and evidence of rehabilitation efforts.
    - Housing providers must ensure that that they are not engaging in disparate treatment in any individualized review process. One study found that when housing providers used discretionary criminal record screening policies—or policies that evaluated prospective tenants on a “case by case” basis—they favored White applicants over similarly situated Black applicants 55 percent of the time.”

The memo concludes with this statement: “We will continue to work collaboratively to ensure that the Fair Housing Act’s protections are realized by all protected classes.” Thus, any reader of the HUD memo can only conclude that HUD clearly intends to protect the felon when such felon is already a member of a protected class, which includes race, color, national origin, religion, sex, disability, and familial status.

In light of this far-reaching HUD memo, condominium and homeowner associations would be well advised to check in with their association’s attorney prior to denying an applicant based on their criminal past and when revising application procedures, too. A copy of the June 10, 2022, HUD memo can be found at:

https://kbrlegal.com/wp-content/uploads/2022/07/hud_2022june10_memo-felons.pdf

January 10, 2021January 25, 2021

Financial Screening of Purchasers: How Far Is Too Far?

A few months back a case came before the county court in the 20th Judicial Circuit for Collier County, wherein a prospective buyer challenged the validity of a board-adopted rule which required that all prospective buyers provide two years of tax returns with their application for ownership approval. This requirement was in addition to the background check and credit check that were also required. While this is only a county court case and, therefore, has no precedential value other than to the parties themselves, there are principles addressed of which associations and managers should be aware; even though many learned attorneys would opine that the conclusions of the court are legally flawed under the facts of the case and, if appealed, would likely be overturned. Nevertheless, there are still nuggets of knowledge that can be gleaned from this case.

In this case, Mech v. Crescent Beach Condominium Association, Inc., Case No. 19-SC-3498, decided June 2020, the purchaser, who was the plaintiff, was seeking to buy a unit at Crescent Beach Condominium for $400,000, which was to be paid in cash. The purchaser purportedly had a clean background and a credit score of 800. Nonetheless, the board required that, like all other prospective purchasers at the condominium, this purchaser needed to produce his tax returns in order for the association to approve the transfer. The purchaser refused to provide his tax returns and cited his good credit score and clean background as evidence enough for approval. Eventually, an impasse was reached, and the purchaser canceled the contract. Then he brought the county court lawsuit challenging the requirement. (Generally speaking, typically under current Florida law, the purchaser would not have legal standing to even bring the claim against the association; but it does not appear that this legal infirmity was raised by the association, which allowed the case to proceed.)

The purchaser challenged the rule, arguing that the rule was not within the scope of the association’s authority to adopt, nor did it reflect reasoned decision-making. (It is noteworthy to point out that, after the initiation of the lawsuit, the association amended its declaration of condominium to provide that the association may require tax returns in an application for approval of a sale. However, this is not relevant to the conclusions of the Court in this case since it occurred after the litigation was filed.)

The association argued that the tax returns are necessary because they provide more information than a credit report and could help ensure that the potential purchaser is “a good credit risk.” The Court, however, did not agree, calling the argument “nonsensical.” The Court goes on to identify what this judge considers to be the best indicator of a person’s financial history, and as a result, it is the only information the association is allowed to seek. (We note that this conclusion is also without a stated legal basis.)

In the final judgment, some might argue that the Court goes way beyond what proper judicial consideration and conclusions typically contain and indicates that she could find “NO justification for the invasive requirement that a full, or even partial, return would be required when, in fact, the board already requires a full background check and credit check.” While no legal support for the conclusion was provided, the Court held that the request for tax returns was invasive and unnecessary and that the requirement was “shocking.”

The Court objected to the blanket requirement that applied to every applicant regardless of the results of their background and credit checks. Had the tax returns only been required when an applicant’s credit history showed a history of financial instability or delinquencies, the rule may have been upheld by the Court. How-ever, the Court held that “to take a position that ‘every person’ who applies to be a member at [the association] is patently unreasonable and shall be stricken.” Lastly, also without a legal basis or ability, the Court ordered the association to strike all reference in its condominium documents which require potential purchasers to produce tax returns unless the association can show good cause to request the information.

A brief discussion regarding the adoption of rules and regulations is necessary to highlight lessons that can be learned from this case. Generally, both condominium and homeowners association governing documents will typically provide that the board of the directors has the authority to adopt rules and regulations for the community. While some governing documents may contain restrictions requiring a membership vote to approve new rules, it is common for the governing documents to provide the board with the authority to adopt rules and regulations. (Careful review of the documentary authority for each community is recommended as some may limit the rule-making authority to common areas only and not to the residential property within the community.) Although the board is generally authorized to adopt rules and regulations, those rules and regulations must not conflict with any provision expressly set out in the governing documents or reasonably inferred from them, and they must be reasonable. (This should be contrasted with covenants recorded in the County’s official records, which may be unreasonable and still be legally enforceable under long-standing Florida case law.)

In Beachwood Villas Condominium v. Poor, et. al., a 1984 Fourth District Court of Appeal (4th DCA) case in which several owners challenged rules enacted by their association’s board of directors, the Court noted that there could be two sources of use restrictions: (i) those set out in the declaration of condominium and (ii) those adopted by the board. As to the use restrictions set out in the declaration, the court held that such restrictions are “clothed with a very strong presumption of validity,” as initially provided in Hidden Harbor Estates v. Basso (a 1981 4th DCA case).

In examining board-adopted rules, the court first must determine whether the board acted within its scope of authority—in other words, whether the board had the express authority in the documents to adopt the rule in the first place. If the answer is “yes,” the second question to determine is whether the rule conflicts with an express provision of the governing documents or one that is reasonably inferred. (If the documents are silent on an issue, the inference is that it is unrestricted. Adopting a rule to restrict a topic that the declaration is otherwise silent about would conflict with the inferred unrestricted use and therefore be unenforceable.) If these first two issues are found to exist, the court will then determine if the rule is reasonable. The board’s exercise of its reasonable business judgment in adopting a rule is generally upheld so long as the rule is not “violative of any constitutional restrictions and does not exceed any specific limitations set out in the statutes or condominium documents.”

In examining your own board-adopted rules, ask the following:

Did the board have the power to adopt the rule?
Is the rule in accord with with the declaration, articles of incorporation, or bylaws?
Is the rule reasonable under the circumstances? (While ultimately only a court can make this final determination, the board should use its best judgment, with assistance of its counsel, to reach this decision.)

If the answer to these three questions is “yes,” then the rule should be found to be valid and enforceable by the court upon an owner challenge.

Ultimately, what can be gleaned from Mech v. Crescent Beach Condominium Association Inc. is that even if the association acts reasonably when adopting rules and even when amending the declaration, a lower court judge can reach almost any decision it wishes. Had the provision at issue only required tax returns when the background or credit checks revealed that the prospective purchaser had a history of financial irresponsibility, the provision may have withstood judicial challenge by this particular judge. Additionally, had the provision requiring tax returns been set out in the declaration before the initiation of the lawsuit, the outcome may have been different under existing, well-established case law.

Bottom line, whenever the board is considering new rules, it is recommended that the board consult with the association’s legal counsel before adopting them.

(Reprinted with permission from the September 2020 edition of the Florida Community Association Journal)