LEGAL/LEGISLATIVE ALERT FOR APRIL, 2020
A LITTLE GOOD NEWS
We’re going to start with some good news, because there isn’t much of it. Existing home sales increased by more than 7 percent year-over year in February, posting the highest annual rate (5.77 million units) in 13 years. New home sales increased by more than 14 percent, year-over-year.That’s it for the good news, and it is tempered considerably by the time frame; These upbeat stats are based on sales that occurred before the rapid-fire and still ongoing spread of the coronavirus upended life as we knew it, decimated the global economy, and made “lockdown” a reference to cities and states as well as prisons.Some industry analysts are predicting that home sales could fall by as much as 35 percent this spring compared with the fourth quarter’s strong results. That would put the annualized sales rate for what should be the market’s peak at around 4 million units, which would be the slowest pace in almost 30 years, as shelter-in-place orders prevent buyers from shopping for homes, while job losses (expected to reach historic levels) undermine the confidence and erode the income needed to support homebuying activity. American workers filed 3.28 initial unemployment claims for the week ending March 21, the largest number of claims filed for one week since the Department of Labor began collecting this data in 1967. The previous high was 695,000 claims filed in October of 1982.Real estate brokers nationally are reporting a decline in buyer interest and are canceling open houses in response. Sellers, for their part, are deciding that this is not the ideal time to put their homes on the market, further reducing an already anemic inventory of listings.“The decline in confidence related to the direction of the economy coupled with the unprecedented measures taken to combat the spread of COVID-19, including major social distancing efforts nationwide, are naturally bringing an abundance of caution among buyers and sellers,” Lawrence Yun, chief economist for the National Association of Realtors, said in a press statement. “With fewer listings in what’s already a housing shortage environment, home prices are likely to hold steady,” he added. Other analysts suggest that price stability may be irrelevant given that few buyers are likely to be shopping for the homes that are available.
DEMANDING COVERAGE
New Jersey lawmakers are considering legislation that would require insurers to apply the business interruption coverage in property insurance policies to losses resulting from the coronavirus, even though the language in most policies seems to preclude the coverage. The proposed legislation highlights efforts to soften the economic blow the virus is inflicting on business of all kinds.Pressure to cover financial losses is also coming from Congress. Eighteen members of the House of Representatives – a bipartisan group including Democrats and Republicans -- recently wrote major insurance industry trade groups, asking them “to work with your member companies and brokers to recognize financial loss due to COVIC-19 as part of a policyholders’ business interruption coverage.”Insurers, not surprisingly, are resisting these requests. Among other arguments, they note:
Property insurance policies typically cover losses only if they result from damage to the property; and
Most policies specifically exclude losses resulting from a virus, under a provision added to standard policies after the SARs epidemic 15 years ago.
“Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats and are vetted and approved by state regulators,” the leaders of three industry trade groups wrote in response to the letter from Congressional representatives. “Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19,” they said.Echoing that view, Paul White, an insurance industry attorney, told Insurance Journal: “Insurance companies set premiums and purchase reinsurance based on the risks their policies intended to cover and the potential loss exposure for those covered risks. This legislation will have disastrous effects on the insurance industry, and in turn, for consumers seeking insurance in the future. Insurance companies could be forced out of business.”Insurers may not be as insulated from coronavirus claims as they assume. Chris Cheatham, CEO of RiskGenius (a company that analyzes insurance policy language) suggests in a recent article that 80 percent of existing commercial insurance policies are either “silent” or sufficiently vague to make the companies vulnerable to virus claims.“While insurance experts would be correct in asserting that insurance policies silent on communicable diseases traditionally do not cover communicable disease losses, we are focused on what may occur with unexpected court rulings or new laws and regulations,” he wrote.
EASING THE RULES
Fannie Mae and Freddie Mac are relaxing some of their requirements for appraisals and employment verification to help mortgage lenders cope with operating challenges created by the coronavirus. The policy changes are designed “to facilitate liquidity in the mortgage market during [this] national emergency,” the Federal Housing Finance Agency – which regulates the GSEs – said in a press statement.Among other changes, the secondary market rules, for now, will not require appraisers to inspect the interior of homes, but will allow broader use of “drive-by” and desktop appraisals. The temporary guidelines will also allow lenders to accept alternative means of verifying income, recognizing that shelter-at-home orders are closing many companies and forcing others to operate with reduced staff, making it difficult to obtain verbal verifications. The GSEs will now accept alternatives, including an e-mail from the employer, a recent year-to-date paystub from the employee, or a bank statement reflecting a recent payroll deposit.“[Lenders should] continue to utilize sound underwriting judgment to ensure these alternatives are appropriate to the borrower’s circumstances,” the FHFA statement notes.The new GSE rules also permit lenders to suspend mortgage payments for up to 12 months for borrowers facing financial hardships resulting from the pandemic.
ESSENTIAL GOODS
Consumers in many parts of the country are finding hand sanitizer, disinfectants toilet paper and products in short-supply as virus-rattled residents horde these and other staples. But California consumers will have easy access to at least one product many would deem essential: Marijuana. As orders for the drug (now legal in many states) have increased in recent weeks, dispensaries (listed in California as an “essential” business that can remain open during lockdowns) have responded by increasing their supplies and offering delivery service. This is a necessary means of accommodating consumers who are either unable or unwilling to shop in person, the owner of one dispensary told Insurance Journal. “It’s not much different from Amazon.” Industry executives report that demand for marijuana and marijuana products has soared as virus infections and community lockdowns have increased. One on-line marijuana delivery service reported a 66 percent increase in orders between the first and second weeks in March. Several dispensaries also reported a sharp increase in sales after state officials announced school closures. “People are buying four or five items instead of one or two,” one owner told reporters. “People are asking what the legal limit is. We’re seeing bulk buying and people stocking up on products.”
DON’T BE HER GUEST!
Many condominium communities restrict the number or types of pets residents can own or ban them entirely. But it is unlikely that the standard covenants in association governing documents would address the issue confronted by a Florida condominium, where a resident insisted on feeding alligators, vultures and other animals living in a preserve area behind her home. While the critters appreciated the finger sandwiches, raw chicken and dog food she offered them, other residents in the community did not welcome the wildlife that gathered regularly and in large numbers to eat – and relieve themselves – on community property. One homeowner likened the smell to “a thousand rotting corpses.” It wasn’t just the smell. Vultures, who aren’t known for their refined manners, engaged in raucous after-dinner play that destroyed pool enclosures, furniture and grills. When the animal-loving owner refused the board’s repeated requests that she let the wild animals fend for themselves, the board took her to court. A judge issued a permanent injunction forbidding the feedings, and ordered her to pay $53,000 to resolve the suit.
IN CASE YOU MISSSED THIS
Apartment tenants in many communities are struggling with rising rents, but the owners of commercial property are confronting the opposite problem ─ the growing risk that declining rents in a weakening economy may not support the peak prices they paid for their buildings “The combination of falling real rents and surging property prices has depressed commercial real estate cap rates to cyclical low levels, raising the question of a potential unwind,” a recent research report warns.The outsized incentives many states offer to attract business don’t provide much of a return on the investment.The U.S. recorded 14 weather disasters last year with damages totaling $1 billion or more.The U.S. has 3.3 million fewer housing units than are needed to meet current demand, and the gap is increasing every year, according to a Freddie Mac analysis.Changes in the way credit scores are calculated will leave more consumers with lower scores and reduced prospects of qualifying for a home mortgage.
LEGAL BRIEF
BUSINESS JUDGMENT
Courts in most jurisdictions apply the “business judgment rule” in determining whether a condominium association board has been negligent in fulfilling its obligations to preserve and protect association property. That rule generally gives broad deference to board actions as long as they are undertaken in good faith and based on a reasonable decision-making process.Plaintiffs in this case (Jongerius v. Sun Lakes Country Club Homeowners Association), argued that “judicial deference” (California’s version of the business judgment rule) applied only to decisions affecting common areas, and did not protect an association from liability for damage to homeowners’ lots. A California Appeals Court disagreed.The damage at issue resulted from long-term settling of a slope above lots owned by the three plaintiffs. When the board became aware of the problem in 2004, it installed meters to monitor cracks between the owners’ side yard walls and a common area wall sitting on top of the slope. The association ultimately won a $300,000 judgment against the developer as compensation for the excessive “slope creep.” The association also hired a civil engineer (Hinkle) to analyze the problem and track it over time. The engineer’s reports, submitted annually between 2006 and 2010, noted ongoing lateral movement of the site, but found no evidence of damage to owners’ homes and no sign that the slope was becoming unstable.In 2011, the board hired a second engineer (Helfrich) to assess the condition of the slope and to recommend measures to address the damage the continuing movement of the site was causing to the common area wall.Hinkle had said the “perfect” repair would require installing a caisson wall system, which would cost more than $4 million. That repair wasn’t necessary, he said, because the slope was nearing the end of its “creep cycle.” Helfrich concluded that remedial measures were needed, but he suggested that the problem could be addressed more cost-effectively by filling and patching cracks as they appeared. The board accepted that recommendation and undertook the periodic repairs.In 2017, the slope failed, causing substantial damage to the lots owned by the plaintiffs, who sued, claiming that the board had negligently failed to maintain the slope. The trial court ruled that “judicial deference” barred the claim. The owners appealed the decision.In its analysis, the Appeals Court reviewed the1999 state Supreme Court decision (Lamden v. La Jolla Shores Clubdominium) creating the framework for “judicial deference.” That decision held: “Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority [to discharge its obligations] to maintain and repair a development's common areas, courts should defer to the board's authority and presumed expertise.”The plaintiffs argued that judicial deference applies only to decisions affecting common areas, “not to private properties owned by third parties.” The Appeals Court disagreed, noting that the Lamden decision ”never distinguished personal or separate property from common area property.” On the contrary, the Appeals Court noted, the Lamden decision awarded compensation to the owner for damage to her property resulting from the board’s failure to deal with a termite problem.In another case the plaintiffs cited, the court failed to apply judicial deference because of the association board’s “10-year failure to undertake any maintenance of the…main plumbing lines, despite knowledge of a recurring plumbing problem in the first-floor units.”There was no evidence here that the board had failed to respond reasonably and in good faith to the slope settling problem, the Appeals Court said. “According to the undisputed facts, the Association extensively investigated the [issue] over the course of several years,” hiring two experts to evaluate the problem, and adopting what the board considered to be the most “prudent” and cost-effective solution.“There is no evidence of willful misconduct on the part of any board member, nor is there any evidence the decision was made in bad faith or without regard for the best interests of the community,” the court noted. The judicial deference doctrine, the court noted, protects a board’s “good faith decisions” to maintain and repair common areas. “And that is what we have here. The Association was faced with two choices: adopt a prohibitively expensive course of action or make repairs directly to the rear common wall on an as needed basis. After carefully weighing the alternatives and giving primacy to the best interests of the Association and its members, the Association’s board chose the latter action. We must defer to the board’s authority and presumed expertise.”
WORTH QUOTING
“The coronavirus outbreak is economically akin to a major hurricane occurring in every state around the country for weeks on end." ─ Daniel Zhao, senior economist at Glassdoor.