Within any community, there will be disagreements. In shared interest communities, unfortunately those disagreements can sometimes lead to litigation.  That litigation can take many forms: resident vs. co-op or condominium, or vice versa. Conflict may also arise between an association or co-op and one of its vendors, or its vendors against the community. None are good, and all are to be avoided if possible. Unfortunately, in the life-cycle of any condo, co-op or HOA, litigation in one form or another is nearly certain. Knowing how to handle it when it happens is critical to the health and well-being of the community.

Reality, Response & Rules to Live By

The legal pros consulted for this article note that communities should prioritize two basic principles should they find themselves on the receiving end of litigation. The first is protecting confidential information—including strategy, concerns, litigation budgets, any weaknesses in the association’s position, and expectations of settlement or trial results. The second is sharing all non-private, non-confidential information with residents in lay language, setting realistic expectations, and being candid about the negative effects of the litigation—even if it’s frivolous—on the owners and the association.

“Board members should discuss the confidentiality of facts surrounding a lawsuit with the association’s counsel,” says Steven Mlenak, a partner with Greenbaum, Rowe, Smith & Davis, a law firm located in Roseland, New Jersey. “Board members owe a duty of confidentiality to the association, and the underlying litigation strategy in defense of a lawsuit must always be kept confidential. However, the existence of a lawsuit does need to be disclosed to the association membership. Often, the association’s counsel will be asked to provide an opinion consistent with ABA standards with respect to the potential damages to the association and likelihood of success for inclusion in the association’s annual audit.”

The pros also stress the importance of getting legal counsel involved immediately upon receiving news of a lawsuit. The truth is, most co-op and condo boards are not composed of attorneys—and even if a community has an attorney or other legal professional on the board or living in the building, they’re not going to be the one to prosecute a suit for the association or corporation. That’s why every community has outside legal counsel to help the board and board members stay in the right lane while getting the job done.

According to Scott Piekarsky, a community law attorney with Piekarsky & Associates, based in Wyckoff, New Jersey, “Associations and corporations should never take a lawsuit into their own hands and play lawyer, thinking they know what they’re doing. Even if a board member is a lawyer, leave it to your counsel. Anything you say can be used against you in ensuing litigation, so get professional help. Don’t discuss the case with anyone, and don’t ignore it. Don’t put it in a pile and think it’s going away. It won’t—and then it can turn into a bigger problem. Don’t try to confront the person and try to intimidate them. Go through normal channels. That’s why they exist.”

When & How Insurance Kicks In

Depending on the type of suit, the co-op or condominium may be covered by their insurance carrier for conducting, prosecuting, or defending the case. This could extend to anything from a ‘slip-and-fall’ incident under general liability insurance coverage to defending board members under a directors and officers (D&O) policy.  In these cases, the responsibility for the suit—along with the legal costs—will shift to the carrier’s attorneys, along with the legal costs.

But key to activating that coverage is letting your insurer know about litigation immediately, says Michael S. Simone, principal of The Simone Law Firm in Cinnaminson, New Jersey. “Boards need to distinguish what potential litigation is involved,” he says, “specifically, if it has to do with their liability coverage. If it does, notify your insurance carrier first and foremost. Problems arise when a board tries to handle litigation or claims by themselves. That runs the risk of their carrier denying the claim. That’s how insurance compaanies weasel their way out; there is a required notification period in the policy, and you’re giving them an escape clause if they are not notified [of litigation] in a timely manner.”

According to Chris Florio, an attorney and partner at the Lawrenceville, New Jersey, office of Stark & Stark, “A lawsuit starts even before the complaint has been served. When you look at insurance policies, which are contracts, we learned a long time ago that if there’s the potential for a suit–[even if] it could be years down the road–you need to give written notice to the insurance broker of the potential for a suit.” This act is known as timely notification. “Policies contain language that state if you don’t give adequate notice for a suit, the carrier may issue a declination of the claim. You have to give the insurance company an opportunity to either reach out to the injured party, or prepare for the suit.”

Mlenak concurs that when responding to a lawsuit, the first thing that an association should do is put their insurance carrier on notice of the action. “Most Directors and Officers (D&O) policies require notification to the carrier within a certain period, or else a claim can—and will—be denied,” he says. Like all insurers, D&O insurers are extremely cognizant of claims and the costs associated with those claims.  Repeated claims against a board’s D&O policy may result in higher premium costs. “The greater the number of claims and amount of money spent by a carrier to defend an association,” cautions Mlenak, “[the greater the] impact on the association’s ability to secure affordable coverage going forward.”

“The association’s attorney, the insurance carrier, and the attorney appointed by the insurance carrier must be involved with all steps in the action, and all relevant information must be available to them,” says Bruno Bartoli, senior director of management services for Evergreen Management based in Manchester, New Hampshire. “They need access to everything to be able to properly defend the association. There are also times when the management company becomes involved during discovery to provide necessary information to the attorneys.” Discovery is part of the legal process where pre-trial meetings are arranged between the respective parties’ legal council to establish the facts of the case. If the lawsuit is covered under your policy, the insurance carrier will take over the case and keep you informed through your attorney as to its progress.  

Of further concern is that if a community has too many instances of litigation, or too many in too short a time period, their insurer may deem them ‘high-risk’, possibly resulting in higher premiums, or even having their policy dropped altogether. Kim tells us that “Especially in tight market conditions, premiums may increase substantially—or the policy may not be renewed. Both the number of claims as well as the nature and dollar amount of claims would be considered. Some insurers will say—unrealistic and unfair as it sounds—that any claim is too many.”

“I want all boards to avoid litigation,” says Seth Barnett, a partner with Marcus, Errico, Emmer & Brooks, a law firm located in Braintree, Massachusetts. “We counsel them to avoid it. When legal issues or challenges come up, I want them to contact me immediately.” When it comes to managed versus self-managed associations, Barnett notes that “There’s no more resistance to contacting us when a suit is threatened in managed properties than in self-managed properties. In fact, self-managed boards are generally more receptive to hearing their legal counsel’s opinions.”

Effect on Sales & Reputation

What about longer term impacts of litigation on things like sales prices and community reputation? During the purchasing process, buyers will find out if a community has a reputation for litigiousness, and what it can cost shareholders or owners.  

Mlenak adds that “many mortgage lenders will request a statement from the association regarding both actual and threatened litigation. Also, most associations disclose this information in their annual audits, which sellers typically make available to prospective buyers.” So, in fact, litigation is often noted in the public realm.

“Buildings with a long history of litigation, or frequent litigation, often develop a reputation that leads brokers to avoid showing apartments in those very buildings,” says Mark Hakim, a partner at Schwartz Sladkus Greenberg Reich Atlas, a law firm located in New York City, “and that’s quite understandable. Generally, unless a buyer is getting a steep discount, most would wish to stay away from buildings with frequent lawsuits.”  

Bartoli concurs, noting that “during the process of purchasing a unit in a condo association or co-op, the board or management company will have to complete a questionnaire” from the buyers’ counsel, and more and more often their lender as well “that typically asks if the association or corporation is involved in any litigation, either currently or recently. A lot of buyers may decide not to purchase after learning that the association is under litigation.”

Why does it matter? According to Simone, “Due to the long-term impact on the buyer, and special assessments that could potentially occur as the result of litigation, there’s a strong incentive on the part of the buyer and their representative to request a copy of the governing documents, budget, and related obligations and viabilities for an association. Ultimately, it’s a two-way street. There needs to be disclosure, but there’s also the buyer’s right to investigate.”  

It should also be noted that in some states—New Jersey being one—state law requires that disputing parties make a good-faith attempt at alternative dispute resolution (ADR) before going to court. If a plaintiff tries to bypass ADR, the courts typically will dismiss the lawsuit and mandate an ADR session prior to refiling.  More often than not, having some form of mediation where all parties can sit down and discuss the issue with support from a trained mediator results in an amicable settlement of the dispute without the expense, acrimony, and time investment of full-blown litigation.

Furthermore, according to the pros, not all lawsuits are equal in the eyes of a potential purchaser. Suits alleging theft, impropriety, bad faith by board members, or other malfeasance will have a very different—and more damaging—reputational impact on the building and property values within it than  “A one-off slip and fall that’s being handled by insurance,” says Hakim. “The latter should certainly not have the same impact as misbehavior by board members.” 

Unfortunately, there is no black-and-white rule in terms of exactly what litigation a buyer’s attorney will ding as a major problem, versus a minor hassle. “They would be looking at the nature and types of lawsuits,” Hakim continues, “as well as the frequency, whether insurance has covered them, and what the impact is on the building or association’s insurance premiums.”  

To keep ahead of problems, Mlenak recommends that “associations should routinely consult with their counsel regarding their actions and keep up on current laws governing their association. Managers should encourage their board members to take voluntary training courses for board members through the Community Associations Institute (CAI) or other organizations and should have their counsel provide board member ethics seminars at least once per year for board members.”

Litigation is unfortunately a fact of life for virtually all common interest communities, whether co-op, condo, or HOA. When your community’s number comes up, it’s imperative that the board act quickly and with a clear vision to respond. Having a formalized protocol to follow when the inevitable happens will go a long way in reaching positive outcomes.        

A.J. Sidransky is a staff writer/reporter for CooperatorNews, and a published novelist. He may be reached at alan@yrinc.com.