SB 323 adds new Civil Code section 5105(c)(4), which provides that an association may disqualify a candidate for the board “if that person discloses, or if the association is aware or becomes aware of, a past criminal conviction that would, if the person was elected, either prevent the association from purchasing the fidelity bond coverage required by [Civil Code s]ection 5806 or terminate the association’s existing fidelity bond coverage.”
This optional qualification raises a number of questions and problems, both for associations which adopt it and those which do not:
- Most fidelity policies do not delineate, on a crime-by-crime basis, what convictions constitute grounds for cancellation. Instead, a broad “dishonest acts” clause is used. Brokers are unlikely to prove informative on this front, and may in fact be barred from opining by law or company policy.
- Effective January 1, 2019, specific fidelity coverage is now required by Civil Code section 5806. What are boards to do if their available marketplace of insurers indicate that they will decline to offer or terminate fidelity coverage if a candidate is elected to the board, but the insurers' grounds are not a past criminal conviction?
- In a related vein, what if the available marketplace does not prevent purchase or terminate, but instead prohibitively prices premiums. Is there any markup which would permit a valid disqualification?
- For associations which do adopt this qualification and “become aware” of a candidate’s past criminal conviction, this invites fraudulent concealment from their insurer, which could in and of itself threaten coverage.
- Civil Code section 5135 currently prohibits associations from using association funds to advocate for the election or defeat of any candidate. If a board becomes aware of a candidate's history that would jeopardize its mandatory Civil Code section 5806 coverage, but the grounds do not permit a valid SB 323 disqualification, is there any way the board can discharge its apparent fiduciary duty to communicate that information to the membership prior to the vote?
- SB 323's new Civil Code section 5100(g)(3)(B)(i)'s fidelity coverage qualification differs from the fidelity coverage qualification set forth in SB 323's new Civil Code section 5105(c)(4). The former permits past-crimes disqualifications if the crime would terminate fidelity coverage as to that person, while the latter permits past-crimes disqualifications if the coverage would be terminated per se. If, as discussed in other blog posts, Section 5100(g) applies to all elections, this represents a conflict if the threatened termination is only to the person.
An exciting new minefield.
- Most fidelity policies do not delineate, on a crime-by-crime basis, what convictions constitute grounds for cancellation. Instead, a broad “dishonest acts” clause is used. Brokers are unlikely to prove informative on this front, and may in fact be barred from opining by law or company policy.
- Effective January 1, 2019, specific fidelity coverage is now required by Civil Code section 5806. What are boards to do if their available marketplace of insurers indicate that they will decline to offer or terminate fidelity coverage if a candidate is elected to the board, but the insurers' grounds are not a past criminal conviction?
- In a related vein, what if the available marketplace does not prevent purchase or terminate, but instead prohibitively prices premiums. Is there any markup which would permit a valid disqualification?
- For associations which do adopt this qualification and “become aware” of a candidate’s past criminal conviction, this invites fraudulent concealment from their insurer, which could in and of itself threaten coverage.
- Civil Code section 5135 currently prohibits associations from using association funds to advocate for the election or defeat of any candidate. If a board becomes aware of a candidate's history that would jeopardize its mandatory Civil Code section 5806 coverage, but the grounds do not permit a valid SB 323 disqualification, is there any way the board can discharge its apparent fiduciary duty to communicate that information to the membership prior to the vote?
- SB 323's new Civil Code section 5100(g)(3)(B)(i)'s fidelity coverage qualification differs from the fidelity coverage qualification set forth in SB 323's new Civil Code section 5105(c)(4). The former permits past-crimes disqualifications if the crime would terminate fidelity coverage as to that person, while the latter permits past-crimes disqualifications if the coverage would be terminated per se. If, as discussed in other blog posts, Section 5100(g) applies to all elections, this represents a conflict if the threatened termination is only to the person.
An exciting new minefield.