Can you lose your home if the HOA goes bankrupt? This reader’s HOA management has made some bad decisions which has homeowners worried about their property. Here’s my take.

Q: Our homeowners association (HOA) has been sued. I have been reading that it is not likely the HOA can declare bankruptcy if it loses the lawsuit. Articles I’ve read about in Florida mention bankruptcy would not be possible until all the underlying value of individual properties have been liquidated and used to satisfy the HOA debts. In the worse case scenario, it appears possible all individual homeowners could lose their homes if the HOA management makes some very bad decisions.

What’s your take on this.

A: It’s quite unusual for an HOA to be placed in a situation where it has to file for bankruptcy. On contractual matters, those issues don’t give rise to liability problems. You might have to pay damages if your association breaches a contract, but those damages would not cause an association to fail. More likely, the association would have to levy a special assessment or borrow funds to pay for the wrongful termination of a contract.

On the other hand, a liability problem could be a real concern to an association. To avoid liability issues, HOAs typically carry liability insurance and other insurance coverages. So, if something happens on the property and someone is hurt, the HOA has liability insurance to cover for that issue. If a member of the board absconds with money or does something that harms a 3rd party, the association should have insurance coverage for those actions as well.

We don’t know what you’re concerned about, but if your association has liability insurance and errors and omissions insurance and other coverages that are required in the state in which the HOA is located, your association should be fine financially. We have seen HOAs carry at least one million dollars in liability insurance, and many other associations now carry even more coverage than that.

You’d need to assess what the issue is, what sort of liability that issue carries for the HOA (and the owners) and determine whether you have insurance coverage for that issue. Your association has been sued. Now the question is whether the defense of that case has been given to the HOA insurance carrier for defense. If the defense has been tendered and the insurance carrier is working on the defense, you may be fine.

We don’t know why you’d think that the association would end up in bankruptcy. Is the situation you are in so severe that you fear that insurance will not cover a judgment that may be handed down by the judge? If so, your HOA board may have underinsured it’s liability coverage. If that’s the case and the judgment that’s handed down is greater than the insurance coverage carried, the next step may be for the attorneys for the association to negotiate a settlement with the plaintiff for the amount of insurance coverage.

If the negotiations don’t work, then the question would be whether the plaintiff would accept the full amount of the insurance coverage to settle the suit. If the plaintiff seeks more than the insurance coverage, the homeowners might have to pay up in a special assessment to settle the case. The intricacies may depend on the state, the type of case and varying circumstances, but we could envision the plaintiff pursuing the case further in an attempt to extract more money from the association, including trying to go after any reserves or other bank accounts owned by the association.

For more information, you should talk to an attorney that focuses his or her practice in condominium law or common ownership associations.