Layered Liability

At a recent seminar on condominium governance, the presenter discussed the concept of ’layered liability.’ Layered liability is a strategy in which the board of directors makes decisions for the property with information provided by professional consultants. In addition, layered liability includes retention of insurance to protect the property and the board of directors. A reserve study is an important example of layered liability pertaining to the financials and the property’s physical assets. 

A reserve study significantly reduces the risk of undesirable funding scenarios including special assessments and bank loans. These undesirable funding scenarios result from failure by the board of directors to execute their fiduciary responsibilities. When decisions made by the board of directors result in special assessments and bank loans, unit owners are at risk of foreclosure, property liens, or savings account depletion. Certainly, this situation is undesirable for everyone associated with the community and it strains relationships throughout the community and within the home.

A reserve study plans for major capital improvements and recommends an annual contribution to fund these expenditures. Instead of special assessments and banks loans, the community can expect predictable annual maintenance fees and no surprises. Since a professional prepared the reserve study, the liability is placed on the professional not the board of directors. Regular updates to the reserve study ensures that the board of directors continues to act in good faith on behalf of the property. As a result, the board of directors may rest comfortably with this layered liability.

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