Association can veto proposed insurance settlement

Q: A lawsuit filed against the condominium association is being defended by the association's insurance carrier's appointed counsel. The insurance carrier wants to settle the case, with a substantial payment to the plaintiff, who is a unit owner. However, the board of the association opposes the proposed settlement. Does the insurance carrier need the board's approval of the settlement?

A: The association's insurer that is defending a liability claim against a condominium association must notify the association of the terms of the settlement no less than 10 days before settling the claim. However, the association may not veto the settlement unless otherwise provided by contract or statute.

This is described in Section 12(k) of the Illinois Condominium Property Act.

If the board does reject the settlement, the insurance carrier might not have an obligation to cover a future settlement or judgment in excess of the amount of the rejected settlement. That could have a material adverse financial impact on the association.

Q: I am the new treasurer for my condominium board. What sort of financial report is the association required to provide owners?

A: The board of a condominium in Illinois is required to annually supply to all unit owners an itemized accounting of the common expenses for the preceding year actually incurred or paid. The accounting must include an indication of which portions were for reserves, capital expenditures or repairs, and payment of real estate taxes. Further, there must be a tabulation of the amounts collected pursuant to the budget or assessment and show the net excess or deficit of income over expenditures plus reserves.

The declaration of condominium will typically include a deadline by which time this annual accounting needs to be provided.

Q: The declaration for our association is silent as to what the board is supposed to do if there is a year-end deficit. Can you provide any guidance?

A: If the fiscal year ends in a deficit, then, to the extent there are not any contrary provisions in the association's declaration and bylaws, the board has the authority, in its discretion, to address the deficit by incorporating it into the following year's annual budget.

That said, there is a procedure in the Illinois Condominium Property Act that permits the owners to seek a meeting of the owners to vote to select a different option than that selected by the board.

Q: Can a condominium waive the requirement that it maintain a reserve account for capital expenditures and deferred maintenance for repair or replacement of the common elements?

A: An association without a reserve requirement in its condominium declarations may elect to waive in whole or in part the reserve requirements set forth in the Illinois Condominium Property Act. This requires approval through a vote of two-thirds of the total votes of the association. Any association having elected to waive the reserve account requirements may, again by a two-thirds vote, elect to again be governed by the requirements.

Note that in the event an association elects to waive all or part of the reserve requirements of the Act, that fact must be disclosed in the financial statements of the association and, highlighted in bold print, in the response to any request of a prospective purchaser for the information prescribed under Section 22.1.

Further, if the owners vote to waive the reserve account requirement of the Act, no cause of action may be brought for damages against these parties for the lack or inadequacy of reserve funds in the association budget.

That said, such a decision to waive the reserve requirements of the Act can jeopardize the ability of an owner and prospective purchaser to obtain mortgage financing on the unit.

• David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in the Chicago suburbs. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.