Surviving Disaster: Financial Strategies for Community Associations in Times of Crisis

By Daniel C. Heaton, Esq.

The Urgency of Financial Preparedness in Light of Recent Wildfires

The recent string of devastating wildfires across California has brought to light a stark reality: community associations must add disaster preparedness to their list of tasks. Disaster preparedness isn’t just about evacuation plans and emergency contacts; it also includes financial readiness. Community associations that take proactive steps today to fortify their financial strategies will be in a much stronger position when the unexpected happens. This article explores key financial challenges facing associations and the strategies community managers can use to help their boards safeguard their communities’ financial health in times of crisis.

Understanding the Growing Financial Strain on Community Associations

As a result of the recent fires, many associations have found themselves scrambling to rebuild, only to realize that their insurance policies fall short, their reserves are insufficient and their homeowners are unprepared for the ensuing financial burdens. The financial landscape for associations is changing rapidly, and boards that fail to adapt may risk leaving their communities vulnerable to insolvency.

California community associations are grappling with significant financial pressures driven by skyrocketing insurance premiums, increased wage costs and other inflationary economic forces. Furthermore, boards must recognize that disaster recovery expenses may undermine earlier efforts toward financial planning. Without strategic planning, these combined pressures can lead to budget deficits, deferred maintenance and legal disputes with homeowners. Notably, some of the most significant financial challenges associations face include:

Skyrocketing Insurance Premiums and Coverage Gaps

Many associations have experienced unprecedented increases in their insurance premiums, with some doubling, tripling, or even increasing tenfold or more in just the last few years. For instance, the California FAIR Plan reported that its total exposure increased by 61.3% in the year ending September 2024,1 reflecting a growing reliance as private insurers withdraw from high-risk areas.

At the same time, insurers are imposing higher deductibles and reducing available coverage limits, forcing associations to accept policies that may leave them underinsured. Associations must meet certain minimum insurance thresholds to qualify for certain legal protections for their members or directors,2 and many CC&Rs mandate additional policies. However, boards are required to make complex risk management and budgeting decisions as coverage becomes increasingly expensive and restrictive.

Rebuilding Expenses Following Natural Disasters

The cost of rebuilding after disasters is at an all-time high. In California, the average cost of reconstruction ranges between $400 and $700 per square foot,3 and can soar even higher in high-risk or high-demand areas.4 Associations may be responsible for common area repairs, structural rehabilitation and debris removal. Those without adequate reserves or insurance coverage may be forced to levy significant special assessments to cover these rebuilding costs, placing an unexpected financial burden on homeowners.

Economic Inflation and Rising Maintenance Costs

Inflation continues to drive up the costs of labor, materials and essential services. Over the past few years, the prices of construction materials alone have surged by nearly 25%, while labor costs continue to rise due to shortage of skilled workers. These escalating costs require associations to budget more aggressively and ensure their financial planning accounts for future inflation.

The Crucial Role of Community Managers in Identifying Financial Vulnerabilities

Community managers play a critical role in assisting boards to assess their financial health and address vulnerabilities before they escalate into crises. Some key areas where managers can provide valuable guidance include:

Insurance Gaps and Risk Management

Managers should collaborate closely with insurance professionals to ensure the association’s policies offer sufficient coverage. Annual insurance reviews should be conducted well in advance of policy renewal dates to help identify coverage gaps, deductible increases, and exclusions that could leave the community exposed. For example, at one upscale retirement community in Walnut Creek, residents faced an insurance crisis due to increased wildfire threats.5 This resulted in predominantly cash-only home sales, as buyers struggled to secure mortgages without adequate insurance coverage.

In California, the average cost of reconstruction ranges between $400 and $700 per square foot, and can soar even higher in highrisk or highdemand areas.

Outdated Governing Documents

Many governing documents were drafted decades ago and fail to account for modern financial realities or impose and unrealistic insurance requirements. Managers should encourage boards to review and amend governing documents as necessary to clarify financial authority, emergency spending procedures and assessment protocols.

Reserve Fund Adequacy

Associations must visually inspect accessible common areas and prepare a reserve study every three years.6 Managers should ensure that boards review these studies at least annually, as required, and make necessary adjustments to meet recommended funding levels. Older communities should consider conducting more frequent onsite reserve studies and invite vendors to obtain the most accurate remaining useful life of components and their replacement costs.

Budgeting for Long-Term Sustainability

Effective budgeting involves more than just maintaining the status quo. Managers should assist boards in evaluating future expenses, making necessary adjustments (including proactive phased increases when needed) and implementing other strategies to ensure greater financial stability.

Raising Immediate Funds in Times of Disaster

When an association faces a financial crisis, whether caused by a natural disaster or another unexpected expense., several funding mechanisms are available. However, each option has its own legal and logistical considerations.

1. Emergency Assessments

Civil Code § 5610(c) allows boards to impose emergency assessments without a homeowner vote to cover unforeseen expenses necessary to repair or maintain the common areas. Historically, some associations relied on this mechanism to try to offset steep, unexpected increases in insurance premiums. However, because these increases are now a recurring and predictable issue, associations are finding it more difficult to argue that they are “unforeseen” and may face legal challenges to future attempts to use emergency assessments.

2. Revised Regular Assessments

Adjusting regular assessments is a more sustainable approach to financial planning. However, boards cannot increase regular assessments by more than 20% per year without membership approval.7 Given the current insurance climate, associations should consider implementing the maximum increase for both regular and special assessments each year for the near future. This approach would help associations avoid sudden financial shortfalls and enable boards to more successfully argue that an emergency assessment is needed to pay insurance premiums.

3. Borrowing from Reserves

Many boards are unaware that before they can temporarily borrow from reserves to help meet short-term operational expenses, they must first satisfy strict requirements found in Civil Code § 5515:

• Provide written notice of an open meeting to discuss the transfer, including the reasons why it is necessary, options for repayment and whether the board is considering a special assessment.

• If approved, issue a written finding recorded in the board’s minutes that documents why borrowing funds is necessary and specifies when and how the funds will be repaid to the reserve fund.

• Repay the borrowed funds within one year unless an extension is properly noticed and approved through the same process.

Given these stringent requirements, managers should strongly encourage their boards to consult legal counsel before borrowing from reserves.

4. Securing Loans

Bank loans can provide a financial lifeline for associations dealing with major reconstruction projects or an unexpected financial crisis. However, loans often require conducting a membership vote for homeowner approval, as well as obtaining separate consent from mortgagees. Boards must also thoroughly evaluate repayment terms, interest rates and the potential impact on future assessments.

Transparent Communication with Homeowners

Effective communication is essential for maintaining homeowner support during challenging financial decisions. Boards should not introduce the necessity for a regular assessment increase for the first time at the same meeting where it’s approved, nor should they wait until ballots are mailed to explain why a special assessment or proposed loan is necessary. Instead, boards should allow homeowners to witness their struggles with significant financial issues. Community managers can assist boards by promoting transparency and fostering a broader community understanding of financial issues by:

Explaining Rising Costs

Many homeowners may not fully understand what drives cost increases. They often mistakenly assume that rising assessments result from financial mismanagement rather than from industry-wide trends. Members commonly believe that insurance premium increases stem primarily from claims and loss history. Managers should take time to provide clear, factual explanations about why costs are rising so that homeowners understand it is due to external economic and environmental factors often beyond the board’s control.

Presenting Financial Strategies

Encourage your boards to openly discuss financial strategies, including potential assessment increases, cost-cutting measures and long-term financial planning efforts. Homeowners are more likely to support financial decisions when they understand the rationale behind them and the advantages that one option may have over potential alternatives.

Managing Expectations

Hosting town hall meetings, issuing newsletters and utilizing digital communication platforms can help keep homeowners informed and engaged in the financial decision-making process.

Conclusion

The financial stability of an association depends on proactive planning and sound decisionmaking. As natural disasters become more frequent and economic pressures continue to rise, associations cannot afford to take a reactive approach to fiscal management. Community managers should assist boards identifying possible vulnerabilities, developing and implementing prudent fiscal strategies and communicating effectively with homeowners. By taking action today, associations can be prepared to withstand future crises and safeguard the long-term health of their communities.

Community associations that take proactive steps today to fortify their financial strategies will be in a much stronger position when the unexpected happens.

[1] California FAIR Plan Association – Key Statistics & Data, www.cfpnet.com/key-statistics-data/.

[2] See, e.g., CA Civ. Code §§ 5800-5805.

[3] Insurance Information Institute, “Wildfire Risk and Rebuilding in the West” (2025), https://www.iii.org; see also Real Estate Skills, “How Much Does it Cost to Build a House in California in 2025?” October 2024.

[4] See MarketWatch, “L.A. fire victims face a dilemma: Sell their burned-down homes at a loss, or pay a staggering cost to rebuild?” Feb. 22, 2025 (reporting a contractor’s quote to rebuild a 3,800 square foot Pacific Palisades home for approximately $3,8 million, or about $1,000 per square foot).

[5] Michael Cabanatuan, San Francisco Chronicle, “California’s insurance woes have triggered a cash-only crisis at this upscale Bay Area Community,” www.sfchronicle.com/california-wildfires/article/rossmoor-cash-only-homesales-20025908.php.

[6 CA Civ. Code § 5550.

[7] CA Civ. Code § 5605.

Daniel C. Heaton, Esq. is a Senior Attorney at DeNichilo Law, APC, exclusively serving as corporate and litigation counsel for community associations throughout California.