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Ask the Experts: Covenant Enforcement

What is “covenant enforcement?”

 
In the past few years, Colorado communities have been moving away from the concept of HOAs and transferring their responsibilities to special districts. This often includes things like covenant enforcement, architectural control, and design review.

When this occurs, the board assumes responsibility for enforcing standards for that community. Whether this involves landscaping, parking, lawn ornaments, fencing, house color, roofing, siding, or new construction, the districts are in charge of keeping everything up to code. These type of responsibilities are commonly referred to as Covenants, Conditions, & Restrictions (CC&Rs).

There are several aspects of special districts that make them more desirable than home or property owners’ associations. Unlike HOAs, districts have governmental immunity against potentially costly litigation.

Districts also receive certain tax exemptions, which can lower costs. This makes them ideal for not only the types of work districts normally do (water, fire, roads, parks, sewers, etc.) but also covenant enforcement and other more neighborhood-centric tasks.

How does this affect coverage with the Pool?

Any time a group sets any sort of legally binding rules, it’s a good bet that someone is going to have a problem with that. This means that when an HOA or a district is tasked with enforcing covenants, there is an elevated risk of legal action.

For this reason, this type of transfer is seen as a “material change” in operations. A change of that nature therefore requires that the Pool be notified since the risks being covered are now much different.

Members must disclose their participation in covenant enforcement for underwriting purposes and remit a nominal charge based on the number of homes. This allows us to provide coverage for any unforeseen risks involved with this type of exposure without having to raise rates for every member.

If the Pool is not notified that a district is conducting this type of work, we won’t necessarily be able to provide coverage in cases where there is a legal action or claim that results from those activities. It may be considered a material misrepresentation and coverage could be disputed.

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