Overview

If you’re a consistent follower of my published Fact Sheets, then you know that California HOAs are required by the Davis-Stirling Act to maintain accounts to hold reserve funds that homeowners pay in over many years to repair and replace roofs, paving, plumbing, and other major components. But here’s a question that most every homeowner never even thinks about: does your HOA have a legal duty to make sure that money stays insured if the bank holding it fails?

Federal deposit insurance protects HOA money only up to a set limit at each bank, and HOA reserve balances can easily exceed it. If an HOA keeps reserve money above that limit at a single bank and the bank fails, the HOA could lose some or all of the uninsured portion. And if that were to happen, homeowners would be the ones forced to replace it, almost certainly through one or more massive special assessments.

Now, while it’s true that the Davis-Stirling Act doesn’t explicitly dictate where HOAs must keep reserve money, or even require HOAs to insure every dollar of it against loss, California law is clear that HOA directors owe their HOAs and members a fiduciary duty of care. That duty requires directors to protect HOA money with the care an ordinarily prudent person in their position would use. Some governing documents also expressly require HOAs to keep their money in insured accounts, but many don’t. Either way, keeping even very large balances fully insured takes so little effort that HOAs have no good excuse for leaving reserves exposed.

This Fact Sheet answers the question posed at the end of the first paragraph. It explains how the fiduciary duty of care applies to reserve money, how far federal deposit insurance reaches, and which reserve investments it covers and which it doesn’t. It also explains the straightforward options HOAs have to keep every dollar insured, and what homeowners can do when their HOAs ignore the problem by ignoring the FDIC’s insurance limits.

Key Points

Corporations Code 7231 sets the standard of care every HOA director must meet, and that standard governs how directors hold and invest the HOA’s reserve money. The Davis-Stirling Act adds its own protections for reserves, including strict limits on what HOAs can spend reserve money on. The points below explain what federal deposit insurance does and doesn’t cover, the simple tools HOAs have to keep reserves within its limits, and why ignoring those limits falls short of the duty directors owe. They also explain what homeowners should do when their HOAs leave reserve money exposed.

• The FDIC insures an HOA’s deposits up to $250,000 at each bank, no matter how many accounts the HOA has there. The FDIC adds together every account an HOA holds at the same bank, operating and reserve alike, and insures the combined total only up to $250,000. Thus, for example, if your HOA had $100,000 in its operating account and $550,000 in its reserve account at the same bank, only $250,000 of that $650,000 would be insured, leaving $400,000 unprotected. Coverage increases only when the HOA moves money to a different insured bank. Credit unions carry the same $250,000 limit through the National Credit Union Administration (NCUA). Any reserve money above the limit at a single institution has no federal protection, and so your HOA could lose some or all of its money if that institution were to fail.
  • The FDIC insures traditional bank deposits, not investments. Checking accounts, savings accounts, certificates of deposit (CDs), and money market deposit accounts at an FDIC-insured bank all count as insured deposits, subject to the $250,000 limit. Before an HOA deposits reserve money anywhere, it should confirm that the institution is FDIC-insured, which anyone can check through the FDIC’s BankFind tool. Stocks, bonds, mutual funds, and municipal securities get no FDIC protection, and that includes money market mutual funds, which HOAs shouldn’t confuse with money market deposit accounts. U.S. Treasury securities aren’t FDIC-insured either, but the full faith and credit of the federal government backs them, so an HOA can count on being repaid if it holds them to maturity. Municipal bonds, however, work differently. Only the city, county, school district, or other local government that issues a municipal bond stands behind it, so its safety depends entirely on that issuer’s finances. [And be aware that even cities and counties can file for bankruptcy protection, as happened with Orange County, California in 1994, when it became the largest municipality in United States history to ever file for bankruptcy.]
• HOA directors owe a duty of care that extends to how they hold reserve money. Corporations Code 7231 requires every director to act in good faith, in the HOA’s best interests, and with the care, including reasonable inquiry, that an ordinarily prudent person in a like position would use. Deciding where to keep reserve money falls squarely within that duty. Directors can rely on managers, accountants, and financial professionals, but only in good faith and only after reasonable inquiry when the circumstances call for it. [Civil Code 5515, which governs borrowing from reserves, separately requires HOAs to exercise prudent fiscal management in maintaining the integrity of the reserve account. That language appears in the context of repaying borrowed reserves, but it shows how seriously the Legislature treats reserve money. Similarly, Civil Code 5380 requires managing agents who hold HOA money in accounts opened at the HOA’s written request to keep that money in insured accounts that protect principal, and it bars them from investing it in stocks or high-risk investments. That statute applies only to managing agents, so applying it to money the HOA holds directly would stretch it. Still, it would make little sense for the Legislature to demand more care from a manager than from the directors who hire the manager.] [If you’d like to learn more about a director’s fiduciary duty to the members and the HOA, read my Fact Sheet, “California HOAs and Fiduciary Duty: What It Means and Why It Matters.”]
  • When an HOA’s governing documents require insured accounts, directors have no discretion at all. For a few HOAs, the governing documents simply require that all reserve funds be insured against loss, either through the FDIC’s coverage, or through private insurance. In such cases, there is not only a fiduciary aspect to that duty, but a contractual one as well.
• Keeping every reserve dollar insured is easier than it sounds, no matter how large the balance. The most basic option available to HOAs is to spread reserve money across several insured banks and keep no more than $250,000 at any one of them. That works, but it means opening, monitoring, and reconciling accounts at multiple institutions. And depending on the size of the HOA, that could be a daunting task, especially for volunteer directors. Each of the options referenced below, however, allows HOAs to keep large balances fully insured while dealing with only one bank or firm.
  • CDARS lets HOAs spread large balances across many insured banks while dealing with only one. Under CDARS, which runs through the IntraFi network, an HOA deposits its reserve money with a single participating bank. That bank divides the money into amounts under $250,000 and places each one in a CD at a different FDIC-insured bank in the network. The HOA deals only with its own bank and receives one consolidated statement covering all of its CDs. HOAs can also tell the bank not to place money at specific banks, such as a bank where the HOA already keeps other deposits. [Contrary to what many people may believe, using CDs doesn’t mean locking up reserve money for years. When HOAs buy CDs, they can set the maturity dates so that a portion of the reserves comes due every few months, which keeps cash available for unexpected repairs without paying penalties to cash out a CD early.]
  • A brokerage account also lets HOAs hold insured CDs from many different banks in a single account. With this option, brokerage firms buy CDs issued by different FDIC-insured banks and hold them as custodians for HOAs, keeping no more than $250,000 from any one bank. FDIC coverage applies separately at each issuing bank, so HOAs’ entire balances stay insured, as long as the account records show that the brokerages hold the CDs only as custodians for the HOAs. HOAs would obviously need to have that arrangement spelled out in writing, and they should make sure the brokerages don’t buy CDs from banks where the HOAs already keep other deposits. Brokered CDs don’t carry early withdrawal penalties, but if HOAs sell them before maturity, they can get back less than they paid if interest rates rose during the interim time period.
  • Some credit unions carry private insurance that covers deposits above the federal limit. HOAs can’t buy this coverage on their own. They get it only by keeping their money at a credit union that carries it. Excess Share Insurance Corporation, for example, adds up to $250,000 of coverage above the NCUA’s $250,000 limit at participating credit unions, for a total of up to $500,000. Because a private insurer, not the federal government, stands behind that extra coverage, HOAs should confirm in writing exactly how much coverage the credit union carries before relying on it. Even then, the combined limit still falls short of many reserve balances, so HOAs with larger reserves would still need to spread their money across more than one institution.
• Leaving reserves uninsured falls short of the fiduciary duty directors owe to the HOA and its members. The options above take so little effort that directors would have a hard time claiming an ordinarily prudent person would leave hundreds of thousands of dollars of reserve money exposed at a single bank. The duty of care under Corporations Code 7231 includes reasonable inquiry, so directors can’t defend themselves by saying that they never checked where the money was or how much of it the FDIC covered. Once directors know that reserves exceed insurance limits, every month they leave the problem unfixed makes their position that much harder to defend. Corporations Code 7231 shields directors from personal liability only when they meet its standard of care, and ignoring a known insurance gap gives up that protection. [To learn more about when members can hold individual HOA directors personally liable, read my Fact Sheet, “Can I Sue My HOA Board Members Personally in California?”]
• If you suspect that your HOA’s reserves aren’t fully insured, get the records and put the HOA on notice in writing. Civil Code 5200 entitles you to inspect your HOA’s bank statements and its general ledger, which together cover every bank account in the HOA’s name, including any reserve accounts it maintains. Those records show where the reserve money is and how much of it the HOA holds at each institution. If your HOA keeps more than $250,000 at any one bank or credit union outside a CDARS or brokerage arrangement, raise the issue in writing with the HOA, speak about it at the next open board meeting, and ask the HOA to put it on a future agenda. Point the HOA to the simple options described above so it can’t claim the fix is too complicated. A written warning also makes it hard for directors to claim later that they didn’t know about the problem.
• If your HOA has left reserve money uninsured, call the HOA attorneys at MBK Chapman. The HOA attorneys at MBK Chapman are experts at analyzing whether your HOA’s directors are breaching their fiduciary duties to you and to the HOA, especially when it comes to leaving your HOA’s reserve savings at risk. Whether your HOA is ignoring the FDIC’s limits right now or has already left reserves exposed for years, call MBK Chapman today.

Every dollar in an HOA’s reserve account came out of homeowners’ pockets, and every dollar above $250,000 at a single bank has no federal protection. With CDARS, brokerage custodian accounts, and similar options keeping every dollar insured with almost no effort, directors have no excuse for leaving the rest exposed. Check where your HOA keeps its reserves, and if the numbers don’t add up, put your directors on notice before a bank failure turns their inaction into one or more massive special assessments.

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About Michael Kushner

Michael Kushner is a California attorney with over 30 years of experience representing homeowners in disputes with their HOAs. He is widely regarded as California’s leading homeowner-side HOA attorney, and has built one of the state’s most prominent law practices dedicated to holding HOAs accountable under the Davis-Stirling Act and California law.

In addition to his law firm’s work, Michael is a recognized lecturer, author, and the host of the hit HOA HELL podcast, where he provides homeowners living in HOA-governed communities with clear, practical strategies for dealing with bad HOAs. He’s also the author of the best-selling book, HOA HELL | California Homeowners’ Definitive Guide to Beating Bad HOAs, which has become a go-to resource for both homeowners seeking real-world solutions to their HOA disputes, as well as those good HOA board members who are interested in doing a good job.

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