It’s called “sleep insurance” for a reason.
Directors and officers (D&O) liability insurance helps community association board members sleep well at night without worrying that their personal assets are at risk because of a decision or action – or inaction – they make on behalf of the association.
When you join a community association board, you are volunteering your time and effort and taking on the responsibility of making decisions for the association. Board members are required to interpret and enforce the association’s governing documents. You have a fiduciary duty to make decisions as a reasonably prudent person would and to make decisions you believe to be in the best interest of the association.
Even with your best efforts, these actions can lead to potential lawsuits alleging breach of contract, breach of fiduciary duty, employment or housing discrimination, slander or libel or a host of other potential claims. Lawsuits can seek monetary or nonmonetary relief. A good D&O policy will cover both.
Most states require associations to indemnify board members for decisions they make on behalf of associations. Indemnification is an agreement to provide financial reimbursement to an individual board member or association in case of a specific type of loss.
This means that, if you are sued, the insurance company will pay legal fees or assume the defense for you. Should you lose the court case, it will pay and judgment or settlement. Not only state laws, but most association governing documents also require board members to be insured. But even if they don’t it’s wise to obtain such coverage to protect your personal assets.
Premiums for a stand-alone D&O policy generally start at $650 a year. Pricing depends on the number of units in the association, along with other factors that might increase the cost.
The “insured” in a D&O policy is typically the community association as an entity and any subsidiary of the association. “Insured persons” are commonly defined as those who act in the capacity of past, present, duly elected or appointed officers, directors, trustees, employees, volunteers or committee members. Spouses of insured persons also are covered. Often the community manager is covered under the policy as well.
If a board member is accused of intentionally dishonest or fraudulent acts, a majority of D&O stand-alone policies will provide a defense for the insured persons. Coverage is terminated if it is proven that the allegation is true. A good stand-alone policy will continue coverage until a court or other body makes final judgment. Any theft loss is generally covered by a fidelity policy.
Community associations face a variety of claims these days. However, there are several types of claims commonly seen. Here are some examples that illustrate why this insurance is so important:
Breach of fiduciary duty. Your association holds an election to decide who will sit on the board next year. Everything goes smoothly until one month later when a losing candidate alleges the election was conducted improperly. That homeowner sues the association, challenging the election process and demanding that a new election be held.
Insured vs. insured. Your association president receives a letter from a unit owner demanding that the board “use all means available” to stop the improper actions of a certain board member and the community manager. The letter alleges they are using association funds to pay personal debts and other expenses not authorized by the association. The unit owner demands that the association recover the allegedly misappropriated funds as well as fees and costs. He files a lawsuit in the name of the association and for the benefit of its members. Sometimes even board members sue other board members.
Many D&O policies specifically exclude coverage of claims by one insured against one another. Yet it is a potentially costly liability facing associations. A board member’s legal expenses won’t be covered if such claims are excluded.
Breach of contract. Your condominium association votes to have the landscaping redone in a beautiful botanical-garden style. After the lengthy process of finding the right landscaping company at the right price, the contractor starts working on the common area. As the work progresses, the board discovers the landscaping company is not providing the high-quality materials or work that was expected. The board decides to terminate the contract with the landscaper. What happens? The board is sued for breach of contract.
Associations sign contracts with painters, landscapers and others regularly. If things go wrong and board members need to break a contract, they are left vulnerable to a lawsuit.
Employment discrimination. Your association hires and individual to perform maintenance work. After a year, the board is concerned that the individual they hired doesn’t work fast enough and isn’t responding to requests for repairs in a timely manner. The association fires him and hires a younger worker to perform the same tasks. The terminated individual sues the association for wrongful termination and age discrimination.
Many community associations employ their own staff. Even if you have just one employee, there is a potential for litigation. Wrongful termination, sexual harassment and discrimination are common claims in today’s world.
THE PERFECT MATCH
One way to avoid some of these pitfalls is to hire professionals who specialize in community associations.
Choose an insurance professional who is familiar with board members’ duties and liabilities. Does he or she have CAI’s Community Insurance and Risk Management Specialist (CIRMS) designation? CIRMS designees must have at least five years’ experience with community association insurance.
Find out if your current policy includes the most comprehensive coverage. Stand-alone D&O policies provide the broadest amount of coverage. Determine any limits on what the insurance company will pay. Every policy is different. Some pay for defense costs, but not damages. Ask whether you and your association would be protected if common claims like those listed above are made. The more questions you ask, the better.
When a complaint or demand that might lead to legal action arises, consult with the association’s attorney. Report the incident to your insurance provider immediately. If you don’t report it quickly, you might be denied coverage.
In addition to purchasing D&O protection, you can minimize your association’s liability risk by understanding your obligations and duties as a board member, staying informed on the issues and laws, establishing proper procedures for hiring and contracting and seeking expert advice when you need it.
You can sleep on that.
by Kevin Davis, CIRMS, and Sherry Branson