Directors and officers liability insurance (“D&O Insurance”) is insurance that protects the officers and directors of a homeowners’ association and provides coverage for liability and legal expenses that result from acts committed as a director and/or officer of the association. Because directors and officers of homeowners associations are frequently named as defendants in law suits that are filed against the association, it is extremely important for homeowners’ associations to have proper D&O Insurance for its directors and officers.
The first place to start in order to assess whether or not an association has proper D&O Insurance is the association’s governing documents. Insurance requirements that were imposed when the association was created will be found in the association’s bylaws and/or declaration or CC&Rs. All amendments to those governing documents should also be reviewed for changes in the requirements. Applicable state statutes (statutes governing nonprofit corporations, condominiums and homeowners’ associations) should also be reviewed for any provisions pertaining to D&O Insurance.
Once a determination has been made about the nature and extent of the coverage that is mandated by the association’s governing documents and the applicable state statutes it is important to review all existing policies owned by the homeowners’ association to determine whether or not all of the required insurance is in place. If it is not, steps should be taken to make sure that the association has the required coverage.
Not all insurance companies offer the exact same coverage. Frequently, decisions on whether or not to purchase a policy are based on the cost of the policy without taking into consideration other important facts about the extent of the coverage offered by the policy. When evaluating D&O Insurance coverage, the following items should be considered:
- Who is covered by the policy? All HOA board members should definitely be covered, but it is also desirable to extend the coverage to all association employees as well as all committee members and other volunteers.
- What is covered by the policy? Many D&O Insurance policies will pay for the legal costs and fees that are incurred for defending board members against claims that are made against them and pay any judgment that is rendered against them, within the limits of the policy, but policies can vary on the extent of legal costs that are covered when a case has been settled. Whether the case is settled or not, you want to make certain that the legal fees that are incurred will be covered by the insurance.
- What are the policy exclusions? Virtually every policy contains language that excludes certain parties and certain types of claims from coverage. For example, some D&O Insurance policies will cover claims that are based on a breach of fiduciary duties, but they may exclude claims that are based on negligent, fraudulent, or intentional acts. As it is common for parties who are suing to allege claims that are based on multiple theories of liability, it is most desirable to have more comprehensive coverage.
- When is the carrier required to make payments under the policy? Some policies provide for payment of expenses as they are incurred, while others provide for payment all at once after the case is concluded. Clearly, it is more desirable for the payments to be made periodically as they are incurred to avoid having to front the expenses.
- What are the policy limits? Every insurance policy has monetary limits on the amounts that will be paid out by the insurance carrier. Determining the appropriate limit for insurance coverage involves many considerations that insurance agents can assist with. Larger associations with more members and extensive common areas and amenities will have greater exposure to claims than a smaller association with fewer members and common areas.
- What is the cost of the policy? The amount of the premium (the cost of the policy) for a D&O Insurance policy is dependent on factors such as the comprehensiveness of the coverage, the policy limits, and the deductible for the coverage. Each of these items should be evaluated to make informed decisions about the coverage to purchase.
Evaluating insurance coverage takes a lot of time and effort and it is easy for an association’s volunteer directors and officers, or property manager, to blindly rely on representations by a sales agent without a review of the actual policy provisions. This practice is contributed to and facilitated by the fact that most policies are not delivered to an insured until after they have already purchased the policy. Those policies are then typically filed away without reviewing the terms and, all too often it is not until after the claim has been made and the matter has been tendered to the insurance company that the insured first learns that it is not covered for a claim.
Having to defend claims and lawsuits that are not covered by D&O Insurance exposes the homeowners’ association to thousands of dollars in legal fees, court and other litigation costs for items such as expert witnesses, and damages in the event the case is lost or settled. These items are not budgeted for and typically necessitate special assessments on the members to generate the necessary funds, or in more extreme situations, homeowners associations have been forced into bankruptcy as a result of an adverse judgment that was not covered by insurance. To avoid such a problem, homeowners associations should be proactive in appointing people to evaluate the coverage considerations well before a deadline for purchasing a policy. Coverage quotes should be obtained from several different insurance carriers and specimen policies should be obtained and reviewed before the policy is purchased so that the association knows exactly what it is being offered by the different carriers and what the full nature and extent of the coverage would actually be under a particular policy.