J & N REALTY, INC.

Directors and Officers Insurance for Homeowners Associations

Consider The Facts...  

• A community association board spends $1 million defending itself against a resident alleging that a special assessment was too high and inequitably distributed.  

• In a dispute over a fence, a community finds itself facing a legal tab of $61,000.  

• In an argument over a $500 pair of drapes, both the association and the homeowner paid more than $15,000 in legal fees.  

Why Directors  & Officers Liability Insurance Is Critical?  

Despite good intentions and the care your clients take in performing their duties, community association boards are being sued with increas­ing frequency.  

In California alone, experts estimate that 75% of community associations are involved in a legal dispute.  The good news is, affordable Directors & Officers Liability Insurance is available.  It protects the association and board members from lawsuits resulting from actions or decisions made while serving.  The bad news is that many associations do not have adequate protection.  Without the right insurance, their personal assets could be on the line.  In addition, you could find yourself in the line of fire.  

Ensuring Your Community Association Clients Have the Right Policy  

Not all Community Association Directors & Officers Liability is creat­ed equally.  There are no “standard” D&O policies.  As a result, doing apples- to-apples comparison for your clients can be tough.  

• Avoid handling coverage as an add-on or endorsement to the client’s package policy.  Generally speaking, coverage is inadequate.  For example, many add-ons and endorsements exclude defense coverage for non-monetary claims Considering that 75% of commu­nity association claims involve suits for non-monetary damages, this could be a big exposure that comes back to haunt you.  

• Go for a stand-alone policy.  They   typically provide better coverage for a minimal, if any, cost difference.  

• Work with an underwriter who knows real estate and has experience writing community associations  

Community Association Directors & Officers Liability Insurance Checklist Make sure the policy:  

• Provides coverage for:  

– The association as an entity  

– Past, present and future board members  

– Property manager  

– Builders and developers serving on the board  

– Individuals working at the discretion of the board (e.g., volunteers, committee members, employees, etc.)  

• Provides defense for both monetary and non-monetary (defense) claims  

• Covers defense costs associated with breach of third party contract claims  

• Pays on the association’s behalf so there is no waiting to be reimbursed  

• Provides coverage for defense costs that is in addition to the limit of liability and is not subject to a deductible  

• Contains broadly defined protection for claims related to Employment Practices Liability, such as wrongful dismissal, discharge, termination and sexual harassment  

• Includes coverage for prior acts  

• Enables the association to choose their own counsel  

Choosing Policy Limits  

Limits vary from policy to policy – ranging from $1 million to $5 million.  These limits may be extended by most Commercial Umbrella policies.  

Look for a policy that does not diminish the limit of liability for defense.  

While the “right” limits depend on your client’s individual situation, it is extremely rare for any D&O claim, defense, and/or indemnity, to break the $1 million mark.  

Insurance is Only the Beginning  

Finding the right Directors & Officers Liability Insurance for your client is critical; however, there is a lot you can do in terms of risk management and loss control to limit their odds of being involved in a suit.  Encourage your association clients to:  

• Elect board members who are serious and understand what their responsibilities will entail.  

• Provide training for all board members.  

• Make sure all board members have a good understanding of the association’s by-laws, CC&R and any other governing documents.  

• Retain association counsel and hire experienced professionals if decisions are outside of the board’s comfort zone.  

• Require new residents to read and sign off on the by-laws and other regulations when they move in.  

• Provide a mechanism that enables residents to address problems or grievances.  Communication can keep small issues from becoming big ones.  

• Review by-laws, CC&R’s and other governing documents     regularly to ensure they are up to date.  

• Keep good records and accurate board minutes.  

• Maintain a complaint log that includes details on how you responded  

• Keep emotions and personalities out of the equation.  

How Claims Work  

Directors & Officers Liability insur­ance is a “claims-made” policy.  If the association even suspects that a situation could lead to a claim, they should immediately notify you, their insurer, and property manager.  The report of a potential claim will not impact the association’s insurance rates.  

The Most Frequent D&O Claims  

Breach of Fiduciary Duty – For example:  

• A board member approves one color for the whole condominium association, but his unit gets its own shade  

• Officer elects to hire the services of his brother-in-law's pool maintenance company without disclosing the information to the board  

Breach of By-Laws – Examples include:  

• Not enforcing rules and regula­tions with a neighboring unit that failed to submit plans for improvement prior to making changes  

• Failing to obtain the requisite number of votes prior to hiring a contractor to do some work  

• Failure to provide access to books and records  

Assessment Disputes  

Discrimination – Examples include:  

• Approving a front yard fence for one unit and denying an application for the same fence to another unit  

• Selectively restricting use of association facilities  

Wrongful Employment Practices – For example:  

• Wrongful termination  

• Sexual Harassment  

• Unfair Hiring Practices