The broad nature and fiduciary responsibility of a community association and its board members leaves an organization and each individual vulnerable to a host of liability lawsuits from residents and employees. Their responsibilities include everything from establishing an annual budget to collecting dues and fees, maintaining the common areas, and adopting and enforcing rules and regulations, etc. Claims can include residents alleging board members were asleep at the wheel while a fellow director embezzled association funds. Or, homeowners may claim that the board funded unnecessary projects to the detriment of necessary maintenance, or that the board negligently failed to collect assessments, resulting in losses. In each situation, board members can be sued for failing to act in the association’s best interest.
Directors & Officers (D&O) insurance provides protection for allegations of mismanagement, failure to perform, and other management liability issues that cause economic or financial injury. In discussing this much-needed coverage be sure to review the following salient points:
- Who exactly is covered? Most policies cover all officers and directors, but some also cover employees, committee members, and volunteers. Be sure to review if any individuals are expressly not covered as well. For example, an association’s bylaws may allow non-owners to serve on their board or may not address the issue. Some policies exclude the actions of non-owners, and some board actions could be invalidated if prohibited people were sitting on and acting for the board. Also, check whether a policy covers officers and directors who served at the time of the alleged wrongdoing but who are no longer on the board.
- When does coverage kick in? Most policies will pay for defense costs and any judgments or settlements (up to the policy limit) for covered losses. In some cases, the association may be required to pay for its own defense and then seek reimbursement after the case concludes. Also, it’s important to note whether the policy covers any settlements the insured enters into before a claim is filed.
- What acts does the policy cover and exclude? Most policies will cover a breach of the fiduciary duty but not fraudulent acts or the acts of directors who knowingly violate their own governing documents or state law. Clarify this with the insured.
- What are the dollar amounts in the policy? The insured should understand that D&O policies come with dollar limits. It’s important to discuss the policy limits available to determine how much coverage an association should purchase. For example, some policies offer defense coverage in addition to the policy limit while others don’t.
Make sure board members understand that even if they have protection for the community association under a General Liability policy for management-liability related claims, many policies may only cover the association as a whole. This means that individual board members would not be protected. In addition, the breadth and depth of coverage available with a stand-alone Directors & Officers policy that’s tailored to the industry is designed to better respond with the appropriate insurance, including providing all board members with individual coverage.
Cyber threats should also be stressed when discussing D&O coverage with the community association and its board members. Community associations keep valuable data on their computer systems, including homeowners or condo owners’ bank accounts and routing numbers, credit card numbers, Social Security numbers and email addresses. If cyber criminals get their hands on this data, the association can be liable for the attack and first-party expenditures that include notification costs, credit monitoring and other related expenses. It’s, therefore, important to include Cyber coverage as part of the association’s insurance program.
Point out the rise in employment practices lawsuits that affects all types of organizations, including non-profits. The #MeToo movement has opened up discussion about the prevalence of sexual harassment and discrimination in the workplace and, in part, has been responsible for an increase in disputes. According to the EEOC’s Performance and Accountability Report, in 2018 employers paid more $505 million to resolve disputes affecting almost 68,000 victims of discrimination in the workplace with the commission, a rise of 4.35 percent from the $484 million reported last year. There is now a heightened awareness in organizations to foster a safe and secure work environment to mitigate potential lawsuits, and a re-focus for the need to carry Employment Practices Liability Insurance (EPLI) in the event of a claim. Coverage should be available to protect community associations against allegations made by employees – paid or volunteer.
The price of D&O insurance will depend on the scope of the policy’s comprehensiveness and payout limits.