Directors and Officers Liability Insurance 101 – Article by Patrick Prendiville
Community associations are formal legal entities with By-Laws and CC&Rs that govern these entities. When an individual accepts a position on a board of directors for a community association, he or she is presumed to have read the Declarations of Covenants, Conditions and Restrictions and have a working knowledge of the duties and responsibilities of a board member. Unfortunately, this is usually not the case.
Board members should be prepared to do certain things such as enforce the By-laws and CC&Rs, establish sound fiscal policies, develop a workable budget, select an attorney, insurance agent and other professionals, and much more. The board must obey state and federal laws, they must put the interests of the association over their own personal interests and their duties and decisions must be handled with such care as an ordinarily prudent person would use under similar circumstances. As long as a board is professional and aware of their duties, things usually run very smoothly. However, that is not always the case. The most common areas where Directors & Officers for community associations get into legal trouble are:
* The Board’s failure to adhere to By-laws.
* The Board’s failure to properly count votes and proxies.
* The Board’s failure to maintain common areas.
* The Board’s failure to properly disburse funds (i.e. insurance proceeds).
* Challenges to assessments.
* Challenges regarding easements.
* Challenges to decisions of the Architectural Review Board.
* Challenges regarding power granted the Board by the By-laws.
* Improper removal of Board Members.
* Decisions by the Board resulting in physical damage to the association’s property.
* Breach of fiduciary duty.
* Defamation by the Board of a member.
As you can see, failure to know and follow your governing documents is the most common cause of problems. That is why most CC&Rs demand that the association obtain Directors & Officers Liability insurance.
Liability insurance for the errors, omissions, and other wrongful acts of directors and officers has been available since the early 1960s. Since that time, the increase in public awareness and the more litigious nature of our society have resulted in a virtual explosion of litigation. A Directors & Officers Liability policy provides financial protection for the directors and officers of your association in the event they are sued in conjunction with the performance of their duties as they relate to the association providing the following criteria are met:
* The act or omission was performed within the scope of the officer’s or director’s
* The act or omission was performed in good faith.
* The act or omission was not willful, wanton, or grossly negligent.
* The association maintained (at the time the act or omission occurred) specified levels of
General Liability Insurance and Directors & Officers Insurance.
Most board members are the undeclared heroes of an association. They are the ones volunteering their time and energy to make sure their neighborhoods stay friendly and safe. Yet sometimes mistakes happen and if they do, it’s nice knowing that Directors & Officers Insurance is there to help. As you can imagine, all Directors & Officers Liability policies are not the same. There are a few specific things you want to make sure your association’s policy covers. First off, make sure your Directors & Officers Liability policy is specifically written for community associations and will cover board members, association employees, committee members, volunteers, as well as the property manager and management company. Many D&O policies do not cover all of these decision makers. Another thing to consider is that the major cost in D&O claims are the attorney’s fees incurred by the insurance company to defend against the lawsuit. On many D&O policies the attorney fees come out of the policy limits. Make sure your defense costs are paid “in addition” to the policy limits, leaving the full Directors & Officers Liability policy limit to pay any resulting judgment. Lastly, if you have an Umbrella Liability policy you’ll want to make sure that it will cover everyone and everything that your D&O Policy covers.
As long as you have an association with a proper Directors & Officers Liability insurance policy in place as well as a board of directors which understands its duties, By-Laws and CC&Rs, you should be free to enjoy your nightly walks, hang out with your neighbors, and rest assured that your home really can be your home sweet home.
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