D & O Insurance Coverage
Q: Our board is struggling with our insurance renewal. We are trying to save some money on premiums and a couple of the members are saying we are foolish to spend money on directors and officers liability insurance. What are we getting for our money and what are the different coverages that should be included? Do you think we really need this coverage?
A: We certainly encourage you to obtain directors and officers liability coverage, which is generally referred to as a D & O policy. This policy will protect the board members, officers, employees and committee members for actions, or failures to act, and decisions they make regarding management of the association. While suits against boards are rare, when they are filed it is generally an expensive experience.
First let's look at what can trigger a law suit which will require D & O coverage to protect the association.
• Duty of Care - You have a duty to act with the care that a reasonably prudent person in a similar position would use under similar circumstances.
• Duty of Loyalty - You must refrain from engaging in personal activities or pursue a personal agenda that may not be in the best interests of all the owners. You may not use your position of trust to further your own personal gain.
• Duty of Obedience - You are required to perform your duties in accordance with applicable statutes and the terms of the association's declaration and bylaws. You may create liability if you act in a manner that is beyond the powers set forth in your governing documents.
Some of the common sources of D & O claims are association members, current or former employees, regulators, or volunteers.
The variety of grounds of lawsuits that are brought against associations and their boards is significant, but we can fit most of them into the following categories:
• Discrimination - both under the Fair Housing Act and employment discrimination, including sexual harassment.
• Architectural enforcement issues - Allegations of selective enforcement of the exterior maintenance requirements.
• Financial - Allegations of failure to budget properly and/or maintain adequate reserves.
• Breach of contract - Allegations by a vendor that it was terminated improperly or without cause as required in a contract.
• Failure to abide by the governing documents - Allegations of the board or an officer exceeding the powers set forth in the covenants. This is often manifested in a suit over an improper special assessment, alleging that the assessment is not permitted or it was carried out in an improper manner.
• Defamation - these claims stem from statements made about members in meetings which are injurious and have no relevance to the operation of the community.
• Breach of Fiduciary duty - Board members have a high duty of observing care with respect to the preservation of the association's assets and managing its money appropriately.
• Declaratory Relief Actions - This occurs when a suit is filed to ask the court's interpretation of a provision in the covenants, such as an ambiguous architectural regulation provision concerning fences or auxiliary structures.
• Injunctive Relief Actions - This most commonly occurs when an association member challenges a board vote to take a certain action which a member believes is contrary to the documents. It seeks an order from the court to stop the board from proceeding further with the action. It can also be used to force action of the board when a member believes it should be acting and it is not doing so, such as effecting maintenance to a common element which is in disrepair.
Not all insurance companies provide the same types of coverages under a D & O policy and a consultation with your insurance advisor is essential. One subject that is critical for discussion is the "duty to defend" provision. Most policies require that the insurance company defend the association, by paying attorney's fees and costs, if it is sued for money damages, but some do not provide such coverage where the relief sought in the suit is only for an injunction. This is hard to believe, but we have seen this happen. You should make sure this coverage is included because one of the primary benefits of this coverage is that the insurance company pays for your defense. Many suits are quite defensible but the cost can run anywhere from $5000 to $50,000 to defend, depending on the point at which the case is ended, either by court order or settlement. Consequently, since payment by the insurance company of the attorney's fees is possibly the most important coverage you have in the policy, you should make sure it is comprehensive.
Regardless of the quality of your coverage, you certainly want to limit your possibilities of being sued. That is called "risk management". Hopefully we will have the opportunity to address this topic in the near future.