HOA Board Members: Ensure that You're Personally Insured
June 2008
You may think that since your association has general liability insurance, you'll be protected if a member sues you and your fellow board members. Not so. General liability insurance protects the association from personal injury and property damage claims. It doesn't protect board members from claims that their actions have damaged the association or its members. That's where directors and officers (D&O) insurance comes in. It protects directors and officers from claims that they failed to act or acted wrongfully in their individual or group capacity on behalf of the association. When might you need such insurance? An obvious case would involve directors who embezzled association funds and homeowners' claims that fellow board members were asleep at the wheel while the embezzlement was taking place. Less obvious cases might involve homeowners who claim that the board has funded unnecessary projects to the detriment of necessary maintenance or claims that the board has negligently failed to collect assessments, resulting in unnecessary losses. In each situation, you could be sued for failing to act in the association's best interest. If your association doesn't currently carry D&O insurance, start getting quotes for it now. If it already has insurance, re-read your policy to see what it does and doesn't cover. In both cases, keep these rules in mind. 1) Identify who's covered. Most policies cover all officers and directors, but some also cover employees, committee members, and volunteers. Policies can also expressly exclude people. For instance, some associations' governing documents allow non-owners to serve on their board or don't address the issue. But 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 wrong but who don't serve now. 2) Determine when coverage kicks in. Most policies will pay to defend you in any claim filed against you and will cover any judgment entered against you. But read the fine print. You may be required to front your own defense and then seek reimbursement after the case concludes. Check whether your policy covers any settlements you enter into before a claim is filed (for example if an owner sends a 'demand letter' notifying you that he is going to sue unless you settle). Finally, check what your policy says about claims filed in a criminal court or in an administrative setting, such as your state's employment department? 3) Know what acts the policy covers and excludes. Many policies will cover a breach of your fiduciary duty but not fraudulent acts or the acts of directors who knowingly violate their own governing documents or state law. Policies also differ in whether they'll cover acts taken before coverage began, punitive damages if your state allows those to be covered by insurance, employment decisions, and wrongful acts that result in personal injury. 4) Understand the dollar amounts. Just like your home and auto insurance policies have coverage limits, D&O policies also have dollar limits. Ask an insurance broker to recommend policy limits, and then use your judgment to determine whether the recommendation fits your association. For example, a small association with only 10 units and $20,000 in average reserves may need only basic coverage amounts, while a 200-unit association with a $100,000 average reserve may need higher coverage. And don't forget the flip side of that equation. There's no need to be overinsured. With many associations' budgets crunched these days, be realistic, not hyper-conservative, in your coverage needs.
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