DIRECTORS AND OFFICERS
INSURANCE

Purpose. Directors and Officers ("D&O") Insurance is essential. It protects volunteers from personal liability for decisions they make while on the board. D&O insurance is in addition to the association's general liability coverage and covers board negligence, breach of fiduciary duties, etc., provided the errors or omissions were:

  • within the scope of the officer or directors' duties
  • performed in good faith, and
  • not willful, wanton, or grossly negligent
Duty to Defend and Wasting Policies. Make sure the policy provides a duty to defend rather than reimbursing the association its costs at the conclusion of the litigation. Avoid "wasting policies" that pay your defense costs out of the policy limits. If you have $1 million of insurance and the carrier pays legal fees of $300,000 defending the board, only $700,000 will be left to settle the case or pay any judgments. You want a policy that pays defense costs in addition to the policy limits, thereby leaving the full $1 million to cover potential judgments against the association.

Coverage. Boards should make sure the following are included in the policy:

  • board members and officers
  • committee members and other volunteers
  • employees
  • manager and management company
Policy Limits. To avoid personal liability for injury, emotional distress, wrongful death or property damage as a result of the tortuous act or omission of the volunteer officer or director, the association must maintain at least minimum levels of insurance as provided for in Civil Code §1365.7. Additional coverage can be added through umbrella policies at very reasonable costs.

Claims Made. Most D&O polices are "claims made" which means they only cover claims that occur and are reported while the policy is in effect. As a result, boards should immediately notify the insurance carrier whenever a claim or potential claim is made against the association. Reporting potential claims are more problematic since every threat by an owner to sue the board could be considered a potential claim. Reporting every "potential claim" could cause the carrier to drop the association as high risk.

Employment Practices. If your association has employees, you should ask for "employment practices liability" coverage.

For insurance brokers that specialize in homeowner associations, see the Service Directory

Updated 8/7/2008

 
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