D&O Ins & Umbrella

Started by LeeS1 • 18 replies • 1884 views

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LeeS1 (New Mexico)
Posts: 24

Posted:

Situation: voluntary HOA with about 1500 homes. Have D&O and Umbrella coverage, with the amounts appearing backwards. Have no common areas which would be the best reason for having umbrella. Office rents space in a building. Current coverage is: $14M umbrella (premium $7000+;); and $1M for D&O.

Agent has asked why we need more coverage for D&O, and asked if we were expecting a lawsuit, etc.. This agent must be totally clueless as to the lawsuit happy society we live in. We have a rather hostile community when it comes to people who are choosing to ignore the covenants, and have won all but one lawsuit as a result over a 20-year period (5 lawsuits total).

What is the coverage norm for a HOA this size with no common areas? Our dues are under $10/month.Unfortunately, a number of board members think that $1M for D&O coverage is too much. The rest of us feel it is too little.

Any suggestions? Any stats? I appreciate your help on this.

RogerB (Colorado)
Posts: 5,067

Posted:

Lee, I suggest you first review what your Declaration requires. I would never consider less than $1MM. Many HOA's carry $1MM some $2MM D&O. Why do you need the $14MM umbrella?

LeeS1 (New Mexico)
Posts: 24

Posted:

We have many sets of covenants, as the community has developed over a 50+ year period, with each "neighborhood" having its own set, as written by the developer. The writing in them is awful--vague, ambiguous, omissions of information that are common requirements for CC&Rs, etc. There is nothing in any of the sets of covenants that specifies insurance.

As for the $14M umbrella? Sounds like some agent sold the board a bill of goods, if you ask me. How stupid--no common areas!

KirkW1 (Texas)
Posts: 1,665

Posted:

I would drop the umbrella to one million and probably call it a day. I doubt any D&O insurance has hit its limit with regards to an HOA. If it did, the corporation could simply declare itself bankrupt. If the judge didn't back off, then every simply quits and you shutter the organization.

If nothing else, your policy insurance will fight off all attempts to remove the director indemnification. (You did indemnify the directors and officers didn't you?) For all the talk of breaking that, it actually takes a lot to break the indemnification. If the officers act with reasonable prudence they remain covered no matter what the suit says.

JohnK3 (Pennsylvania)
Posts: 967

Posted:

Umbrella policies are used to increase limits on underlying policies. For instance, if your auto policy has a $500K top end, and your homeowner policy has $250K top end on liability, you might, for a small cost, add umbrella coverage adding $1M extra.

Why not just set your HOA D&O and liability limits at a comfortable level (ours are $2M & $5M), and drop the umbrella?

LeeS1 (New Mexico)
Posts: 24

Posted:

KirkW1 - I know about indemnification, but now you have me wondering. When you say indemnify, where are those terms supposed to be--in the bylaws? In the insurance policy itself?

BradP (Kansas)
Posts: 2,640

Posted:

I too was wondering about the high umbrella...

RogerB (Colorado)
Posts: 5,067

Posted:

Lee, hopefully the indemnification will be in the Articles of Incorporation (referred to as the corporate shield) and also in the Bylaws. I would not serve on a Board without this protection. A Board member's first protection is having a good D&O insurance policy which covers every important item (some don't). And the fourth protection is to always do things in good faith using good business judgement.

LeeS1 (New Mexico)
Posts: 24

Posted:

I checked our Art. of Incorporation--nothing about indemnification; but it is in the bylaws. Does an indemnification clause have to be in the Art. of Incorporation, too?

RogerB (Colorado)
Posts: 5,067

Posted:

Quote:

Posted By LeeS1 on 08/12/2008 10:48 PM
I checked our Art. of Incorporation--nothing about indemnification; but it is in the bylaws. Does an indemnification clause have to be in the Art. of Incorporation, too?

No, but I would consider trying to amend the Articles to add and indemnification paragraph. Read your Articles to find out the actural percent required to amend; approval may be difficult to achieve.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Posted By RogerB on 08/13/2008 2:58 PM

No, but I would consider trying to amend the Articles to add and indemnification paragraph. Read your Articles to find out the actural percent required to amend; approval may be difficult to achieve.

Roger,

The indemnification clause(s) is usually contained in the bylaws of a corp. Why do you suggest amending the articles to also contain that clause? Neither my former or my present assn articles of inc. contain an indemnification clause.

Generally speaking, the articles of inc. do not go into great detail about a corp's operations, which are spelled out in more detail in the bylaws.

LeeS1 (New Mexico)
Posts: 24

Posted:

I just learned that the insurance agent told us that the insurance carrier that handles the D&O policy does not require an indemnification agreement in either the bylaws or the articles of incorporation.

One of you mentioned that you would never serve on any board that did not have an indemnification clause (and, I presume, the money to defend against any charges or lawsuits brought against one of the directors or officers). And neither would I.

So my next question is, if the insurance company doesn't care that none of the association's documents even address the issue of indemnification, then why would the HOA be purchasing insurance in the first place? Something doesn't make sense, here. Or, the insurance agent is not telling us good information.

Related to this, I cannot get the treasurer to see that we need more than just the 1 quote--we need to get at least 3 quotes. He "trusts" that the quote he has received from the agent is the best the agent has. My response was, "And we would know that how?"

RogerB (Colorado)
Posts: 5,067

Posted:

Lee, insurance coverage is different and separate from indemnification. The insurance company doesn't care whether the HOA has an indemnification clause but the members who serve the HOA should be sure of the extent to which their insurance covers those members who serve and have previously served the HOA. Indemnification in the Bylaws provides a separate protection to those members who serve the HOA. Indemnification in the Articles is desirable because it provides another level of protection often referred to as "the corporate shield". It and qualifying as a nonprofit are two reasons for incorporating.

LeeS1 (New Mexico)
Posts: 24

Posted:

Roger,

Thank you for the clarification. We are incorporated, but from what I am hearing, it certainly would not hurt to amend the Art. of Inc. to add the indemnification clause.

Do you have any thoughts on the question of quotes--I don't think the Association is being responsibility with the members' dues when it only gets 1 quote. I don't know whether anyone on the finance committee knows the agent personally or professionally--guess that would be the next thing to find out. If someone does, that could certainly be why they don't want to get 2 other quotes, right?

JohnK3 (Pennsylvania)
Posts: 967

Posted:

IMO, an indemnification clause in the documents, unless required, is just fluff, so why bother with it? Insurance is the issue; the last thing we'd cut from our budget. One huge loss w/o the backing policies and an HOA, an Membership, could be dropped into a dark, expensive hole. Again, just get a policy(s) that cover the back end of potential liabilities.

RogerB (Colorado)
Posts: 5,067

Posted:

John, you may be correct when insurance covers all of the HOA's and the member's expenses. Does yours? Does it cover members personal expenses up front or are they reimbursed after final settlement? Lots of senarios which must be considered and often are not. Thus while D&O insurance is the first protection it definitely should not be the only protection. We live in a litigious society

JohnK3 (Pennsylvania)
Posts: 967

Posted:

Roger,

I'm sure you know that ins. policies probably contain more exceptions than coverages!

Float me a hypothetical and maybe I can noodle through it.

LeighM (Illinois)
Posts: 1

Posted:

Re: the number of quotes. It is common practice to get 2-3 quotes. If you wreck your car, your insurance company normally will request 2-3 quotes for the repair to be sure they pay a fair price. Here's how I would present it to your member that thinks 1 quote is enough: If he was going to build a deck onto his house, would he only get one quote? Of course not!! This applies to all kinds of business. It's
only common sense to make sure you get the best price. Actually,
it never hurts to get more quotes, but 3 would be reasonable. I would want 3 quotes for anything I was going to put out cash for.
If you only have one member who thinks one quote is enough. Take
a census - how many others want more than one quote?

LeighM

LeeS1 (New Mexico)
Posts: 24

Posted:

To put closure to this, our treasurer has agreed to get at least another quote, and I sent him a link for a third possibility. Common sense finally rules!

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