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HeatherJ1
(South Carolina)

Posts:86

11/29/2008 10:17 AM
Hey guys! Hope you all had a WONDERFUL Turkey Day!!!! Question: I was told by my board that b/c we have liability insurance, the individual board members can not be sued by a homeowner. But, someone else told me (a lawyer) that our HOA would need board of directors insurance for that to be the case. Does anyone know? I thought for some reason, that liability insurance covers if there is an accident on the common area but not a homeowner lawsuit for i.e. selective enforcement. Also, in our by-laws, we have an indemnification clause. Does that in itself protect the individual board members from lawsuits? "ARTICLE XI Indemnification of Officers and Directors The Association shall indemnify any and all persons who may serve or whom have served at any time as directors or officers of the Association against any and all expenses, included amounts paid upon judgments, counsel fees and amounts paid in settlement (before or after suit is commenced), actually and necessarily incurred by such persons in connection with defense or settlement of any claim, action, suit or proceeding in which they, or any of them, are made parties, or a party, which may be asserted against them or any of the, by reason of being o having been directors or officers or a director or officer of the Association, except this indemnification shall not operate with respect to a director or officer or person who has been adjudged in an action, suit, or proceeding guilty of willful and intentional misconduct in the performance of his duties to the Association. Provided, however, that in the event of a settlement the indemnification herein shall apply only when the Board of Directors approved such settlement and reimbursement as being in the best interest of the Association. The Association shall likewise indemnify any bonded professional management company for any of the above-mentioned expenses, when such expenses are incurred in the course of duties delegated by the Board of Directors." Thanks everyone!!!!

SusanW1
(Michigan)

Posts:2316

11/29/2008 10:33 AM
Make sure that your board has general liability AND D&O liability insurance. The Idemnification bylaw basicially says that the HOA Corportion's board is protected from being sued indivudually because they are under the "corporate veil" i.e. the board is one unit. BUT it does not cover illegal, immoral or deliberate actions made by the board or individuals on the board. Ususally when someone sues, they will file a lawsuite against "everyone" - that is the HOA, the Board and the Members. But the board and the members will be protected under this Idemnificaton bylaws and your state laws governing not for profits. It does not cover deliberate illegal actions, however. But probably will cover board stupidity.

JohnK3
(Pennsylvania)

Posts:568

11/29/2008 10:42 AM
Heather, Our HOA carries (as required in our docs) 3 insurances: 1. General Liability. 2. D&O (actually, a rider to the GL policy) for misfeasance (as in, poor judgment) of BODs. 3. Fidelity Bonding for malfeasance (as in, criminal behavior) of BODs. It would appear you have #1, your Article XI is self-insuring #2, though does not cover #3. Any plaintiff can sue anybody the plaintiff chooses. So I’d say your BOD is covered for everything ‘cept illegal activity, for which you’d need a #3.

MaryA1
(Arizona)

Posts:2504

11/29/2008 12:42 PM
John, Please explain what you mean by saying: "your Article XI is self-insuring #2" (which is the D&O coverage). I'm of the impression Heather's assn only has liability insurance. She also asked what liability coverage means. IMO, that is the coverage for property damage. Coverage for the board members is through D&O insurance and Fidelity bonding. It appears to me her board members do not understand what type insurance coverage they have and perhaps what type they need. IMO, they should consult with an insurance agent who can best explain everything to them.

BruceF1
(Connecticut)

Posts:696

11/29/2008 2:19 PM
Heather, Liability insurance only protects the association with respect to claims for personal injury or property damage caused by the HOA. For example, if someone is injured on the common areas, the liability insurance would probably cover it. If a board member or an HOA employee damaged someone else's property in the course of HOA duties, the liability insurance would probably cover it. Liability insurance DOES NOT protect the board from "wrongful acts, errors and omissions." For that, the association needs "D&O (Director's and Officer's) insurance. The indemnity clause is common in corporation bylaws and means that the HOA will cover the board members for their actions. Basically, that means if the board is sued for their actions (by anybody, it doesn't have to be a homeowner, it could be a contractor), you and all the homeowners pay (because you don't have D&O insurance). However, note that the indemnity clause states "except this indemnification shall not operate with respect to a director or officer or person who has been adjudged in an action, suit, or proceeding guilty of willful and intentional misconduct in the performance of his duties." If an officer or director knowingly violates the law, the indemnity clause (and D&O insurance) won't cover it. That can be dificult to prove, however, if the board has followed the advice of an attorney. If the attorney gives bad advice, that's not the board's fault. I've read our D&O policy and it can be very confusing. However, there are several good articles available on the internet. I've included a couple with this message. For others, you might go to www.associationtimes.com and click on the Articles tab and choose to sort by subject.
Attachment: 1112919879471.doc Attachment: 1112919892054.doc

MaryA1
(Arizona)

Posts:2504

11/29/2008 3:55 PM
Bruce, If the indemnification clause in the bylaws means the assn does not have to procure D&O insurance, then why would the bylaws of my assn state the BOD has a duty to: "procure and maintain oficers and directors liability insurance. . ."? I read the indemnification clause and come away with the interpretation that the board must maintain liability insurance, but not necessarily foot the bill for any lawsuit. I mean, why would the assn want to be resp. for paying the cost of defending a board member?

JosephW
(Michigan)

Posts:788

11/29/2008 8:06 PM
he key idtem missing in most indemnification clauses is the responsibility to defend. In other words, if you used to be on the board and are now being sued by an owner, the current board could opt to not pay anything until the case was decided, leaving all of your defense costs to you. Based on most of the lawsuits I've seen, that usually makes up the bulk of any judgement or settlement. The key to D&O is the duty to defend. Also, in some cases, the board may choose not to re-imburse, , win or lose, leaving you to sue the board for the indemnification. Its not worth the risk to serve on any board, profit or non-profit, without an excellent D&O policy. You need one that covers current and past board members, as well as comittee members or other volunteers, that defends from the first dollar, and covers you even when you go off the board. If you don't understand your D&O policy, get the agent in to explain it in detail, especially the exclusions. Don't skimp on this! Joe

Joseph West Official HOATalk.com Sponsor Community Associations Network, LLC www.CommunityAssociations.net *See legal notice below (end of page) or go to www.hoatalk.com/legal

BruceF1
(Connecticut)

Posts:696

11/30/2008 4:05 AM
Posted By MaryA1 on 11/29/2008 3:55 PM Bruce, If the indemnification clause in the bylaws means the assn does not have to procure D&O insurance, then why would the bylaws of my assn state the BOD has a duty to: "procure and maintain oficers and directors liability insurance. . ."? I read the indemnification clause and come away with the interpretation that the board must maintain liability insurance, but not necessarily foot the bill for any lawsuit. I mean, why would the assn want to be resp. for paying the cost of defending a board member? Mary, You raise a good point, but I think it depends on what is stated in the documents. Neither the indemnity clause nor any other may actually require D&O insurance to be purchased. In your case, the requirement exists. Without that, the indemnity clause may state only that the association will pay for any judgements against the corporation's officers and directors (and not necessarily defense costs). But, IMO, the indemnity clause does permit the association to purchase D&O insurance. Otherwise, the individual directors and officers would have to purchase something (if it exists) on their own or take their chances. If there is no D&O insurance in place, the indemnity clause, IMO, would imply that the association would have to pay for any judgement against the board members, and that means all the homeowners pay. In any event, the cost of defense is key, as Joe pointed out. Without D&O insurance that provides that, win or lose, either the board members individually, or the association, would have to pick up that tab. An additional note for Heather: Lawsuits against the association, or it's board, or former directors or officers, can be brought by anyone, not just a homeowner. A lawsuit could be brought by a contractor that was fired or not paid, for example. It could be brought by an employee, or by a prospective employee who was not hired. Lawsuits can be filed against individual directors and officers. They are not immune. Our attorney has advised us that because of that, Connecticut courts have ruled that we must record the individual votes of board members in board minutes.

JohnK3
(Pennsylvania)

Posts:568

11/30/2008 10:05 AM
Posted By MaryA1 on 11/29/2008 12:42 PM John, Please explain what you mean by saying: "your Article XI is self-insuring #2" (which is the D&O coverage). I'm of the impression Heather's assn only has liability insurance. She also asked what liability coverage means. IMO, that is the coverage for property damage. Coverage for the board members is through D&O insurance and Fidelity bonding. It appears to me her board members do not understand what type insurance coverage they have and perhaps what type they need. IMO, they should consult with an insurance agent who can best explain everything to them. Mary, By that I mean the HOA docs are assuming the risk rather than passing it on to a third party entity, such as an insco. A common example would be your auto policy or HO policy if they have deductibles (say, $500 per occurence). In that case, you are self-insuring the first $500. In Heather's case, her HOA, via the docs, is taking on the entire risk in exchange for not paying a premium for D&O coverage. Is that wise? Depends on how lucky and self-confident one feels. Lots of big operations self-insure. It might sound crazy, but most major museums do not carry insurance on their collections. Why? The premiums would be astronomical. So they figure with their security ops, fire protection, etc., they won't come up with a big loser. See "The Thomas Crowne Affair" for more insight. (Or just to see Rene Russo in that dress)!

BruceF1
(Connecticut)

Posts:696

11/30/2008 10:25 AM
Many major corporations self-insure with regard to their employee health insurance. They hire an administrative company (such as CBCA) or an insurance company to merely administer the program and write the checks. The claims are actually paid by the corporation.

MaryA1
(Arizona)

Posts:2504

11/30/2008 10:58 AM
Posted By BruceF1 on 11/30/2008 10:25 AM Many major corporations self-insure with regard to their employee health insurance. They hire an administrative company (such as CBCA) or an insurance company to merely administer the program and write the checks. The claims are actually paid by the corporation. Bruce, I am well aware of that but, IMO, that is much different than self-insuring against potential law suits. Incidentally, I'm sure the cost of health care is also a tax write-off for the co.

BruceF1
(Connecticut)

Posts:696

11/30/2008 11:31 AM
Posted By MaryA1 on 11/30/2008 10:58 AM Posted By BruceF1 on 11/30/2008 10:25 AM Many major corporations self-insure with regard to their employee health insurance. They hire an administrative company (such as CBCA) or an insurance company to merely administer the program and write the checks. The claims are actually paid by the corporation. Bruce, I am well aware of that but, IMO, that is much different than self-insuring against potential law suits. Incidentally, I'm sure the cost of health care is also a tax write-off for the co. Yup. Just sayin'. And I'm not sure, but I don't think the cost of a judgement is tax deductible but the cost of D&O insurance is. I don't think either of us think it's a good idea to go without it.

JohnK3
(Pennsylvania)

Posts:568

11/30/2008 11:35 AM
Returning to Heather's situation, I doubt our D&O coverage rider ($1-2M coverage, $1K deductible) adds more than $100 to our approx. $700 GL annual premium. At that price, self-insuring would, if you ask me, be foolish when one looks at the possible downside exposure. Legal defense costs alone, should a claim be made, would total in the $1,000s.

MaryA1
(Arizona)

Posts:2504

11/30/2008 11:48 AM
Bruce & John, Ok, guys. So even though you are saying the HOA does not "have" to procure D&O ins with an indemnification clause in the bylaws, they would be prudent to do so. I totally agree! I'd much rather pay a small premium than be faced with a legal bill in the 10's of thousands. And no BOD should ever think it can't or won't happen to them!

MaryA1
(Arizona)

Posts:2504

11/30/2008 11:50 AM
Posted By BruceF1 on 11/30/2008 11:31 AM Posted By MaryA1 on 11/30/2008 10:58 AM Posted By BruceF1 on 11/30/2008 10:25 AM Many major corporations self-insure with regard to their employee health insurance. They hire an administrative company (such as CBCA) or an insurance company to merely administer the program and write the checks. The claims are actually paid by the corporation. Bruce, I am well aware of that but, IMO, that is much different than self-insuring against potential law suits. Incidentally, I'm sure the cost of health care is also a tax write-off for the co. Yup. Just sayin'. And I'm not sure, but I don't think the cost of a judgement is tax deductible but the cost of D&O insurance is. I don't think either of us think it's a good idea to go without it. Bruce, I would say the attorney's fees would be tax deductible but any judgment would not. I certainly agree procuring D&O is well worth the expense.

HeatherJ1
(South Carolina)

Posts:86

11/30/2008 7:45 PM
Wow. I am still amazed how much I learn here. Good to know again that what I thought made more sense than what my current board thinks. Crazy that I keep finding examples of that, huh? Any of you wanna move into my neighborhood????? ;) Thanks so much for the information. I'm storing it in my HOA memory database to use at a later date!!!!

MaryA1
(Arizona)

Posts:2504

12/01/2008 2:50 PM
Heather, I have a 3-ring binder full of HOA info -- everything organized and indexed. Some of the info contained in it is also in my computer. That binder and the other binder that contains all my gov docs and state laws are my 2 HOA bibles. Both are large 3" binders and both are chock full! It's amazing what you can accumulate from year to year.

JosephW
(Michigan)

Posts:788

12/01/2008 2:54 PM
What Mary does is what all board members should do, and then pass it along to their successor when they go off the board. The loss of "institutional memory" is often why associations repeat the same mistakes, or take forever to do something that has been done before. Joe

Joseph West Official HOATalk.com Sponsor Community Associations Network, LLC www.CommunityAssociations.net *See legal notice below (end of page) or go to www.hoatalk.com/legal

RogerB
(Colorado)

Posts:3726

12/01/2008 3:47 PM
Posted By JosephW on 11/29/2008 8:06 PM he key idtem missing in most indemnification clauses is the responsibility to defend. In other words, if you used to be on the board and are now being sued by an owner, the current board could opt to not pay anything until the case was decided, leaving all of your defense costs to you. Based on most of the lawsuits I've seen, that usually makes up the bulk of any judgement or settlement. The key to D&O is the duty to defend. Also, in some cases, the board may choose not to re-imburse, , win or lose, leaving you to sue the board for the indemnification. Its not worth the risk to serve on any board, profit or non-profit, without an excellent D&O policy. You need one that covers current and past board members, as well as comittee members or other volunteers, that defends from the first dollar, and covers you even when you go off the board. If you don't understand your D&O policy, get the agent in to explain it in detail, especially the exclusions. Don't skimp on this! Joe Joe's comments are worth repeating!!! I would not serve on an HOA Board which did not have excellent D&O insurance. AND make sure either the insurance policy or the governing documents state that payment will be made up front on any expenses a Board member, past Board member, committee member, etc. incurs due to a suit.

Roger Borcherding Official HOATalk.com Sponsor DARCO Property Management (Colorado) (303) 925-0150 *See legal notice below (end of page) or go to www.hoatalk.com/legal

MicheleD
(Kentucky)

Posts:1866

12/01/2008 4:50 PM
Posted By RogerB on 12/01/2008 3:47 PM I would not serve on an HOA Board which did not have excellent D&O insurance. AND make sure either the insurance policy or the governing documents state that payment will be made up front on any expenses a Board member, past Board member, committee member, etc. incurs due to a suit. And THIS is worth repeating. I would resign in a heartbeat if the board did not keep up the D&O insurance.

HeatherJ1
(South Carolina)

Posts:86

12/02/2008 7:00 AM
Posted By MicheleD on 12/01/2008 4:50 PM Posted By RogerB on 12/01/2008 3:47 PM I would not serve on an HOA Board which did not have excellent D&O insurance. AND make sure either the insurance policy or the governing documents state that payment will be made up front on any expenses a Board member, past Board member, committee member, etc. incurs due to a suit. And THIS is worth repeating. I would resign in a heartbeat if the board did not keep up the D&O insurance. Wow. Thanks, guys. I had no idea how important the D&O Insurance was. If I could somehow convince my board to not waste so much money on useless lawyer fees, maybe I could convince them to get a policy. But, again, they seem to think they know everything and I know nothing so I am always fighting an uphill battle.

JosephW
(Michigan)

Posts:788

12/02/2008 7:13 AM
Print off the articles from this page and give them to the board: http://www.communityassociations.net/insurance_do.html Joe

Joseph West Official HOATalk.com Sponsor Community Associations Network, LLC www.CommunityAssociations.net *See legal notice below (end of page) or go to www.hoatalk.com/legal

BruceF1
(Connecticut)

Posts:696

12/02/2008 9:39 AM
Posted By JosephW on 12/02/2008 7:13 AM Print off the articles from this page and give them to the board: http://www.communityassociations.net/insurance_do.html Joe Good idea, but will they bother to read them? When you already "know" everything, there is nothing to learn.

MaryA1
(Arizona)

Posts:2504

12/02/2008 9:45 AM
So true, Bruce. You can lead a horse to water, but you can't make him drink!!

JosephW
(Michigan)

Posts:788

12/02/2008 11:12 AM
They may choose not to read them, or after reading them, choose to ignore them. By doing so they will only increase their chances of running into some personal liability down the road. Ignorance is not bliss. Last year, for the first time, we had a court (I think in CA) second-guess a decision by a board, rejecting the business judgment rule. I think we're going to see more of this, especially in the area of failing to adequately reserve and failing to insure adequately or under-insuring when trying to save money. I wouldn't be surprised to see a court take a board to task for failing to react effectively to the assessment collection and foreclosure problems, imposing an economic hardship on other owners. Way too many large additional assessments going on out there for this not be hitting the courts, and sooner or later, some board is going to get whacked. This is the cycle I keep seeing, both on this site and in the news: A percentage of owners stop paying assessments The board, sympathetic to the economic issues, i.e. layoffs, inability to find second mortgage financing, etc. delays collection, lien and foreclosure proceedings. Mortgage company forecloses before association. In some states, association gets 6 months of back assessments, in other states, nothing. Revenue to the association declines steeply Association begins cutting expenses, usually later than they should. Maintenance is postponed, contracts are canceled, insurance is reduced or deductibles are raised, to lower premiums. In some associations, this isn't noticed for awhile, because the association had few responsibilities, but in multi-story condo associations, they can create a danger to the owners. After a period of time, when trash doesn't get picked up, or half the elevators have been out of service for months, or the potholes in the road aren't filled, or the pool doesn't open, or is turning green, owners who have been paying their assessments are going to start asking boards why they are not fulfilling their responsibilities where the documents require these actions to be done. Some associations are dipping into capital reserves, often in violation of state law, to try and meet operating expenses. When the reserves come up short, special assessments are going to be harsh, and litigation will follow. Many associations, most in Florida, had underfunded reserves to begin with. The revenue shortfall, coupled with absolutely needed maintenance, (elevator repairs, roof replacements, etc.) are leading to massive additional assessments, and increasing the number of foreclosures. IMO - you're going to see courts seriously look at HOW the board dealt with this crisis, and not just give them a blank check under "business judgment", because I think plaintiffs will able to show very little "business judgment" was used. Joe

Joseph West Official HOATalk.com Sponsor Community Associations Network, LLC www.CommunityAssociations.net *See legal notice below (end of page) or go to www.hoatalk.com/legal

MicheleD
(Kentucky)

Posts:1866

12/02/2008 11:45 AM
Pretty good assessment. By the way, to my knowledge, I'm the only one on my board who has read the insurance policy. Ever. Well, there was one other treasurer who did, so I stand corrected on that. None of the other board members, past or present, have even bothered to scan it. Even though I bring the binder to almost every meeting.

BruceF1
(Connecticut)

Posts:696

12/02/2008 1:38 PM
Posted By MicheleD on 12/02/2008 11:45 AM Pretty good assessment. By the way, to my knowledge, I'm the only one on my board who has read the insurance policy. Ever. Well, there was one other treasurer who did, so I stand corrected on that. None of the other board members, past or present, have even bothered to scan it. Even though I bring the binder to almost every meeting. I was the only one on my board to read our policy, too!

SusannaM
(Florida)

Posts:289

12/04/2008 5:33 AM
Hi all, I'm reading my HOA's policy and under the breakdown of Limits of Insurance it has 2 separate lines for Habitational Assoc Directors/Officers Aggregate 1 million Habitational Assoc Directors Officers Occurrence 1 million Are these standards? your input.

JohnK3
(Pennsylvania)

Posts:568

12/04/2008 8:17 AM
Posted By SusannaM on 12/04/2008 5:33 AM Hi all, I'm reading my HOA's policy and under the breakdown of Limits of Insurance it has 2 separate lines for Habitational Assoc Directors/Officers Aggregate 1 million Habitational Assoc Directors Officers Occurrence 1 million Are these standards? your input. Susanna, Our D&O does not have a similar breakdown and I don't know if it's standard for other carriers. If you check the Definitions section in your policy, it might contain more insight. However, what it most likely means in insco parlance is that you'd max out at the $1M level in either of two situations, both of which are unlikely: 1. A single wrongful act for which the damages equal or exceed $1M, or; 2. A number of wrongful acts which may or might not be related, but also for which the damages equal or exceed $1M during a single period of coverage, such as a year if you have an annual policy renewal. But if you had a $1M occurrence and six $50K occurrences, the most you're covered for would remain $1M total. Hope that helps.

SusannaM
(Florida)

Posts:289

12/04/2008 8:22 AM
Thanks JohnK.

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