Board of Directors Insurance?

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!!!!

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.

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.

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

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)!

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.

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.

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.

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.

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.

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.

Good idea, but will they bother to read them? When you already "know" everything, there is nothing to learn.

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

I was the only one on my board to read our policy, too!

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.