ALL D&O INSURANCE POLICIES ARE NOT CREATED EQUALLY: BOARD MEMBERS SHOULD KNOW THEIR LIABILITY RISKS
In our overly litigious society, it is said that anyone can sue anyone for anything. The volunteers serving on condominium association boards sometimes feel as if they can be sued by almost everyone for almost everything – an overstatement, perhaps, but an understandable one. It is certainly true that condo owners are not always happy with the decisions boards make and it is also true that some owners express their dissatisfaction with board members by suing them.
Recognizing this, condo associations typically “indemnify” board members, promising to pay their legal expenses if they are sued. But that promise isn’t worth much to the trustees unless it is also backed by a Directors and Officers (D&O) insurance policy that covers their liability risks. Most community associations have this insurance, but they don’t always have the coverage they need.
D&O coverage comes in one of two forms: As an “endorsement” included in the association’s general liability policy; and as a stand-alone or “monoline” policy that is purchased separately. Stand-alone policies typically offer broader coverage and have higher limits than a D&O endorsement. They are also more expensive, but the difference in cost - which can be as little as $1,000 - is far exceeded by the value of the more extensive coverage they provide.
Non-monetary Claims
One key difference: Endorsements may not cover non-monetary claims - suits that accuse the trustees of doing or failing to do something, but don’t seek financial compensation for the ‘harm’. This is problematic because non-monetary claims - involving architectural review decisions, rules enforcement, collections and assessments, for example - also represent the majority of the D&O claims most communities are likely to file.
Stand-alone policies differ from endorsements, but they also differ from each other. For example, some exclude claims for discrimination, which is coverage associations definitely want to have. Many of the claims against associations we represent are filed with the Massachusetts Commission Against Discrimination (MCAD). Even frivolous claims – and many of them are – can require between five and ten hours of legal time even if they are dismissed, and significantly more than that if they proceed. The cost of a discrimination claim can be hefty even if you win.
Some D&O policies and some endorsements will pay only the damages awarded if the association loses; you want the policy to also to state a “duty to defend” the claim against you. You also want to make sure the policy limit doesn’t include the defense costs. If it does, the legal expenses could drain most of the coverage, leaving little if anything with which to pay any judgment against you. You want a policy that puts coverage for defense costs “outside,” not “inside” the policy limits.
There are some claims that stand-alone policies and endorsements will not cover. These include claims for:
Breach of contract;
Bodily injury or property damage; and
Failure to obtain adequate insurance.
Trustees should also be aware that the D&O policy provides coverage only for claims related to the performance of their official duties. So, it would not cover the fire damage resulting from a trustee’s well-intended but unsuccessful effort to repair a short circuit in an owner’s light switch (sometimes being helpful isn’t the best option).
Essential Details
A few other details to keep in mind when you are shopping for a D&O policy:
You want the list of “named insureds” covered by the policy to be extensive and specific, including not just current trustees but also past and future trustees, officers, volunteers and even spouses – anyone who might be targeted in the scatter-shot liability suits many plaintiffs file.
Pay careful attention to the notice requirements. Most policies require notice to the insurer of any claim. We suggest providing that notice when the board becomes aware that an incident may result in a claim, even if a suit hasn’t been filed. You don’t want to risk having a covered claim rejected because you failed to provide the required notice of it. And you can’t provide that notice retroactively,
Purchase adequate coverage, which is defined as sufficient coverage for any claims you are likely to incur. Fifty years ago, a $1 million limit was considered more than adequate. No longer. The policy limits an association chooses should be based on its size, but even for a mid-sized association, an umbrella policy providing at least $10 million of additional coverage above the policy limit would be realistic.
When purchasing a D&O policy – or any insurance, for that matter – you don’t want the cheapest policy you can find; you want the best policy you can afford. Please contact Mark Einhorn for more information and/or questions regarding this issue.