When It Comes to D&O, Make Sure Your Board Is in the Know

Insurance has become an aspect of daily life. Medical and health insurance, automobile insurance, homeowners insurance…do any of us go very long without dealing with one or more of these?  In the realm of condominiums and homeowner associations, there are multiple and particular forms of additional insurance to be considered.  These policies form a necessary aspect of the association’s overall security (financial and physical).  General liability and property insurance must be carried by the association and is done so via what we refer to as the “master policy”.  Similarly, unit owners obtain what are commonly referred to as “H06” policies on their units, improvements to units and personal property.  The focus of this article, however, is a form of insurance designed specifically for the board members responsible for conducting the operations of an association.  This insurance is known as “directors and officers” or “D&O” coverage.Board members serve their associations in a fiduciary capacity. Generally speaking, this means that they owe a duty of care to the organization they serve and that they must make decisions based not on their personal desires, but rather on the best interest of the organization.  Board members at associations serve in this capacity whether they are “trustees”, “corporate officers” or the “directors” of an unincorporated association.  An inherent danger in the role of a fiduciary is that those being served may disagree with the decisions made or the manner of operations.  When this happens, those disgruntled by the alleged shortcomings of a fiduciary may, among other things, make a legal claim.  This is where D&O insurance policies come in.  A directors and officers policy provides insurance coverage for claims made against board members.  In fact, there are three common forms of D&O coverage: a) claims against the board members themselves; b) claims against the board members when costs are borne by the organization (i.e. the association indemnifies the board members); and c) claims made against the association (as opposed to individual board members) directly.  Expenses typically covered by D&O insurance include defense costs, settlement expenses and perhaps judgment amounts if a plaintiff prevails in a claim.Claims against board members can vary, as can the coverage provided under a D&O policy. Board members may face particular claims such as misrepresentation or negligence related to one or more transactions pertaining to the association’s business.  They may also face more general claims of breach of fiduciary duty, alleging that they have, in part or in whole, failed to properly perform their role.  Certain allegations (e.g. theft of funds, theft of property, harassment or discrimination) may give rise to criminal charges as well as civil claims.  D&O insurance coverage varies on such issues and some such claims fall within exclusions (exceptions to coverage).  Therefore, it is imperative that boards understand their coverage and work with their insurance agent to obtain the broadest range of coverage possible.  Note, however, that D&O policies will not cover all criminal claims and will not cover any intentional criminal activity.  This is for the obvious reason that accountability would be unacceptably low if persons could insure against their intentional criminal conduct.  When it comes to such behavior, our society’s top priority is to prohibit such conduct to the greatest extent possible.There are those who argue that even the D&O insurance which is available should not be among insurance offerings. In their view, having insurance coverage for wrongful acts or failures to perform, even as to civil claims, unacceptably reduces the level of accountability for those serving in fiduciary roles.  While this is a valid concern, it appears that the insurance industry has attempted to find the balance and draw the line through pricing and through negotiable and non-negotiable policy coverage exclusions.  In the realm of condominiums and homeowner associations, the vast majority of board members are volunteering their time to assist a non-profit organization.  If personal liability relative to alleged claims were part of the deal, associations would find it extremely difficult to find members willing to volunteer to serve in these positions.If your association’s governing documents require the organization to carry D&O insurance on board members, then the obligation to do so is clear. However, even if not, you may be wise to view such coverage as mandatory anyway.  As set forth above, absent provision of personal protection, most associations would be hard-pressed to find volunteers to serve.  Perhaps more compelling, almost all governing documents include language to the effect that the association will indemnify board members against claims.  If an association is indemnifying its board members but does not maintain D&O insurance, then the association’s funds are at risk for expenditures such as legal defense costs and potential settlements and judgments.  Since, at a minimum, every member of the organization is a potential plaintiff, and since legal expenses alone could bankrupt the average association in a large case, D&O insurance coverage, like general liability and property policies, is critical.In sum, D&O insurance is an important safeguard against claims that could have a devastating impact on an association. Since all policies are not created equal and since some exclusions may be negotiated, boards would be wise to review coverage and shop for their policy with the assistance of a qualified insurance agent who understands the needs of condominiums and homeowner associations.SidebarIf an association is indemnifying its board members but does not maintain D&O insurance, then the association’s funds are at risk for expenditures such as legal defense costs and potential settlements and judgments. Since, at a minimum, every member of the organization is a potential plaintiff, and since legal expenses alone could bankrupt the average association in a large case, D&O insurance coverage, like general liability and property policies, is critical.If you have any questions regarding this article, please contact Gary Daddario at gdaddario@meeb.com.