The ABC's of D&O Insuring Your Board's Decisions

 Good afternoon—and welcome to the board. Your mission should you choose to accept it is to make  decisions to better your building. The residents may not like you and, more  importantly, may not like those decisions. Nevertheless, keep doing the job you’re doing. In a worst-case scenario, you will be sued. Perhaps more than once.  Should anything go wrong, don’t worry; you’re protected by the board's D&O insurance. Good luck.”  

 On-the-Job Protection

 You volunteer to be on your co-op or condo association’s board. You do your best to help make the right decisions and make your HOA a  great place to live. Unfortunately, one of your fellow residents doesn’t like a decision you made and takes you and the rest of the board to court.  They are suing for thousands of dollars—maybe even millions. Your home, life savings and other assets are at risk if you  lose.  

 With stakes like that, it would be virtually impossible for co-op and condo  boards to find volunteers if there wasn't some form of protection from lawsuits  resulting from the decisions made by board members in the course of doing their  job. Fortunately, that protection exists, in the form of Directors and Officers  insurance—D&O for short.  

 Some people think that it's only the board that initiates the lawsuits when  homeowners are late with dues, or because they broke the rules, but lawsuits  are a two-way street, says Kevin M. LaCroix, Esq., executive vice president of  OakBridge Insurance Services, an Ohio-based insurer with clients in New Jersey  and New York.  

 “They can be sued by members of the HOA and by third parties who provide services  or goods to the association,” says LaCroix. “There’s no reason to serve on a board and face risk of potential liability without  adequate coverage.”  

 Take a recent lawsuit profiled in The New York Times where the former president  of a co-op board sued the board, claiming that racial discrimination was the  reason the board did not let him buy a neighboring apartment. The board debated  that the resident couldn’t afford both units. They went to court—and the legal fee meter started ticking overtime.  

 A few years ago, Moneymagazine profiled an ongoing legal battle in California where a homeowners  association was suing a resident for taking too long to do their landscaping.  The resident lobbied back with a countersuit.  

 In Michigan, a resident filed a lawsuit to against his condominium association  to resolve a dispute over who should pay for a road repair in a condominium  complex where he owns a unit. The resident wasn’t happy that the association was assessing the residents to pay almost $30,000  to repair an access road, which the resident said was a public road. The  resident decided to sue the board and let a judge decide.  

 “People get emotionally excited about what you do as a board member,” says Kevin Davis, president of Kevin Davis Insurance in Los Angeles,  California. “You tell them no you can’t have a pet, or hang your laundry on the balcony. The residents will say ‘Who are you to tell me that I can’t?’ It’s the number-one reason for lawsuits.”  

 Crash-Helmet Coverage

 Think of D&O, or directors and officers, insurance, as your own personal protective helmet  from fastball lawsuits. “It [provides] you with a lawyer to defend against claims if you get sued,” says David J. Byrne, a shareholder attorney with the Lawrenceville-based law  firm of Stark & Stark, “but it doesn't protect anybody from criminal actions, such as fraud or  self-dealing.”  

 “What it does cover, for the most part, are things like employment  discrimination, architectural disputes, inadequate reserves, negligence,  third-party breach of contract, arguments of reassessments, liens, defamation,  basically various types of breach of fiduciary duty,” says Paul Felsen of Felsen Insurance Services, Inc. in Denville. “There are literally hundreds of actions that can be brought against a board  member these days when people are unhappy. Every policy is different, and every  policy has different exclusions. A typical exclusion would be any act that's  deliberately dishonest or fraudulent, any willful violation of the statute or  regulation.  

 “Normally, if an action is brought against the property manager, the manager is  usually included under the D&O policy, but the coverage sometimes will fall under the property manager's  professional liability coverage,” Felsen continues. “This is not a professional liability coverage for the property manager per se,  or the property management company, [but it] includes the property manager as  an additional insured, though the coverage is not broader than what that would  be for the board itself.”  

 Fortunately, Davis says that in most lawsuits, “They are suing because they want a right to do something,” rather than for a big financial payout. “For example, an individual in Unit H on the second floor had a nice view, but  now a tree is blocking it. He asks to have it cut down. The resident in the  unit below him says no, it’s shading his apartment. In this case, the board didn’t uphold their fiduciary responsibility. If Unit H bought a view, they need to  make sure they maintain the view, so they’ll go to court, just to see who’s right and who’s wrong.”  

 Whos & Whats

 To find out if your board has a policy, just ask. However, don’t assume you’re automatically covered without taking a good look at the policy. Like  fingerprints, every D&O policy is different.  

 “My personal opinion—and I would like to think that most insurance professionals agree with it—is when you see the coverage included in a package policy and you look at that  premium and the premium comes out to $247 or something like that, you're really  getting a plain vanilla coverage with lots of exclusions and not very, very  broad coverage terms and definitions,” says Felsen. “We strongly recommend that directors coverage be written on a monoline,  stand-alone policy through a company that specializes in D&O for community associations. The premium is going to be more, but the coverage  is going to be much, much broader and you're going to be dealing with a company  that's an expert in the field.”  

 When negotiating your D&O coverage, Byrne says “It's nice if you can try to get a 'consent to settle provision', which is that  the D&O carrier doesn't have the right to settle a lawsuit without the board's  consent. And I think they ought to try to get a provision by which they are  allowed to choose their own lawyer, provided that the lawyer is willing to  accept the rates that the insurance company charges or will pay.”  

 “I warn our associations to be careful when drafting policies,” says Jennifer Loheac, an attorney with Becker & Poliakoff in Morristown. “For example, governing documents include indemnity language for board members,  and volunteers on committees would frequently fall under this coverage as well.  However, that's not always clear. Associations should also be aware that if the  association agrees to indemnify people, but the insurance coverage does not  cover the defense or the action, the association may have to make up the  difference. This is why I advise associations to try to be very clear on  exactly what their D&O policy covers. To the extent the association intends to cover many volunteer  committees, maybe consider actually naming those committees in the policy.  Also, as tempting as it is for many communities to create specific policy  resolutions promising indemnification, the bottom line is that if the insurance—for whatever reason—declines coverage or issues partial coverage, it's better that the association  does not draft a lengthy policy resolution promising volunteers indemnity,  defense, etc. because this can be relied upon by volunteers, and the  association may end up footing the bill for very expensive, unanticipated  actions where costs or scope exceed insurance coverage.”  

 There are exclusions to consider as well. “The myth is that D&O insurance covers everything, which obviously isn’t true,” says Adam S. Collins, CIC, and assistant vice president at Aon Affinity, Ian H.  Graham Insurance in Sherman Oaks, California, which has multiple clients in the  tri-state area. “Some of the more important exclusions contained in a D&O policy are damage or destruction to tangible property, bodily injury,  construction defects, and intentional criminal acts.”  

 That last item is a very important one. Does D&O coverage protect the co-op, condo, or HOA from criminal actions by the  director or officers? It seems a straightforward enough question but it can sometimes be surprisingly  tough to answer.  

 “Most, if not all, D&O policies contain a provision that excludes intentional criminal and fraudulent  acts committed by board members,” says Collins. “However, our policy will continue to defend the directors and/or officers until  such time that a criminal action can be proven. The policy will then cease to  provide any further protection once it is determined that a board member  knowingly committed a criminal or fraudulent act.”  

 D&O coverage also doesn't indemnify a board or board member against decisions made  "in bad faith," or with illegal intent. If a board is found to have acted in an  illegal manner—deliberately discriminating against a prospective buyer, for example—and are hit with punitive damages, members are on their own when it comes to  paying them.  

 What is the Cost?

 A stand-alone policy typically starts at a minimum annual premium of around  $1,200 and will increase depending on the number of units in the building and  other factors. The co-op or condo is generally responsible for paying the  premium for this specific type of coverage.  

 “Premiums can also be impacted by additional exposures—such as commercial tenants, to name one—and/or the number of employees,” says Collins.  

 According to Steve Reisler, vice president of TD Insurance, the coverage arm of  TD Bank, “The cost of D&O coverage is usually based on the number of units in the association, and the  association's loss history. An association can pay as little as $500 to as much  as $10,000 annually for coverage, which is traditionally paid for out of the  maintenance fees collected from the unit owners. There are several companies  that provide D&O coverage for community associations. Some of them include Chubb, CNA, Chartis,  Great American and Travelers. Most of the D&O is offered through managing general agents (MGA's) like McGowan, Distinguished  Programs and Ian H. Graham. These MGA's specialize in providing insurance for  Community associations.”  

 When it comes time to cutting a check, Collins says that not all D&O policies are created equal. “Most stand-alone policies contain a ‘Duty to Defend’ provision,” says Collins. “In other words, our D&O provides a defense for the board once they accept the claim. The obvious  benefit is that the association doesn’t have to front the money (except for the retention) in hopes of having it  reimbursed to them by the association or the insurance policy, as is the case  with standard D&O policy or embedded form. The converse to that is an “indemnification” provision contained in some less comprehensive D&O forms.”  

 If your association doesn’t have or won’t get insurance, the Nonprofit Risk Management Center (NRMC), says that every  state has a volunteer protection law and the federal Volunteer Protection Act  (VPA) became effective in September of 2010. The Act provides that, if a  volunteer meets certain criteria, he or she shall not be liable for simple  negligence while acting on behalf of a nonprofit or governmental organization.  

 The VPA also provides limitations on the assessment of non-economic losses and  punitive damages against a volunteer. The Volunteer Protection Act does not,  however, protect a volunteer from liability for harm "caused by willful or  criminal misconduct, gross negligence, reckless misconduct, or a conscious,  flagrant indifference to the rights or safety of the individual harmed by the  volunteer." The act does not prohibit lawsuits against volunteers nor does it  provide any protection for nonprofits. Some of the notable stand-alone D&O programs that are specifically tailored to community associations are written  with CNA, Travelers, Great American, Chubb and Chartis.  

 To reduce any potential expenses from D&O insurance, it’s best to have a board that is well informed of their responsibilities. “Know, understand and follow the bylaws and CC&R’s, educate all board members, and attend law seminars, risk management seminars  specifically designed for community association boards,” advises Collins, who recommends both The New Jersey Cooperator and the national and the New Jersey chapters of Community Associations Institute  (CAI-NJ) as viable resources for board member education.  

 It's tough enough to get people interested in taking positions on their co-op or  condo board without the threat of lawsuit damages hanging over their heads.  Board education and good communication are two pieces of protection against  legal action; a solid D&O policy is third piece of the puzzle.   

 Lisa Iannucci is a freelance writer and author and a frequent contributor to The  New Jersey Cooperator.  

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