Imagine you sit on a board of directors that makes a mistake or error in judgment that results in a lawsuit. Imagine the case goes to trial, and the judge awards the plaintiff hundreds of thousands of dollars in damages. Now imagine that each member of that board of directors—including you—is held personally liable for their portion of those damages.
In our overly litigious society, the best way for volunteer board members to protect themselves against financial ruin in the event of a lawsuit is to purchase directors and officers—or "D&O"—insurance, which indemnifies board members from claims made while acting in their individual capacity on behalf of their homeowners association (HOA).
Unlike general liability insurance, which merely covers liability against third party bodily injury and property damage, D&O insurance protects directors against claims made for what are perceived wrongful acts or omissions by said directors while they are conducting HOA business.
"When you agree to serve on a community association board of directors, you become part of a growing number of volunteers who take on liabilities they never considered," says Kevin Davis, president of Kevin Davis Insurance Services, one of the major D&O carriers in the condominium association marketplace. "Board members are required to perform such duties as interpreting, revising, and enforcing the association documents. They also enter into contracts, hire and fire people and expend association funds. Any of these actions could result in a lawsuit alleging such things as breach of contract, waste of corporate assets, discrimination, or acts in bad faith, just to name a few."
According to Joel Meskin, a senior vice president for IHG Insurance, Aon Community Association Services, some of the most common D&O claims include the board's failure to adhere to by-laws, properly notice elections, maintain common areas, or properly count votes and proxies; challenges by members regarding power granted by the board by by-laws; improper removal of board members; decisions by the board resulting in physical damage to the association's property; breach of fiduciary duty; questions or challenges regarding easements; financial mismanagement; or defamation by the board of a member.