D&O Insurance Coverage in Your Community Association

These days, inflation is noticeable in everything we do, and community associations  are not immune to the pressures that higher costs and expenses can cause. When addressing these issues, Boards of Directors must balance cutting costs with ensuring that the association is properly maintained and protected.

Of course, when cutting costs,  it is always tempting for Boards to look to insurance coverage and premiums, as they represent one of the costliest expenses associations incur. However, skimping on insurance coverage now can generate significant costs down the road. For community associations specifically, it is imperative to have comprehensive directors and officers (D&O) insurance in place. Unlike the associations general liability policy, which protects the association itself, D&O insurance, as its name suggests, protects its board members, along with other agents of the association.

As anyone who has lived in a community association knows, keeping all members happy all the time is nearly impossible. It is inevitable that some homeowners will be unhappy, and sometimes that leads to  lawsuits. D&O coverage applies when lawsuits name individual board members or agents of the association, such as a property manager. Defending a lawsuit is expensive, and even when the case is dismissed or settles, the costs can still be substantial. Should a homeowner’s lawsuit be successful and judgment be entered against a board member or agent, the costs could be astronomical.

Without a D&O policy in place, these costs commonly fall to the association, or even to the board members or agents themselves if the association does not indemnify them. Board members are volunteers, committing their time, energy, and talents to their community.  In order to attract and retain qualified, valuable board members, associations should offer protection from expenses that, even when claims are completely unjustified, can be potentially ruinous.

Associations need to protect not only their board members, but also the corporations themselves. Many governing documents require that the association indemnify their board members and agents.  By doing so, the community association assumes responsibility for the costs that may arise when someone is sued for their work on behalf of the association. That transfer of liability  can be expensive, and without proper D&O coverage, associations may  face depleting their reserves or assessing the costs to its members. Additionally, may states require community associations to carry D&O insurance, making it a requirement in nearly all associations subject to those laws.

For example, in Colorado,  the Colorado Revised Nonprofit Corporation Act permit associations to provide indemnity to their directors, officers, and agents, while the Colorado Common Interest Ownership Act requires associations to carry such insurance coverage. The Minnesota Nonprofit Corporation Act and the Minnesota Common Interest Ownership Act provide the same rights and obligations in Minnesota.

D&O insurance coverage can vary widely, but typically covers the attorney fees and costs associated with defending board members and others against legal claims related to their work for the association, as well as any settlements or judgments that arise out of those claims.  While some policies may limit coverage to only board members themselves, it is far more common that the coverage include other agents of the association, including employees, committee members, management, and vendors.

Some policies cover lawsuits but not arbitration or mediation, even when alternative resolution is required by the association’s governing documents. Some policies may only cover claims for monetary damages, despite the fact that many lawsuits brought by homeowners against their association are seeking a specific action rather than financial compensation. Failure to enforce the governing documents, challenges to assessments or architectural review decisions, improper removal of a board member, and failure to maintain common areas are all examples of non-monetary claims that may be brought by a homeowner and would not be covered under such a policy.

Directors and Officers insurance is important coverage that every association should take seriously. Boards should discuss their association’s specific needs with their insurance agent and property manager in order to ensure that their policy provides adequate coverage. Although it may be difficult to fund a comprehensive D&O policy now, it could save the community and its members significant sums in the future.

Smith Jadin Johnson, PLLC aims to provide comprehensive legal services for HOAs, from daily governance issues, including collections, covenant enforcement, and governing document drafting, to representation on insurance claims. Our experienced team of attorneys can handle all of your HOA’s legal needs in house, eliminating the need to hire multiple firms to handle its legal affairs. Call us today if you have questions regarding adequate insurance coverage in your community.