Does My Association Really Need Director and Officer (D&O) Liability Insurance?

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Based upon many years of defending associations in all types of litigation, my answer to this question is yes. However, exactly what is D&O Liability Insurance, and what does it cover?

In short, D&O provides protection against claims alleging loss arising from mismanagement or wrongful acts. This may include a breach of duty (fiduciary or other), neglect, error, misstatement, misleading statement, omission or other act done or wrongfully attempted by the directors and officers. Claims may be brought for money damages and/or other types of relief (i.e., injunctive relief to challenge or prevent a board decision or action).

But wait… doesn’t the association’s General Liability policy of insurance cover these types of claims anyway? In short, the simple answer is: probably not. Although the term “general liability” in and of itself leads many people to believe that this type of insurance will cover almost every type of claim imaginable, in reality, General Liability insurance will not protect directors and officers in the same way as D&O because General Liability insurance usually covers third-party bodily injury and/or property damage claims, not claims for mismanagement or wrongful acts by Board Members, Directors, Officers or Managers. Claims which could trigger D&O coverage and are likely not covered by General Liability policies of insurance include:
• Defamation;
• Disputes over architectural issues and control;
• Discrimination claims (i.e., ADA and Fair Housing Act) [note: these types of claims are likely not “covered” by a D&O policy because they are illegal and/or are against public policy, but defense costs might be paid];
• Self-dealing;
• Willful acts and wrongdoing;
• Breach of fiduciary duty;
• Failure to properly pay association debts;
• Claims of improper personal gain(s) made against directors and officers;
• Failure to disclose information which results in harm/damage(s) to the association and/or its members.

Based upon my experience in defending associations against these types of claims, some things to consider when choosing a D&O policy include:
• Does the policy cover the association, directors and officers (current and past), committee members and other volunteers (this is often overlooked), employees and other members of the association acting under the direction of the Board of Directors?
• Does the policy also cover the estates, heirs, legal representatives or assigns of board members, directors and officers, committee members and other volunteers?
• Does the policy afford coverage for the community association’s manager who is not an “employee” of the association, but rather, is contracted?
• Does the policy cover wrongful-employment related claims?
• Does the policy cover board members that were developer appointed?
• Does the policy cover defense costs for claims of intentional/wrongful conduct?
• Does the policy cover defense costs for claims that are contrary to public policy, such as discrimination?
• Does the policy cover punitive damages claims?
• Does the policy cover claims for non-monetary claims (i.e., injunctive relief sought by an aggrieved unit owner)?
• Does the policy provide for defense cost payments to be made directly by the insurer or must the association first pay legal costs and wait for reimbursement by the insurer?
• Does the policy include coverage for claims that occurred years ago but are now presented to the insurer (i.e., retroactive date/full prior acts)?
• Does the policy provide for coverage of “non-owners” that sit on the Board of Directors?

Finally, the association’s Board of Directors must realize and understand that if there is no D&O coverage present for the association, its directors and officers, committee members, employees, manager and/or other members of the association acting under the direction of the Board of Directors, these people, who are often serving in a voluntary capacity for the benefit of the community as a whole, can potentially become exposed to personal liability for claims that are brought against them and are not covered by the association’s General Liability policy of insurance. Accordingly, obtaining a comprehensive D&O Liability Insurance policy is a must for every association in today’s day and age. Your association really needs it!

Edward Hoffman, Jr., Esq.
Originally published in the January/February 2011 issue of Community Assets.

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