If you live in an HOA or serve on the board, Directors & Officers (D&O) insurance (D&O) provides essential protection. But shoddy coverage or a late claim can jeopardize your community.
What is D&O Insurance Anyway?
The Directors & Officers Insurance policy (“D&O”) is a small part of an association’s insurance coverage and premium puzzle, but it is a critical piece. D&O insurance protects the board: those community members who agree to accept a difficult and often thankless volunteer job to manage the association. Sometimes they make mistakes (or are accused of mistakes), and they should be covered.
And while D&O insurance covers boards, it also protects the association. In most cases, lawsuits against the board are still funded by the corporation (read: “owners”). D&O insurance lessens the potential liability for the entire community.
Unlike other pieces of the HOA insurance package, D&O coverage can differ significantly from insurer to insurer. There are two significant mistakes associations make in regards to D&O policies.
Mistake #1: Choosing Price Over Coverage
The first mistake is price over coverage. Boards have a fiduciary obligation to manage the association. This obligation includes the procurement of insurance that is in the best financial interest of the association. Accordingly, the first item of business is to obtain the best coverage for the association, because the best coverage will respond to the most claims and cost the association less at the end of the day. The existence of coverage at the time of a claim is the most important part of the insurance purchase equation.
Average D&O Policy Costs
The average D&O policy is probably about $1,000 for a $1 million limit with a $1,000 deductible. Notwithstanding this incredibly low price, one of the biggest problems we find is that the main focus in the purchase transaction is price as opposed to coverage. It is always easy to sell price. What boards must understand is that the point of sale price is only a small part of the equation. An association may save $50, $100 or even $500 on a policy, but if there is an uncovered claim, those purported savings will be dwarfed. The defense of a single uncovered D&O claim can cost the association thousands or tens of thousands of dollars. Moreover, if an association has to fund a lawsuit itself, it may not be able to defend it vigorously and may have to settle even though they did nothing wrong. Where will reimbursement come for those uncovered costs and settlement? It will come from the association. And from the inevitable special assessment.
Common Exclusions – Where You May Not be Covered
During the past year, I have reviewed thousands of claims. Very often, I review claims as part of an application when an association comes to us because a claim was not covered by its existing policy. Do you know what is covered by your policy? Many policies do not cover:
- defense of breach of contract,
- defense of failure to maintain or obtain insurance,
- discrimination claims,
- non-monetary claims,
- emotional distress damages,
- wrongful eviction,
- invasion of right of privacy,
- challenges to elections, or
- challenges to architectural review committee decisions.
Some policies may not cover past directors, community managers, developers on the board, volunteers, or actions between individual board members.
How does the association know what the best coverage is? There is no short cut –do your homework. The best place to start is with a professional that specializes in associations. If the professional does not have adequate experience, find one who does. Many associations rely on their managers, many of whom are extremely experienced. However, do not assume they are experienced. Ask your manager how many D&O policies they have reviewed, how many D&O claims they have been involved with, or ask them to explain to you what is or is not covered in various D&O policies. If you are satisfied, great! But still call the agent.
Mistake #2: Taking Too Long to Report a Claim
The second biggest mistake that associations make with D&O policies is the untimely reporting of a claim. In brief, the policy usually provides defense and indemnity for a “wrongful act” (the board’s alleged mistake) for a “claim” (demand that the board do or not do something about the mistake) made during the policy period and reported to the insurer during the policy period.
Here’s the catch: in some cases, you may want your D&O insurance to defend against a claim that was added to a separate claim that you have already tendered to a different insurance policy. Depending on the facts, your D&O insurance may deny coverage because you did not report that original claim in a timely fashion, even though that original claim did not trigger your D&O coverage.
This policy is different, and may not be familiar to most associations or their attorneys. As a result, many claims that would ordinarily be covered are denied because they are not reported in a timely fashion. Accordingly, it is imperative to understand in each policy how “wrongful act” and “claim” are defined and what the reporting obligation is. Insurers and courts have no mercy for late reports, and have strictly upheld the reporting requirements of these policies.
Fortunately, these two mistakes are very preventable as long as associations and their managers do the necessary homework. It is always better to be educated than surprised.
Joel Meskin, Esq., CIRMS, CCAL is the V.P. of Community Association Insurance & Risk Management at McGowan Program Administrators in Fairview Park, Ohio.