Directors & Officers (D&O) Insurance
Directors and Officers (“D&O”) Insurance protects volunteers from personal liability for decisions they make while on the board. D&O insurance coverage provides protection beyond the association’s general liability policy and covers board negligence and breach of fiduciary duties, provided the errors or omissions were:
- Within the scope of the officer or director’s duties,
- Performed in good faith, and were,
- not willful, wanton, grossly negligent.
D&O insurance policies nearly always pay the cost of defending a claim in addition to paying for any settlement or judgment that might arise against an association or its directors (within policy limits). Insurance carriers handle defense costs in one of the following ways:
- Unlimited Defense. There is no limit in the policy on defense costs. If an association has a $1 million policy and the carrier pays $700,000 in legal fees and expert costs, the association still has $1 million to pay for any settlement or judgment that might arise.
- Burning Limits Policy. A burning limits policy pays defense costs out the policy limits. If an association has $1 million policy and the carrier pays $700,000 defending the board, only $300,000 will be left to settle the case or pay any judgments. Burning limits policies are less than expensive than Unlimited Defense policies.
Boards should consult an independent insurance broker to make certain the following are included in the policy:
- Current and former directors and officers,
- Committee members and other volunteers,
- Employees, and the
- Manager and Management Company.
All policies contain exclusions. Following are common examples of D&O exclusions:
- Insured vs. insured claims (the board is sued by one of its directors).
- Failure to carry adequate insurance; a lawsuit by owners against the board for its failure to carry sufficient limits or its failure to purchase insurance to cover certain losses such as earthquake coverage.
- Breach of contract (an action by members or third parties for breach of the CC&Rs or the breach of a contract).
- Discrimination and employment practices liability. If an association has employees, the board should purchase “employment practices liability” coverage.
- Bodily injury and property damage are always excluded in D&O policies.
- The extra protection afforded volunteer directors is generally not available to board members who own more than two units.
D&O policies do not always use the same definitions. When it comes to matters such as: “who is an insured” or what constitutes a “wrongful act”, the precise definition can greatly affect coverage”.
As with general liability policies, certain minimum levels of coverage are required. Extra coverage can be obtained through the use of an umbrella policy. Such coverage should be obtained for the entire board.
Actual and potential claims must be reported to the association’s insurance carrier timely or it risks loss of coverage.
HOA Financial Management Services