If you sit on condo, HOA, cooperative, or timeshare board, you devote many unpaid hours of your time working on association matters. You spend time reviewing budgets, construction bids, real estate matters, insurance proposals, and many other association matters, but doing so without a Directors & Officers (D&O) policy, could be costly. In my opinion, a D&O policy could be the most important insurance coverage your association purchases, because it’s covering you & your fellow board member’s actions.
So What is Covered?
D&O policies typically pay for costs that the association becomes legally obligated (in excess of the deductible) to pay as a result of a claim made during the policy period for “wrongful acts.” Unlike General Liability policies, which pay for claims resulting from property damage or bodily injury, D&O policies are focused on wrongful acts, which the D&O policy specifically defines. In general, a wrongful act is an actual or alleged act, breach of fiduciary duty, error, omission, misleading statement, or misstatement.
Although policy language may be broad, some of the most common claims that carriers see are a result of the following:
- Breach of fiduciary duty
- Failure to maintain the common area(s)
- Failure to follow the association’s bylaws or Covenants, Conditions, & Restrictions (CC&Rs)
- Failure to give proper notice proper
- Failure to count votes or proxies
- Unsuitable hiring or firing of board members
Two Coverage Policy: D&O and EPL
Nowadays most association D&O policies also include coverage for Employment Practices Liability (EPL), which is a separate coverage in and of itself. EPL protects the association & it’s board members against claims of discrimination, harassment, and various employment related claims such as wrongful refusal to hire a qualified applicant, wrongful demotion, libel, & slander. In recent years, there have been a surge in employment-related claims against associations, so we would recommend always choosing a policy that includes Employment Practices Liability coverage.
Occurrence vs. Claims Made… A Big Difference!
Most officers & directors are used to General Liability policies which are considered “occurrence” policies. This means they respond to incidents that occurred during the coverage period and are covered regardless of when a claim is reported. However, most association D&O and EPL policies are considered “claims made.” This means they only respond to incidents on or after the retroactive date (start date of no claims shown on the policy), only if those claims are reported during the policy period.
Full Prior Acts: A Necessity if Your Association Changes Carriers
If your association is looking to move their D&O coverage to a different carrier, you’ll want to make sure your new policy provides “Full Prior Acts” coverage. This allows for the carrier to cover claims back to a previous carrier’s retroactive date. If full prior acts coverage is not provided by the new policy, the association should look into “tail coverage” from their current carrier which gives the association an extended amount of time to report claims, but does typically cost a lot of money.
Coverage Language & Exclusions
Unlike many Commercial Property & General Liability policies, D&O policy language is not standard. Most of the coverage language and forms vary from carrier to carrier, so it’s important to not only read your policies, but to also have an agent who understands the coverage that is being offered. Although exclusions vary from carrier to carrier, there are a few that seem to be standard throughout the marketplace, such as the following:
- Wrongful acts that occurred before the retroactive date
- Continuing a wrongful practice after learning it is wrong
- Willful failure of the insured to comply with any law
- Failing to pay association debts in a timely manner
- Failure to maintain insurance (including Wind and Flood)
- Ignorance of association books & records
- Aiding or abetting legal actions of others
- Conflict of interest
- Receiving personal gain while acting as a director or officer
- Securities Act of 1933 or Securities Exchange Act of 1934 violations
- Fair Labor Standards Act (FLSA) violations
- Americans with Disabilities Act (ADA) violations
What to Look For
Since policies are not standardized, there can be many differences amongst carriers. We typically encourage our associations to make sure their policies include the following:
- Defense Costs Outside the Limits
- This allows for insurance company’s defense costs in a suit to not impact the liability limits of the policy. If defense costs are inside, a costly suit (with expensive attorney bills) could eat up much (if not all) of the association’s indemnity limit. If the carrier will not defense costs outside, we recommend for associations to either purchase higher liability limits or separate limits for defense.
- Insured vs. Insured Coverage
- This is a very common exclusion in large corporate D&O policies, but for associations it’s strongly suggested to have full Insured vs. Insured coverage for board members as conflict occurs between officers, directors, and the property manager.
- Duty to Defend Wording
- Insurance company is obligated to defend the association if there is a potential claim (better than the duty to indemnify).
- Property Manager Coverage
- Includes the property manager as an employee, just like an officer or director.
Price & Markets
Premiums for D&O policies can vary widely based on claims history, number of units, and number of board members. However, for condos under 50 units with a clean claims history, pricing usually starts under $1,000 for $1 million in coverage. Many different insurance companies provide D&O coverage, but when it comes to associations, it’s more of niche space. Large national & international carriers, such as Aspen Specialty, C.N.A., Great American, Liberty Mutual, Philadelphia, Travelers, & USLI offer insurance coverage through insurance agents such as Insurance Resources.
If your association is without Directors & Officers coverage, or if your association is unaware of the coverage (and/or exclusions) provided by their current provider, please reach out to Brian T. Ford, CPCU at 727-345-0242 or [email protected] who can assist you in handling all of your association’s needs.