#1 Board/Director Rule: Never serve on a Board of Directors for a community that does not have proper Directors & Officers (D&O) insurance coverage in place. Without such coverage, money may not be available to defend you in the event that you are personally sued by an angry homeowner - leaving you potentially exposed to covering such costs out of your own pocket! Of the different types of insurance communities need to carry, D&O is the least standardized. For instance, did you know there are three areas of coverage?
- Side A coverage protects Directors from claims of wrongful acts when the Association refuses or is unable to provide indemnification
- Side B is for claims by the Association for money paid to indemnify a Board member
- Side C is for claims by the Association against the Association itself.
Internal lawsuit coverage
Normally, insurance cannot be used when parties within the same corporation are suing each other (ex: the Association suing an individual Board member, or Board members suing each other). However, in Georgia this assumption has been weakened. At the trial level, the D&O insurance carrier (St. Paul Mercury) obtained a judgment against the FDIC and former bank officers, barring coverage under the usual insured v. insured exclusion. However, the Georgia appeals court reversed the ruling, saying that such exclusions are ambiguous under state statutes, and outside evidence might be necessary to determine intent.
Timing of Contract
In a Rhode Island case (Transched Systems v. Federal Ins.), the insured client negotiated to sell its software products. Following delivery, the purchaser realized that the seller had breached the asset purchase agreement, and that the senior officers misrepresented the software. Since the seller was no longer in business, the purchaser attempted to collect a judgment from the seller’s D&O insurance company, but was denied based on the breach of contract and other exclusions. The court reversed this, saying that contract exclusion did not apply since the misrepresentations took place before the contract was formed.
Over in Kentucky, (State Auto v Highland Terrace Counsel of Co-owners), Highland Terrace was sued by an owner trying to block a $700,000 special assessment. The Association's D&O claim was denied by the carrier. The court upheld the denial, since the underlying suit did not allege claims against the individual members of Highland Terrace for which the insurance could have had an indemnity obligation. The State Auto D&O form did not provide entity coverage to Highland Terrace.
The above situations illustrate why it is critical that you use a professional insurance broker who regularly operates in the HOA industry – preferably someone who is active with the local Community Associations Institute (CAI) chapter.
While there will always be kinks in obtaining the best coverage possible, here are some ‘best practices’ you can implement to reduce risk exposure, according to insurance attorneys:
- Create term limits
- Locate and train Board volunteers with diverse sets of skills and backgrounds
- Evaluate the quality and effectiveness of Board meetings, including the use of agendas, the preparation and distribution of materials, and the timing and length of meetings
- Keep apprised of governance trends and legislation
- Develop and adhere to a code of ethics
- Develop and implement committees to oversee and monitor areas of potential liability, such as director nomination, financial audits, and regulatory compliance
- Prohibit related-party transactions or require independent review of such transactions
- Maintain open and active homeowner relations