Some insurance carriers refer to Directors and Officers (D&O) Liability as miscellaneous liability. Take my word, it is not a coverage that should be considered miscellaneous. There is a world of difference between D&O coverage offered to you as an endorsement on your master policy and proper D&O coverage specifically written as a stand-alone policy.
Directors and officers have exposures to a broad range of potential lawsuits, including harassment, discrimination, negligence, and financial mismanagement. Claims directed at your association board members can be extremely costly. D&O liability insurance is such a critical component to any board’s insurance purchase. It provides directors and officers the essential protection against lawsuits, defense costs, and even potential settlement payments.
A director or officers’ duty is to represent the interests of the association and to make prudent decisions in running the affairs of the association. As a board member you have certain responsibilities while serving on the board:
- Duty of Diligence or Duty of Care – acting in good faith and consistent with what a reasonable prudent person would do in making decisions. As a board member, you need to obtain as much information as you can and consider all the facts before making a decision for the association.
- Duty of Loyalty – avoiding any appearance while serving on the board that will benefit you individually or misuse the trust given to you while serving on the board.
- Duty of Obedience – making sure the association is abiding by all applicable laws and regulations.
The D&O liability insurance is designed to provide defense and indemnity for wrongful acts and allegations against the board of directors. Here are a few of the most common community association Directors’ & Officers’ claims:
- The board’s failure to adhere to by-laws
- The board’s failure to properly send notice of elections
- The board’s failure to properly count votes/proxies
- Challenges by members regarding the power granted to the board by the by-laws
- Improper removal of board members
- Decisions by the board resulting in physical damage to the association’s property
- Challenges to assessments
- Approval of variances, generally by an architecture committee
- Breach of fiduciary duty
- Challenges to decisions of the Architectural Review Board
- Questions or challenges regarding easements
- The Board’s failure to maintain common areas
- The board’s failure to properly disburse funds
- Defamation by the board of a member
Are you sure you have the insurance protection to cover these claims? The D&O endorsement attached to your master policy will not provide the proper protection for the board for these claims. The D&O endorsements have too many limitations and exclusions. You must purchase a comprehensive stand-alone D&O policy. This policy should be reviewed to make sure the coverage includes the following:
_____ Board Members, Past, Present and Future are Covered
_____ Employees, Volunteers, Committee Members, and Spouses insured
_____ Property Manager Coverage
_____ Monetary and Non-Monetary Coverage
_____ Defense Costs Paid Outside the Limit of Liability
_____ Defense for Non-Employment (Third Party) Discrimination
_____ Full Prior Acts / Honor Pending & Prior Date
_____ Defense for Architectural Review Board Decisions
_____ False Arrest, Wrongful Entry or Eviction
_____ Defense for Failure to Maintain or Obtain Insurance
_____ Builder/Developer Protected as Board Members (even if they leave the board)
_____ Defense for Architectural Review Board Decisions
_____ Loss Definition Includes Punitive and Exemplary Damages (where insurable)
_____ Cyber Liability Enhancement
_____ Cyber Expense Coverage (Privacy Event Expense)
_____ Full Limit Defense Costs for Third Party Breach of Contract Claims
_____ Employment Practices Coverage
_____ Libel, Slander or Other Defamation
_____ Copyright, Trademark or Trade Dress Infringement
_____ Public Relations Expense
_____ Outside Directorship Endorsement
Most D&O liability policies are written on a “claims made” basis. This means that whatever insurance company insuring the association when the claim is made, will provide the coverage as defined as a wrongful act (and included in your retroactive date). This is much different than your Comprehensive General Liability (CGL) Insurance. The CGL policy is written on a “per occurrence” basis, meaning whatever insurance company insuring the association at the time the loss occurred will cover the loss.
The board should have a basic understanding of a retroactive date, continuity date or pending & prior (P&P) litigation date in the “claims made” D&O liability policy. Too often, we see a board vote for the lowest premium not realizing they have eliminated coverage for prior acts of the board.
Claims made policies normally include a “full prior acts” provision. Beware that this provision does not protect the association if the carrier uses a retroactive date or prior and pending date or carries an exclusion within the policy. To save premium, the insurance company will eliminate prior coverage and add this exclusion for claims that involve any prior action by the board – leaving you uninsured.
If your new D&O policy reflects a current retro date, the insurer will not allow claims that stem from actions or circumstances that took place prior to the retroactive date, even if the claim is first learned of or reported after this date.
D&O liability policies are individually manuscripted and unique. Be sure you obtain a comparison of the actual coverages provided.
Serving on the board of a nonprofit organization can be an extremely rewarding experience, and a great way to provide value and service to your community. However, serving on a non-profit board also comes with some potentially serious legal exposures that could put your livelihood and personal assets at risk. The proper D&O liability policy will defend the board and may pay for any settlements or judgments. Please make sure you understand the importance of the Directors and Officers liability coverage and purchase it properly.
Submitted by:
Connie is President of Connie Phillips Insurance. Connie has a Certified Insurance Counselor (CIC) and a Community Insurance and Risk Management Specialist (CIRMS). She is also a Community Associations Institute Educated Business Partner (EBP). Connie can be reached at 757-761-7757, or cpi@insurance-financial.net