June 2012 – As condominium and homeowner association management becomes more complex—and more and more board members are sued—it’s critical to monitor your directors and officers coverage to ensure you’re fully protected for your actions, argues Alan Chesler, a partner at Alan James Insurance in Sunrise, Fla.

Here we get Chesler’s and other experts’ suggestions on ensuring your policy has the right provisions and the right amount of coverages.

Good Old Days Long Gone

“There was a time when being appointed to an association board was somewhat ceremonial and considered an honor and a position of status,” says Chesler. “Those times, were, of course, when associations were thriving, collecting monthly assessments on a regular basis, and easily maintaining services, lifestyles, and property values. But times have changed as associations have been plunged into financial distress.”

You’re now required to make tough decisions about the management of your association, adds Chesler, and those tough decisions have resulted in more residents suing board members for a variety of issues. Maybe you have to cut services or employees because of insufficient funds or you’ve voted to pursue a foreclosure against an owner. It’s those difficult decisions, says Chesler, that trigger more claims and threats of lawsuits.

“HOAs are under enormous amounts of financial pressure right now,” agrees Gordon Goetz, president and CEO of Goetz Manderley, a community association management company based in Santa Maria, Calif., that manages 210 associations totaling 17,000 homes in California’s San Louis Obispo, Santa Barbara, and Kern counties. “With people not paying their dues, HOAs don’t have money to fund reserves and aren’t taking care of basic maintenance. There are homeowners who’ll sue the association to perform. Although it’s not rampant yet, it’s certainly something we’ve seen more of than in the past. The more struggles the board has to meet its fiduciary obligations because of financial issues, the more potential there is for a lawsuit.”

So start with having D&O insurance in the first place. “The main thing I’d advise boards is that they need to have D&O insurance,” says Jeff Vinzani, an attorney in Charleston, S.C., who represents associations. “Because more and more individual board members are being sued, more communities are carrying D&O insurance, and some have upped their coverage. However, some boards, especially at smaller communities, feel like that’s an expense they can do without. With the economic downturn, when you’re foreclosing on liens and more and more people are fighting to stay in their homes, or an owner has invested a lot of money in something that violates architectural standards, owners are going to fight back.”

Not having adequate D&O coverage can also put you at risk for intimidation tactics. “Sometimes a homeowner’s lawyer will attempt to intimidate board members by saying he’s going to sue not just the board but individual board members,” explains Vinzani. “Another scare tactic is for lawyers to sue for a dollar amount that’s more than the D&O policy limit. That may make board members reconsider whether they really want to tell this owner he’s violated the covenants if they’ll face a lawsuit for a huge amount. They might also say, ‘I don’t want to be on the board anymore.’ Normally, individual board members will be dismissed from unit owners’ cases. But if you’re new to this, it’s scary to be sued. Having adequate D&O coverage prevents board members from fear and intimidation.”

It also helps you recruit smart and qualified people to your board. “Almost all the associations I represent have D&O insurance, and if they don’t, I tell them to get it,” says Michael S. Hunter, an attorney and partner at Horack Talley in Charlotte, N.C. “It’s relatively inexpensive, and there’s really no reason not to have it. Without it, it’s sometimes more difficult to find qualified people to serve on the board.”

How Much Coverage Is Enough?

It’s not enough to just have D&O insurance. You need to be sure it covers you for all possible risks. Typical claims can include wrongful termination, sexual harassment, discrimination, and mismanagement of funds, but Chesler says policies should not only cover board members but also association employees and committee members or volunteers.

How much coverage is enough? “The minimum is probably $1 million per event per member,” says Chesler. “Policies should also include an indemnification clause that calls for the entire community to act as the insurer if the claim against a director—that doesn’t involve criminal or fraudulent acts or willful or reckless misconduct—exceeds the amount of insurance coverage. This would, obviously, result in a special assessment. To avoid that scenario, insist on higher levels of coverage. That usually doesn’t result in a financial hardship because, in most cases, the difference in premium between $1 million in coverage and $5 million in coverage is negligible.”

Goetz also advocates for higher policy limits for some HOAs. “Maybe for a small association with minimal obligations, $1 million is good,” he says. “Larger associations where the board has much more exposure to the homeowners and there’s quite a bit more involved with maintenance requirements should probably consider $2 million–$5 million. Or they should stay at $1 million and get an umbrella policy that would cover basic liability and D&O insurance. Umbrella policies are much less expensive than a basic policy. They’re very economical because they won’t come into play until that underlying policy is exhausted.”

That’s just what Duane McPherson is seeing more of his clients do. “Our clients aren’t necessarily changing their coverages; a lot are around $1 million,” says the Carrollton, Texas–based division president at RealManage, an association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas. “What we’re seeing is HOAs getting a $2 million– $5 million umbrella over that. It’s not that that expensive. It’s also a good way to manage risk because a lot of things boards can be sued for aren’t necessarily monetary—like violations. Those can create real problems with insurance coverage. The umbrella might cover those and will take over once the underlying policy’s limit is met.”

HOA Leader

Matt Humphrey is president of the Alameda, California-based, from which this article was adapted.

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