Homeowner Association (HOA) boards and Condo Boards are integral to smooth community living operations. Volunteers serve on these boards to make a difference in their communities and protect their property values. This service comes with some risk, however, making it important for board members to understand their risk exposure and options to address it. One option is Directors & Officers (D&O) insurance. Exactly what is D&O insurance and what does D&O insurance cover? Helping HOA and condo boards mitigate risk is what we do at Archer Risk Services. In this article, we address the FAQs boards have about D&O insurance against potential risk exposures.
What Are the Risk Exposures for an HOA or Condo Board?
First things first – let’s understand how the role of volunteer board member carries risk.
- Property: Board members are accountable for the real and personal properties owned the association, such as clubhouses, buildings, equipment, etc.
- Personal liability: HOA board members can be personally liable for any mistakes or omissions in their duties. This means that they could be sued residents and held financially responsible for any damages that are awarded. There are also legal responsibilities arising from accidents on association property. Examples include injuries at the community pool or incidents at the entrance gate.
- Fiduciary duty breaches: HOA board members have oversite of the HOA’s money, bank accounts, valuable documents, and other non-physical assets. The Board has a fiduciary duty to the HOA and its residents. This means that they must act in the best interests of the HOA and avoid any conflicts of interest.
- Regulatory violations: HOAs are subject to a variety of state and local regulations. If an HOA board member violates any of these regulations, they could be sued the government or residents.
- Employment law claims: If the HOA employs any staff, HOA board members could be sued for employment law violations, such as wrongful termination, discrimination, or harassment.
- Employee risks: This pertains to employees of the HOA and any injuries they may sustain while on the job or potential loss of wages and income due to work-related incidents.
- Non-Physical Damages: This includes breaches of contracts, fiduciary duties, or instances of discrimination that might result in financial losses for third parties.
What is D&O Insurance and How Does It Fit?
D&O insurance, while often perceived as the primary protection for the HOA Board of Directors, has a more nuanced role. In essence, D&O insurance covers third-party damages that don’t pertain to physical property damage or bodily injury. Let’s clarify this:
- Physical Risks vs. Non-Physical Risks: Bodily injury or property damage (often abbreviated as BI/PD) refers to physical harm to people or damage to properties. For example, if someone gets injured within HOA premises or a property is damaged because of board negligence, that falls under BI/PD. D&O insurance doesn’t cover these physical damages. Instead, it focuses on non-physical damages, such as breaches of fiduciary duty or unintentional discrimination cases.
- Coverage Spectrum: D&O insurance isn’t solely for the protection of directors and officers. It extends to the management company, the association’s employees, volunteers, committee members, and sometimes even past directors and officers. The coverage encompasses claims related to actions that might have unintentionally harmed third parties in non-physical ways.
- Exclusions and Nuances: It’s essential to understand that not all D&O policies are identical. While good policies include fiduciary liability, some might exclude it. Moreover, D&O insurance often has a property damage exclusion, which implies that it won’t cover claims related to physical property damage arising from the board’s actions or negligence.
What Is the Difference Between D&O and E&O Insurance?
D&O Insurance is tailored to protect HOA and Condo Board members from personal liability. Errors & Omissions (E&O) insurance is also known as Professional Liability Insurance. E&O insurance protects the board as a whole.
D&O Insurance:
- Protects individuals serving on the board from personal liability.
- Covers claims related to alleged wrongful acts, including mismanagement, breaches of fiduciary duty, or other decision-making errors.
- Focuses on the personal assets of board members.
E&O Insurance:
- Protects the HOA or condo board as an entity.
- Covers claims related to professional errors or omissions, such as inadequate maintenance, errors in financial reporting, or failure to meet contractual obligations.
- Focuses on the organization’s financial well-being.
What else does D&O Insurance Cover?
- Employment Practices Liability: Many D&O policies include Employment Practices Liability coverage, which is crucial if the HOA has employees. This coverage addresses potential claims from employment-related issues and can sometimes extend to management companies.
- Breach of Contract Claims: If an HOA gets into a disagreement with a vendor and chooses not to pay, leading to a lawsuit, D&O insurance can come into play. However, the insurance might cover the defense but not necessarily the underlying damages related to the unpaid contract.
- Insured vs. Insured Exclusion: Some policies may have an ‘insured versus insured’ exclusion. This means if one board member sues another, the policy may not cover the claim. This emphasizes the importance of understanding policy nuances and exclusions.
How Does Our HOA or Condo Board Obtain D&O Insurance?
D&O insurance for HOAs is not typically required law in Texas. However, the decision to obtain D&O insurance may be mandated the HOA or Condo Board bylaws or governing documents. While it’s not a legal requirement, having D&O insurance is considered prudent to protect the personal assets of board members and officers in case of lawsuits related to their actions while serving the association.
D&O insurance is just one facet of the comprehensive protection needed. HOA boards must ensure they have a holistic understanding of all their exposures and the appropriate insurance coverages. Ensuring the board is adequately protected not only safeguards individual members but also upholds the integrity and smooth operation of the community they serve.
Talk with one of our HOA insurance gurus to learn more about how you can better protect your homeowners and your board members.