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Why Associations Need D&O Liability Insurance
by Bernie J. Grablowsky, President, UPA
Q. We are trying to save some money on insurance premiums, and a couple of the members are saying we are foolish to spend money on directors and officers liability insurance. Do you really think that we need the coverage?
A. We certainly encourage you to obtain directors and officers liability coverage. This policy will protect the board members, officers, employees, and committee members for actions, or failures to act, and decisions they make regarding management of the association. While suits against board members are rare, when they are filed it is generally an expensive experience.
Let’s look at what can trigger a lawsuit, which will require directors and officers liability coverage to protect the association.
Duty of care: You have a duty to act with the same care that a reasonably prudent person in a similar position would use under similar circumstances.
Duty of loyalty: You must refrain from engaging in personal activities or pursue a personal agenda that may not be in the best interests of all the owners. You may not use your position of trust to further your own personal gain.
Duty of obedience: You are required to perform your duties in accordance with applicable statutes and the terms of the association’s declaration and bylaws.
The variety of grounds of lawsuits that are brought against associations and their boards is significant, but we can fit most of them into the following categories:
Discrimination: Both under the Fair Housing Act and employment discrimination, including sexual harassment.
Architectural enforcement issues: Allegations of selective enforcement of the exterior maintenance requirements.
Financial: Allegations of failure to budget properly and/or maintain adequate reserves.
Breach of contract: Allegations by a vendor that it was terminated improperly or without cause as required in a contract.
Failure to abide by the governing documents: Allegations of the board or an officer exceeding the powers set forth in the covenants.
Defamation: These claims stem from statements made about members in meetings which are injurious and have no relevance to the operation of the community.
Breach of fiduciary duty: Board members have a high duty of observing care with respect to preservation of the association’s assets and managing its money appropriately.
Declaratory relief actions: This occurs when a suit is filed to ask the court’s interpretation of a provision in the covenants, such as an ambiguous architectural regulation provision concerning fences or auxiliary structures.
Injunctive relief actions: This most commonly occurs when an association member challenges a board vote to take certain action that a member believes is contrary to the documents. It can also be used to force action of the board when a member believes the board should be acting and it is not doing so, such as effecting maintenance to a common element which is in disrepair.
One subject that is critical for discussion is the “duty to defend” provision. Most policies require that the insurance company defend the association by paying attorney’s fees and costs if it is sued for money damages, but some do not provide such coverage where the relief sought in the suit is only for injunction. You should make sure that this coverage is included.
Regardless of the quality of your coverage, you certainly want to limit your possibilities of being sued. This is called “risk management”.
Our thanks to G. Robert Kirkland, president of a Virginia Beach property management consulting firm, and Michael A. Inman, an attorney specializing in Virginia community association issues, for providing this information.
The UPA Management Library contains an ever-growing collection of articles and papers of interest to association boards and management as well as rental property owners.
If you have an idea or a possible submission for inclusion in the Library, please contact Debra Young at firstname.lastname@example.org
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