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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?
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 D &
O coverage to protect the association.
Duty of care. You have a duty to act with the 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".
G. Robert Kirkland, president of a Virginia Beach property management
consulting firm, and Michael A. Inman, an attorney, specialize in
Virginia community association issues and are affiliated with the
Southeastern Virginia chapter of the Community Associations Institute.
Bernie J. Grablowsky, Ph.D., PCAM
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