Directors and officers (D&O) coverage is critical for any organization that is governed by a board of directors. It provides coverage for those decisions that the board makes in good faith for the benefit of the organization. They need this coverage because sometimes people make decisions based on the information they haveoand sometimes those decisions turn out wrong.

This is an important coverage for any organization, especially when that organization is run by volunteers, or in the case of a condominium association, by volunteer homeowners. The board members of a condominium association may not have any experience in serving on a board. This isnit necessarily a bad thing, but it can increase the possibility of the board making decisions that could come back and cause them problems later.

A condominium association board is responsible for making financial decisions for the association. Condo associations receive fees from unit owners, and the board must use that money for the operations necessary to the association. These operations include the purchase of insurance, the care and maintenance of the property, landscaping, monitored alarm systems, and more.

Risks for Condo Boards

Like any other business, a condo association should retain a certain amount of earnings. They might need money in the bank in case of an emergency. If the HVAC unit in building three goes out, they need money available to call someone in to get that unit repaired or replaced because in Florida (and other states), no one wants to live without air conditioning and/or heat.

If there is a fire, the association should have money in the bank to cover the insurance deductible and have some additional money available to get contractors out to repair the fire damage.

The problems come up for the board when an unforeseen event happens that breaks their budget or exceeds their retained earnings. Thatis when the board needs to make a critical decision: Do they find the money or put off the work?

One way that an association board can find money is to assess the residents. They simply determine how much money they need for the project and divide it up equally between the residents. Then they send everyone a letter stating how much money each one needs to pay to the association, when it is due, and why they need it. This is normally met by angry residents who may not have fully read the notice, attended the public meeting, or havenit taken an interest in the association governance until it hit their wallets.

Another way they might raise that money is over a period of time where they use the money that comes in from fees, cut a few expenses, and potentially by making certain investments. This could be an option if the work doesnit need to be done immediately and thereis a low risk that the issues will get worse over time. As for investing, like any other investor, an association board could decide to invest reserve money and make a risky decision.

All of these risks could potentially turn into a lawsuit or claim filed by a resident stating that the board made a bad decision.

ï If the board levies an assessment, someone could claim misuse of funds, because there ìshouldî be more money available for projectsoespecially capital projects.

ï If the board chooses to invest money, and that investment doesnit produce the kind of revenue that the association needs, the claim could be for poor investment decisions.

ï If the board chooses to attempt to wait and save as much money as possible in hopes that the building doesnit get worse before the repairs can be made, the claim could be that they knew of a problem and didnit take appropriate action to fix it.

All of these potential claims are in the realm of the D&O policy. It is designed to protect the board of directors against claims that they made the wrong decision. It can also protect individual board members from individual claims against them for their decisions.

Understanding Association Directors & Officers Liability

There are two significant issues with association D&O policies that must be addressed.

First, every D&O policy is different and must be handled as such. In many states, it will be the boardis responsibility to read their own policies, understand them, and be aware of any exclusions or limitations that might be included in the policy. However, most condo association boards arenit staffed by insurance professionals who read and understand these policies. They are staffed by homeowners who may not even fully understand their homeownersi policies.

Thatis why the board truly needs an agent or broker who can help them to understand what is covered by their policies and what is not covered. The exclusions and limitations are not standardized, and because of that, there should be someone on their side who can help them to be aware of these policy details if not help them to negotiate with the insurance company to get certain exclusions removed or mitigated in some way.

Another issue that may come up has to do with budget issues. If the board looks at their budget and decides they need to make cuts in their insurance program, certain policies might fall to the wayside, including potentially the D&O policy. Not only is that the sort of decision that could give rise to a D&O claim, but itis the kind of decision that (without insurance) could cost the board members significantly.

Wraight, CIC, CRM, AU, is director of Insurance Journalis Academy of Insurance. He has written numerous articles for Insurance Journal and My New Markets and is the co-author of Risk-Proof Your Business – The Complete Guide to Smart Insurance Choices. As a sought-after speaker, heis shared his insights multiple times at various insurance industry events nationwide. He can be reached at pwraight@ijacademy.com.