D&O insurance basics

The D&O insurance basics that Community Associations Need to Know

Whether called a Property Owners Association (POA), Homeowners Association (HOA), or Condominium Association (COA), community association groups are legal entities able to enter into contracts and defend themselves in court.

As separate legal bodies, these groups are managed by a volunteer board of directors. The board’s role is to put association interests above those of individual board members or unit owners. Ultimately, the primary charge of the board is to protect, preserve, and enhance the tangible assets of the community association.

To that end, it’s vital for association directors and owners to understand insurance basics dictating their day-to-day operations.

Learning board duties is a good start

Understanding board duties is crucial in maintaining a community association, as failure to recognize basics can lead to a damaging D&O insurance claim. While association management is primarily grounded in common sense, there are aspects of governing based on lesser-known statutes and rules. Board members should therefore turn to community association insurance specialists when necessary. If a mistake is made, D&O policy does not provide coverage for board volunteers as professionals.

Basic questions Community Association members should ask themselves include:

  • Has each board member read association by-laws, rules, conditions, and restrictions?
  • Does the association have an annual audit of its financials?
  • Does the board require managers to have professional liability insurance?
  • Does the board regularly meet with an insurance professional to review coverage?
  • Does the board have written procedures for unit owners to share concerns?
  • Does the board have an official Conflict of Interest policy and require annual board member disclosures?

The basics of D&O liability insurance

In a basic D&O insurance policy, the board must manage two primary risks. The first is “wear and tear” risk items with a limited life – a building’s roof, paint job, and parking surfaces fall under this category.

“Unexpected perils” comprise the second type of risk. As the name suggests, these perils are not guaranteed to occur, making them one of the more difficult items for board volunteers to understand. Not every peril is covered under a basic D&O insurance policy, as it may be covered under a separate general liability policy. For example, “bodily injury” and “property damage” are not commonly covered by D&O liability policies. Defense against alleged third-party contract breaches, discrimination cases, and employment practices are also excluded from most D&O policies.

Read more: The Risks of Aging Infrastructure for Community Associations

Avoiding common community association D&O claims

Most Community Association liability problems are avoidable – it’s up to prospective unit buyers to know the facts when buying into a Community Association. Owners buying into an association are subject to various covenants, restrictions, and conditions.

Unfortunately, many volunteer board members who fail to read the fine print are often the same individuals putting forth basic D&O insurance claims. Placing board interests above those of the individual is the bedrock upon which the Community Association is founded.

Board members not understanding their role is another problem that can lead to potential litigation. At a minimum, new members should read association governing documents, followed by annual board training to update members on any changes to the law.

Read more: The Ins & Outs of Community Association Risk Management

What to know before reviewing a standard D&O insurance policy

  • Don’t review a basic D&O insurance through the lens of a typical publicly traded entity. D&O policies are more in line with management liability wrongful acts policies than something a private business would encounter.
  • Evaluate declarations pages for items subject to risk, such as policy terms, policy limits, deductibles, and prior and pending date exclusions.
  • The “list of forms and endorsements” is the most important item to review on the declarations page. On occasion, policies will come with a separate page that lists all forms and endorsements. Obstacles can arise when associations misunderstand or fail to review all pieces of the policy.

What does an insuring agreement look like?

The language of most common insuring agreements reads as follows:

“The Company shall pay on behalf of an Insured all Loss which such Insured becomes legally obligated to pay on account of any Claim first made against such Insured during the Policy Period or, if exercised, during the Extended Reporting Period, for:(a) a Wrongful Act;

(a) a Wrongful Act;

(b) Employment Practices; or

(c) Personal Injury or Publishers Liability; committed, attempted, or allegedly committed or attempted, by such Insured before or during the Policy Period.”

Key takeaways

Basic D&O policies are a critical piece of the community association insurance puzzle. A few takeaways for volunteer board members include:

  • See a community association insurance professional to help provide appropriate coverage.
  • Fully understand what constitutes a claim under basic reporting requirements.
  • Recognize the different types of exclusions and frequently denied claims.
  • Frequently denied claims are bodily injury, property damage, construct defects, and failure to report claims in a timely manner.

McGowan is a leading provider of Community Association Insurance products nationwide. Contact us today for more information about the D&O Program to protect your association and volunteers.

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