The leaders of an HOA community can run into all sorts of legal trouble, jeopardizing their personal assets and interests. This is where D&O insurance comes in.
Understanding D&O Insurance for Nonprofits
What is DnO insurance? Simply put, Directors and Officers insurance is a form of insurance that offers protection to the directors and officers of an organization should they face liability. It can also apply to homeowners associations, as these entities usually have board directors and officers.
D&O insurance is designed to shield the insured from personal liability. For example, if a homeowner sues the HOA and names a board member personally in the lawsuit, D&O insurance can cover the cost of legal fees and potential damages. As anyone who has ever worked with an HOA knows, lawsuits brought on by homeowners or employees are not unusual. In fact, the most common allegation against board members is a breach of fiduciary duty, which can encompass a number of actions.
Types of Directors and Officers Liability Insurance
Standard D&O insurance policies consist of three types of agreements: Side A, Side B, and Side C.
- Side A. This agreement covers claims where the association cannot or will not pay for indemnification. For instance, if an association goes bankrupt and is financially unable to cover these claims, Side A steps in. Side A insures the individual officer and their personal assets.
- Side B. This side comes into play when the association does grant indemnification but the director or officer suffers losses. This coverage reimburses the association for legal fees. Side B insures the association and its assets.
- Side C. Also known as entity coverage, Side C insures the association and its assets. Additionally, it is designed to extend the coverage for the entity itself.
Inclusions and Exclusions of D and O Insurance
D&O insurance typically includes coverage for the following:
- Breach of fiduciary duty
- Decisions beyond the authority of the director or officer
Reporting errors- Failure to comply with the law
- Failure to adhere to regulations
- Third-party harassment or discrimination
- Inaccurate or insufficient disclosure
- Creditor claims
- Breach of contract claims
- Lack of corporate governance
- Employment malpractice
On the other hand, D&O insurance does NOT cover the following:
- Intentional acts of non-compliance
- Property damage
- Bodily injury
- Fraud
Keep in mind that taking out a policy after a claim has already been made will not protect the association. The policy should already be in effect when the claim is made for it to apply.
Comparing a Standalone DO Insurance Policy and a Package Policy
Sometimes, D&O insurance already comes as part of a package policy for homeowners associations. While there is nothing wrong with purchasing such a policy. a standalone D&O policy is still the best way to go.
Package policies rarely place emphasis on D&O insurance. Instead, it comes as a sort of add-on that does not offer adequate coverage. This is mainly because D&O does not command many premiums from HOAs. Additionally, many HOAs are inexperienced with insurance and don’t ask for more coverage. They feel that simply having D&O insurance is already enough.
But, responsible HOA leaders know that it is always best to be prepared. Homeowners have sued for much less, and legal costs can really add up. A standalone policy will give the HOA’s directors and officers better and more comprehensive coverage than a package policy. Plus, a standalone D&O insurance policy does not cost much more than a package policy with D&O insurance.
Here are the ways a standalone D&O policy differs from a package D&O policy:
Insured
Standalone Policy: Covers past, present, and future directors, officers, trustees, committee members, employees, and other association volunteers.
Package Policy: Only covers directors and officers during the policy period.
Coverage
Standalone Policy: Covers both defense and indemnity.
Package Policy: Only covers indemnity.
Defense
Standalone Policy: Defends against monetary and non-monetary damages.
Package Policy: Does not include defense.
HOA Management Company
Standalone Policy: Extends to the HOA management company or HOA manager.
Package Policy: Only covers the HOA.
Failure to Obtain Insurance
Standalone Policy: Provides defense for failure to obtain insurance.
Package Policy: Explicitly excludes defense for failure to obtain insurance.
How Does D & O Insurance Work?
To give a better perspective of how D&O insurance works, here are the steps of a sample scenario:
- A board director allegedly breached his/her fiduciary duty.
- One or several homeowners file a lawsuit against the board director.
- The board director gets in touch with their D&O insurance provider and gives a description of the claim.
- If the policy covers the claim, the insurance provider covers the cost of the defense.
- If the policy covers the claim and the board director loses the case, the insurance provider pays for the cost of the defense as well as the loss or damages.
Without D&O insurance, all of the costs above would have to come from the pocket of the board director being sued.
How Much D&O Insurance Is Enough?
Some states have laws that govern the minimum coverage requirements of D&O insurance. In California, for example, a development with 100 separate interests or fewer should have at least $500,000 in D&O coverage. Developments with more than 100 separate interests should have a minimum coverage limit of $1 million. In North Carolina, though, such requirements currently do not exist.
If there are no state requirements, homeowners associations should take the size of their community into account. Larger associations with many common amenities should have a higher limit. On the other hand, smaller developments can usually get by with a smaller coverage limit.
How Much Does Officers and Directors Insurance Cost?
D&O insurance is not something that state governments typically regulate. As such, the cost of this insurance can vary greatly. When coming up with a quote, insurers will typically consider the size of the association, its financial position, claims history, and risk appetite. On average, though, homeowners associations can expect to pay an annual premium of $1,240 for D&O insurance.
A Fair Warning
When evaluating an HOA’s insurance needs, D&O insurance should always make it on the list. Therefore, those considering serving on their association’s board should think twice if the HOA does not have proper D&O coverage. Otherwise, it could put the individual and his/her personal assets at risk.
Does your HOA need help to assess your insurance needs and file claims? An HOA management company like Clark Simson Miller is the best option for you. Call us today at 865.315.7505 or contact us online to learn more.
RELATED ARTICLES:
- Workers Comp Insurance: Why Your HOA Board Needs It
- How To Conduct An HOA Insurance Review And Why Do It?
- What Are The Most Important HOA Insurance Coverages?