When Directors’ and Officers’ Insurance Isn’t What You Think It Is | A Wake-up Call for Community Association Board Members
Over the last several months, I have encountered several situations in which condominium and homeowners’ association board members were shocked to learn the true nature of the directors’ and officers’ liability coverage they believed was designed to protect them. In each case volunteer board members were named individually in lawsuits filed by dissatisfied owners. Little did they know that after the claims were made, they discovered that the policy they had relied upon did not provide the broad protection they assumed existed.
These board members believed they had purchased traditional directors’ and officers’ liability insurance. Instead, they learned that the policy functioned more like a limited legal defense program than a comprehensive liability policy. The distinction can be significant. When a board member is sued, the expectation is often that the insurance company will not only provide a legal defense but may also cover litigation-related expenses and, when appropriate, pay settlements or judgments. Yet many policies contain extensive limitations, exclusions, conditions, and reimbursement obligations that can dramatically restrict coverage.
The lesson for every community association board is simple: Do not assume your insurance coverage provides protection simply because of the insurance declaration page, which sets out the policy limits. Board members have a fiduciary obligation to understand the scope of the association’s insurance program, particularly the exclusions that may eliminate coverage when it is needed most.
Too often volunteer board members believe insurance matters are being handled by someone else. Some assume their management company has reviewed the coverage. Others assume the association attorney has already analyzed the policy. While managers and attorneys can certainly provide valuable assistance, the responsibility for understanding the association’s insurance program ultimately rests with the board itself.
One recent example is a policy issued by a well-known legal defense insurance company. The policy expressly provides that it is a legal expense policy and not a traditional liability policy. According to the policy language, coverage is triggered only when a claim is made against the insured and the association’s existing insurance coverage has been denied or determined not to apply. The clear language of the policy further established that it does not indemnify the insured for money damages, judgments, or other damages that may be awarded in the lawsuit.
In addition, the policy provided the following:
- The insurer selects the attorney, not the board.
- Coverage is limited to a maximum of three claims or lawsuits during a 12-month policy period. (This limitation can be quite problematic during complicated association litigation when multiple members sue.)
- Coverage is only available after required underlying insurance policies have first been notified and have denied coverage and such denial of notice is provided within a set period of days. (Therefore, even if coverage would otherwise be afforded, if there is a delay in providing the notice of denial from other insurance carriers, the claim can be denied!)
Only a review of the actual insurance policy at issue will determine the extent of the coverage provided. Under many such policies’ limitations and exclusions section, the insureds (meaning either the association and/or the actual board members named in the litigation) remain responsible for numerous litigation expenses. The bare bones “director and officer liability policies” being sold may exclude the following:
- Expert witness fees and costs
- Deposition fees and costs
- Paralegal costs
- Copies and fax charges
- Legal research costs
- Travel expenses within Florida
- Telephone and long-distance charges
- Data processing charges
- Standard U.S. mail postage
- Transcript costs
- Court reporter fees
- Attorney travel expenses outside Florida
- Trial exhibits
- Expert witness and nonexpert witness fees
- Overnight delivery charges
- Surveillance expenses
- Investigator fees
- Service of process fees
- Court fees and court costs
- Messenger fees
- Appeal-related expenses
- All other litigation-related expenses not specifically assumed by the insurer in the policy.
The policy may even provide that if the insurer advances certain costs, then those amounts may be required to be reimbursed by the insured within 30 days. Failure to reimburse such expenses may result in the insurer ceasing payment of further legal fees associated with the claim! For many associations these expenses can become substantial, particularly in complex litigation requiring expert testimony, extensive discovery, or appeals.
Policy Exclusions Every Board Member Should Understand
Director and officer liability insurance policies can contain numerous exclusions which limit when a defense will be provided. Following are examples:
- Claims or lawsuits that occurred before the policy’s effective date
- Lawsuits filed outside the State of Florida
- Claims not timely reported to the insurer
- Appellate proceedings and appeals
- Class action lawsuits
- Federal court lawsuits, except limited categories involving service animals, emotional support animals, housing discrimination, or Americans with Disabilities Act compliance
- Claims arising after the policy expiration date
- Cases in which the insured is the plaintiff
- Post-judgment proceeding
- Fair Debt Collection Practices Act claims
- Claims involving properties not listed as scheduled locations
- Workers’ compensation-related claims
- Disability benefit claims
- ERISA-related (Employee Retirement Income Security Act) claims
- Unemployment compensation claims
- Intellectual property disputes involving copyrights, patents, trademarks, trade secrets, or trade dress
- Environmental damage claims
- Claims in which the insured employs its own attorney to handle the defense, subject to limited exceptions
- Claims against current or former board members where the association has sued that board member
- Claims involving pollution-related allegations
- Lawsuits between current and former board members suing each other vs. the association suing a former board member
- Lawsuits where the association is suing its own board members
- Claims not first reported to underlying insurance carriers in accordance with those policies
- Claims where the insured declines representation by the insurer’s designated attorney
- Certain lawsuits between master associations and sub-associations
- Certain lawsuits between sub-associations
- Claims exceeding the policy’s three-claim annual limitation
- Claims involving injuries or deaths arising from specified boating and water-sport activities.
When read together, these exclusions significantly narrow the circumstances under which coverage may be available.
Conditions, Reporting Requirements, and Timely Notice Requirements Can Be Just As Important As Exclusions
One of the most overlooked aspects of insurance policies is that conditions can effectively eliminate coverage even when the claim itself appears covered. For example, a policy may require the following:
- Existing general liability insurance coverage to remain in force
- Claims to be reported first to the association’s underlying insurance carriers
- Written denial letters from those carriers within a specific time period
- Reporting of those denials to the legal defense insurer within specified time periods
- Submission of lawsuits within designated reporting deadlines
- Full cooperation with the appointed attorney.
Failure to satisfy any of these requirements could potentially prevent coverage from being afforded at all. For that reason boards should review not only the exclusions section of every policy but also the conditions, reporting requirements, and notice provisions.
The Danger of Assumptions
The greatest risk facing many boards is assuming coverage exists without reading the policy. Every insurance policy contains exclusions, but are such exclusions reasonable? In light of the exclusions, does the association have proper insurance coverage? At the end of the day, the responsibility for understanding the association’s insurance program ultimately rests with the board itself.
Board members owe fiduciary duties to the community they serve. Part of fulfilling those duties includes developing a working understanding of the association’s insurance protections and limitations. A declaration page and premium invoice tell only a small part of the story. Only the policy itself will set out the exclusions, conditions, endorsements, limitations, and definitions that often determine whether coverage actually exists when a claim arises.
A Final Reminder
Every condominium and homeowners’ association board should schedule a meeting with its insurance agent at least annually. Do not, as so many boards do, just accept whatever policy is being sold. When is the last time your insurance agent asked to meet with the board? When is the last time your board received a detailed review of the insurance coverage provided and their exclusions?
During a meeting with the association’s insurance agent, the board should carefully review not only its directors’ and officers’ coverage but also every insurance policy maintained by the association. Ask what is covered. Ask what is excluded. Ask what conditions must be satisfied before coverage applies. Ask whether endorsements have modified the policy language.
The importance of this review cannot be overstated. Not long ago another community association was stunned to learn that it had no coverage for a significant water loss because prior claims had resulted in a water-damage exclusion being added to its policy. When another casualty event occurred and water migrated throughout a multi-story building, the board discovered there was no insurance coverage for the resulting damage. The exclusion was there all along, but no one had reviewed it. In all likelihood that gap in coverage could have been filled by another insurance provider. But after the casualty occurs, it is far too late.
Insurance policies are contracts. The protection they provide is determined not by assumptions but by the words written on the page. A board that takes the time to understand those words before a claim occurs will be far better prepared than the board that waits until after a lawsuit, casualty loss, or coverage denial arrives. An annual policy review with the association’s insurance agent is not merely a best practice. In today’s increasingly complex insurance environment, it is an essential part of responsible community governance. Remember to also consider inviting the association’s attorney to the meeting with the insurance agent because often your attorney’s expertise will focus on additional inquiry and thereby make the time spent with the insurance agent more worthwhile.