What is directors and officers insurance? This is a question many board members ask. This type of insurance policy protects the board members themselves when claims arise from decisions they made. As volunteers, board members need a certain level of protection while serving the association.
What is Directors and Officers Insurance?
HOA directors and officers insurance, often called D&O insurance, is a type of liability coverage designed to protect board members, officers, and committee members. Sometimes, it even protects the association itself from claims arising from management decisions.
Board members make decisions involving budgets, rule enforcement, contracts, architectural requests, collections, and other association matters all the time. Homeowners, vendors, employees, or other parties may disagree with those decisions and file claims. D&O insurance can help pay for legal defense costs, settlements, and judgments covered by the policy.
Several types of D&O insurance coverage are commonly available. These include:
- Individual Coverage. This protects directors and officers when the association can’t indemnify them. It helps cover personal liability arising from board service.
- Association Reimbursement Coverage. This reimburses the association for indemnifying board members for covered claims and legal expenses.
- Entity Coverage. Some policies also protect the association itself when claims are made directly against the organization.
- Employment Practices Liability Coverage. Many D&O policies offer optional coverage for employment-related claims. Examples include wrongful termination, discrimination, retaliation, or harassment involving association employees.
Because policies can vary, boards should review coverage carefully and work with an experienced insurance professional.
D&O Insurance vs General Liability Insurance
Many HOA boards mistakenly believe that general liability insurance provides the same protection as D&O insurance. In truth, these policies cover very different risks.
Directors and officers insurance protects against claims involving board decisions, governance, and management actions. Examples include allegations of selective enforcement, breach of fiduciary duty, election disputes, and improper denial of architectural requests.
On the other hand, general liability insurance protects against bodily injury and property damage claims. For example, if a visitor slips and falls in a common area or a tree maintained by the association damages a vehicle, general liability insurance can step in.
Most associations need both types of coverage. Together, they provide protection against many of the risks communities face.
Is a Directors and Officers Insurance Policy Required?
Whether or not D&O insurance is required depends on state laws and the governing documents. In Maryland, the law generally does not require HOAs or condominiums to carry directors and officers insurance. It requires fidelity insurance for HOAs (Section 11B-111.6) and fidelity, property, and general liability insurance for condos (Sections 11-114.1 and 11-114).
While D&O insurance may not be legally required, many associations choose to purchase it because board members regularly make decisions that can expose them to claims. Some management companies and insurance professionals also consider D&O coverage a fundamental part of a community association’s insurance portfolio.
The Importance of Directors and Officers Insurance for Homeowners Associations
D&O insurance serves several important purposes. For one thing, it can help attract qualified volunteers to serve on the board. Many homeowners are reluctant to serve if they could be personally exposed to legal claims.
Additionally, it protects association funds. Without insurance, legal defense costs may be borne directly by the association’s operating budget or reserves. Attorney fees, court costs, and other litigation expenses can quickly stack up. Before long, the association’s funds will have dried up.
Moreover, D&O insurance allows board members to make reasonable decisions without constantly worrying about personal liability. If boards have to question every step they take, delays are bound to happen. Worse yet, things wouldn’t get done at all.
Finally, it can provide peace of mind for both the board and homeowners. Even when claims lack merit, defending against them can be expensive.
What Does D&O Insurance Cover?
Coverage can vary depending on the policy, but directors and officers insurance usually covers the following:
- Breach of fiduciary duty
- Failure to enforce governing documents
- Selective enforcement allegations
- Architectural review disputes
- Election disputes
- Budget and dues decisions
- Mismanagement claims
- Discrimination claims, when covered
- Defamation claims, when covered
- Wrongful acts committed while acting in an official capacity
Most policies also cover attorney fees and defense costs. These expenses can be quite significant, even if the association ultimately wins the lawsuit.
What Does D&O Insurance Not Cover?
While beneficial, D&O insurance does not cover every claim. Common exclusions include:
- Intentional misconduct
- Fraud
- Criminal acts
- Theft or embezzlement
- Personal profit obtained improperly
- Bodily injury claims
- Property damage claims
- Contractual disputes excluded by the policy
- Claims arising before the policy period
For example, if a board member steals association funds, D&O insurance typically will not provide protection. Crime or fidelity insurance may address those losses instead. Boards should carefully review their policy’s exclusions to understand potential gaps in coverage.
Who Does Directors and Officers Insurance Protect?
In general, a D&O policy may protect current and former board members. It also protects officers, committee members, and other volunteers. Moreover, it can also apply to the association itself.
Of course, the specific individuals or entities covered by a policy will depend on the language. Many policies continue to protect former board members for actions they took while they were on the board. This protection can be particularly helpful because claims can sometimes arise years after a decision was made.
When are HOA Board Members Personally Liable?
Board members generally receive legal protections provided they act in good faith and within the scope of their authority. That said, they are not totally exempt from personal liability.
A board member may find themselves personally liable if they commit fraud or a crime. It can also happen if they act outside their authority, intentionally violate the law, or use their position for financial gain.
Apart from D&O insurance, the Business Judgment Rule can also protect directors if they acted in good faith. This applies even if homeowners don’t agree with the board’s decision.
How Much D&O Coverage Does an HOA Need?
There is no universal coverage amount that works for every community. The appropriate limit will ultimately depend on the size and complexity of the association.
Several factors can influence coverage needs. These include the number of homes or units, the annual operating budget, the reserve fund balance, the number of amenities, and the number of employees. Coverage can also be affected by the association’s claims history and demographics.
Larger communities, for instance, generally face greater exposure because they oversee more residents, larger budgets, and more complex amenities. Boards should work with qualified insurance professionals to determine the appropriate coverage limits. Furthermore, it is important to check the governing documents for guidance.
How Much is Directors and Officers Insurance for HOA?
The cost of D&O coverage can vary significantly from one community to another. Again, several factors can influence premiums. These include the number of homes or units, the annual budget, the claims history, the community amenities, the coverage limits, the deductible amounts, and the location.
A small association, for example, may pay a few hundred dollars annually, while larger communities may pay several thousand dollars per year. Board members should shop around before making a decision.
When requesting a directors and officers insurance quote, boards should compare more than just price. Coverage limits, exclusions, endorsements, deductibles, and insurer experience are all equally important.
What is Directors and Officers Insurance? Answered!
D&O insurance is a valuable tool that helps protect association leaders, volunteers, and associations from legal claims. Even if it’s not mandatory, boards would be wise to obtain sufficient coverage. It is an essential safeguard for both the board members and the association’s funds.
Majerle Management, Inc. provides management services to HOAs and condo associations in Maryland. Call us today at (301) 220-1850 or contact us online to get started!
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