Board members are often targeted for the unpopular decisions they make, but HOA directors and officers insurance can offer protection. When a homeowner sues the board, this policy can cover legal costs and potential damages, protecting the directors from personal liability.
What is HOA Directors and Officers Insurance?
Directors and officers insurance for HOA communities is a policy that protects volunteers (and even managers) from claims related to decisions they make while in service. Often referred to as simply D&O insurance, this usually applies when the board finds itself named in a lawsuit.
Common grounds for HOA lawsuits include:
- Negligence
- Breach of fiduciary duties
- Unfair rule enforcement
- Failure to enforce the governing documents
- Financial mismanagement
- Procedural violations
- Discrimination
- Election fraud
Directors and officers insurance for condo associations works in the same way. As condo boards make decisions for the community, unit owners may attempt to sue them if they disagree with these decisions.
The Importance of D & O Insurance for Homeowners Associations
Board members make decisions that affect homeowners, vendors, employees, and the entire community. Even when the board acts in good faith, disputes can still happen.
In fact, lawsuits involving associations and their boards have become increasingly common. And these lawsuits aren’t cheap. Legal defense costs alone can be very expensive, even if the board ultimately wins the case.
With D&O insurance, volunteer board and committee members can serve without worrying about potential legal expenses. This policy helps reduce the association’s financial risks related to legal exposure. Without it, the HOA would have to tap into its operating or reserve funds to cover costs.
Additionally, D&O insurance helps encourage owners to volunteer. Many owners hesitate to serve on the board or any committee out of fear of lawsuits. They simply don’t want to take on the financial risk involved. Yet, with proper coverage, they are more likely to participate.
Is HOA Board Insurance Required in Maryland?
In Maryland, HOAs are only required by law to obtain fidelity insurance (Section 11B-111.6). Condominiums, on the other hand, must carry property insurance, general liability insurance, and fidelity insurance (Sections 11-114 and 11-114.1).
There is no law that specifically requires associations to have D&O insurance. That said, boards must also refer to their governing documents. Many CC&Rs and bylaws require D&O insurance.
Even without such a requirement, it is generally recommended to obtain coverage for directors and officers. This will help protect the association’s finances and encourage more volunteers to get involved in community operations.
What Does HOA D&O Insurance Cover?
Coverage can vary greatly depending on the policy, but many D&O policies include protection for the following:
1. Breach of Fiduciary Duty Claims
Board members must fulfill fiduciary duties to the association. Homeowners may sue if they believe directors failed to act in the community’s best interests.
Common examples include poor financial decisions or misuse of reserve funds. Residents may also claim that the board failed to maintain common areas or acted with conflicts of interest.
2. Rule Enforcement Disputes
Sometimes, homeowners might claim that the board enforced the rules in an unfair or selective manner. A common example of this is when the board enforces a rule against one homeowner but not another. That said, this claim can also arise from improper fines, discrimination, or failure to follow due process.
3. Election and Governance Disputes
Board elections generally happen every year. During the election process, homeowners may claim that the board did not follow voting procedures. This can expose the board to legal issues. Common claims involve improper notice and invalid ballots.
4. Defamation Claims
A homeowner may accuse a board member of making harmful or false statements during enforcement actions or meetings. This can lead to lawsuits, at which point D&O insurance would kick in.
5. Employment-Related Claims
Some policies include coverage for wrongful termination, harassment, discrimination, and retaliation claims. This often applies when the association has employees.
What D&O Insurance for HOA Does Not Cover
Board members must understand that D&O insurance doesn’t cover every situation. It’s not a “Get Out of Jail Free” card.
Most policies exclude:
- Fraud
- Criminal acts
- Intentional misconduct
- Personal profit gained improperly
- Bodily injury claims
- Property damage claims
- Breach of contract in some situations
General liability insurance usually handles bodily injury and property damage claims instead. For example, if someone slips near the clubhouse, general liability insurance would normally apply, but D&O coverage would not.
Who Does HOA Directors and Officers Insurance Protect?
The extent of protection will depend on the policy. Board members should speak to their insurance agent to clearly define insured parties.
That said, most HOA directors and officers insurance policies offer protection for:
- Current board members
- Former board members
- Officers
- Committee members
- Volunteers
- The association itself
Depending on the policy, some also extend coverage to:
- Community managers
- Employees
- Trustees
Additional insured parties may cost extra. Boards should evaluate their needs and risks, while simultaneously ensuring premiums are covered in the budget.
How Much HOA Directors and Officers Insurance Does an HOA Need?
Coverage needs can vary depending on several factors. These include the size of the community, the number of homes or units, association assets, amenities, and budget. The association’s litigation history and employee count can also influence coverage.
In general, larger communities and associations with extensive amenities often require higher coverage limits. If an HOA is often involved in litigation, the insurance provider may also raise premiums.
Boards should work with experienced insurance professionals to evaluate appropriate coverage amounts and deductible levels. Some governing documents also have minimum coverage requirements.
D&O Insurance vs General Liability Insurance
Many people confuse D&O insurance with general liability insurance. While both offer protection, they differ in coverage.
General liability insurance covers bodily injuries, property damage, and accidents in common areas. Meanwhile, D&O insurance covers management decisions, governance disputes, and legal claims against board members.
It is important to obtain general liability and D&O insurance, as most associations need both. Even if they are not required, these policies can go a long way in preserving the association’s financial health.
A Necessary Tool
Board members are responsible for making decisions that serve the best interests of the community. Unfortunately, some homeowners may disagree with these decisions because they affect them personally. When disagreements turn into legal disputes, HOA directors and officers insurance helps protect the board and the HOA from financial ruin.
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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