Every community needs directors and officers liability insurance protection which, for association boards, is insurance that covers board members and possibly people acting as extensions of the board for legal costs incurred from being sued.
It doesn’t matter how well your board members get along with each other, how small your community is, how big your management company is, or how kind and sweet everyone is on the board. Like family, friends, coworkers, Facebook friends, and other acquaintances, any relationship can become strained and even take a turn for the absolute worst. Lawsuits often blindside people, and can even be frivolous at times.
The takeaway here is that you’ll pay for your own defense if the board doesn’t purchase a D&O policy that protects its board members.
Now that we’ve established that going without D&O insurance isn’t a smart choice, let’s cover what you should look for when reviewing D&O coverage options:
- The Premium Amount – The premium for D&O coverage can be a quick indication of its quality. Most of your robust D&O policies are $700 or more in annual premium. An average annual premium for an average size community usually runs $1,000 to $2,000/year for the best coverage you can buy. If a community is paying less than $700 annually for their D&O coverage, it’s probably a pretty good indication that there’s something missing. This isn’t always the case, but after being specifically focused on this industry for almost 10 years now, I’ve learned it’s almost always is the case. I’ve also learned over the years that this sub-par D&O coverage is typically written by major insurance companies with household names. While the other lines of coverage they provide seem to deliver adequate protection, more often than not, their D&O policies have significant exclusions tied to them.
- Exclusions – The most common exclusion to look for (which will drastically influence the community’s D&O premium) is an exclusion for “non-monetary” related claims. There are monetary claims (where the claimant is seeking a judgment for money), and there are non-monetary claims (where the claimant is not seeking money, but a court ruling in their favor). Many of these popular insurance companies automatically quote their D&O product with an exclusion for non-monetary damages and claims. The problem is, at least 60 percent of D&O claims are non-monetary in nature; the most common types of non-monetary claims have to do with architectural control issues or board member election or removal issues. If your community has this exclusion under their D&O policy, any type of non-monetary related claim will be immediately denied, and the board or board member will have to pay out of pocket for their defense.
- Who’s Insured – Another important thing to review is who’s protected by the policy, and to what level they’re protected. A sound D&O policy provides automatic and extended protection to volunteers, managers, the management company, committee members, the developer (when acting as a board member), and even to the spouses of the board members. A cheap policy more than likely only insures the actual listed board members at the time the claim is filed. A solid D&O policy will also provide protection without any of these stakeholders having to specifically ask for it, and it will protect all of these folks as long as their alleged wrongful act was committed while performing their duties as a board member or as an extension of the board.
- Limits – Another item to consider is the D&O limit that’s being presented. One carrier or agent can quote you a two million dollar D&O limit with a $250 deductible that provides little or no protection (due to a lot of exclusions), while another provider can get you a quote with a 1 million dollar limit and a $1,000 deductible that protects you for just about everything necessary. Which is better? Be careful to review what’s in front of you. If you don’t know, or can’t tell, shoot your agent or representative at AIAI an email for some direction. While AIAI may not write the account, we are an advocate for you and the client and certainly want what’s best for our communities, board members, and managers. This is why quoting and insuring your accounts with AIAI can give you peace of mind as a manager. We don’t aim to sacrifice key coverage items for a lesser premium.
- Coverage Enhancements - The last thing to consider when reviewing D&O coverage options are coverage enhancements. Many D&O policies can provide coverage for discrimination, harassment, breach of contract, full prior acts protection, and added defense limits. I would say that all of these are viable enhancements and often automatically incorporated into better D&O products. Sometimes for just a little more premium, you can get a million dollars in extra protection that goes solely toward defense costs and legal fees. This is completely separate from your standard one million dollar D&O limit, and is often referred to as “defense outside the limit.” Also for a few hundred dollars more you can usually get your umbrella carrier (if the community has an umbrella policy) to extend their umbrella limits over the underlying D&O policy. This is well worth the extra premium if it stacks an additional 1 million dollars, 5 million dollars, or 10 or more million dollars on top of your underlying D&O policy limits.
Selecting the best D&O policy could have a tremendous impact on both a manager and their community. It could end up being the best recruiting tool for your community’s future board members. With solid protection in place for your board members, homeowners may be more apt to run for a position on the board. And you will have peace of mind and a sense of security knowing the type of D&O policy that’s in place for you and the community.
Bo Bond, CIRMS, is the Senior Sales Executive at Associations Insurance Agency, Inc. (AIAI) — the agency dedicated to the insurance needs community associations. Bo is a member of CAI and Independent Insurance Agents of Texas. He obtained his CIRMS designation from CAI National as a distinguished insurance professional in the community association industry. Bo is licensed in more than 30 states and strives to educate board members and community managers about the insurance decisions they make on behalf of their communities.