D&O Insurance: The What, Why, and Who for Community Associations
Directors and officers (D&O) insurance might be one of the most important types of coverage for homeowners' association (HOA) board members. It safeguards nonprofit board members from personal losses in the event they’re sued because of their role as community leaders. Read on to learn what D&O insurance covers, what makes policies unique, how much it costs, and much more.
What Is D&O Insurance?
Directors and officers insurance, also called liability insurance or executive liability insurance, protects directors, officers, and sometimes other volunteers of a community association from lawsuits alleging mismanagement or wrongful acts.
Some of the most commonly covered allegations include:
- Misuse of funds
- Failure to enforce bylaws
- Breach of fiduciary duty
- Wrongful termination of staff or contractors
While D&O insurance is designed to cover settlements, it may also pay for legal defense costs.
FREE DOWNLOAD: “HOA Insurance FAQs for Beginners”
Who is Covered Under D&O Insurance?
Depending on the terms of the D&O insurance policy, protection can extend to any of the following:
- Current and past board members
- Committee members
- Association volunteers
- The community association itself
In short, D&O insurance coverage protects the individuals making decisions on behalf of the HOA from being personally sued.
What Is Side A, B, and C Coverage?
Not all D&O insurance policies are the same. Understanding Side A, B, and C coverage helps HOA boards choose the proper protection.
Side A Coverage
Side A coverage protects individual directors and officers when the association is unable to indemnify, or compensate, them. For example, if the HOA goes bankrupt and cannot pay legal costs, Side A ensures individuals aren’t left exposed.
Side B Coverage
Side B coverage reimburses the association when it indemnifies board members. In practice, most HOAs pay for directors’ legal coverage, and Side B ensures the association itself is repaid for those expenses.
Side C Coverage
Side C covers the association directly if it’s named in a lawsuit alongside directors or officers. This is especially crucial since associations themselves are frequently named in claims.
“Sides A, B, and C are typically covered. A reputable agent will not quote anything without these conditions,” says Jeremy Day, senior sales executive for Associations Insurance Agency, Inc.
PLEASE NOTE: While typical, not every policy encompasses all Sides (A, B, C), and the inclusion or exclusion of coverage can shape both risk and pricing.
Do HOAs Need D&O Coverage?
Yes, every community association needs nonprofit directors and officers insurance. Claims against boards are more common than many realize. To ensure it plays its part in protecting your community, most HOA management companies even require D&O coverage.
“There are three main policies every community should have,” says Day. “Property, general liability, and directors and officers. Per any management contract, a community must carry general liability and directors and officers’ insurance at the very least.”
Additionally, a community without D&O insurance may face significant financial risks. Legal defense costs range from $162 to $392 per hour for basic representation, while specialized attorneys can charge $300 to $500 (or more) per hour. A straightforward lawsuit can easily consume $50,000 to $75,000 in defense costs before settlement discussions begin.
Even if a lawsuit is frivolous, the cost to defend the case can cripple an association. D&O coverage provides legal protection and encourages qualified volunteers to serve on the board.
How Much Does D&O Insurance Cost?
The cost of a D&O insurance policy varies, but these factors may influence premiums:
- Community Size. Larger associations with more units face greater exposure to risk.
- Claims History. Previous lawsuits can result in higher premiums.
- Coverage Limits. Higher coverage amounts cost more but provide greater security.
- Risk Profile. Associations with frequent disputes, high turnover, location risks, or complex amenities might pay more.
Due to the varying factors, the only way to know the premium cost for your community’s D&O insurance is to get quotes from several insurers. Talk to a few agents or an insurance broker who can quote multiple carriers simultaneously.
5 Key Considerations for D&O Liability Insurance
When evaluating a D&O insurance policy, HOA boards should consider these five areas to determine how well the policy protects the association and its volunteers.
1. Premiums
The premium of a D&O insurance policy often signals its quality. Strong D&O policies typically cost $1,000 to $2,000 annually for average-sized communities. Anything below $700 should be considered a red flag.
“A large insurance provider has a certain type of D&O policy that they call an ‘endorsement policy,’” says Day. “It’s really cheap and it looks nice, but it’s not very good coverage.”
Low-cost policies often come with exclusions, leaving boards vulnerable to risks. Obtaining the wrong D&O coverage affects the entire community budget and its directors. Compare policies based on both cost and the scope of coverage, not just the price alone.
2. Exclusions
Some carriers exclude “non-monetary” claims. A policy that excludes these claims is largely ineffective in addressing many common HOA disputes. Such exclusions will significantly affect board members, committees, and ultimately, homeowners. It’s vital to ensure your policy does not exclude non-monetary claims.
3. Who’s Insured
A quality D&O policy should extend protection to current and past board members, committee members, managers, management companies, developers acting as directors, and even spouses.
Limiting coverage to only listed directors leaves many active participants unprotected. This could impact everyone serving the community in a governance or support role. Confirm your policy includes broad protection without requiring individuals to request it separately.
4. Limits
Not all million-dollar policies provide equal protection. A high limit with broad exclusions is less valuable than a lower limit with fewer restrictions. Defense costs alone can quickly deplete policy limits, resulting in both the association and individual board members facing lawsuits. It’s essential to review the terms behind the limits and weigh higher deductibles against stronger protection.
5. Enhancements
Optional enhancements, such as protection against discrimination, harassment, breach of contract, or additional “defense outside the limit,” can strengthen a policy. These extras can provide millions in additional defense costs for relatively little extra premium. Ask your insurer about enhancements and consider extending umbrella coverage to your D&O policy for added security.
6 Insurance Policies Every HOA Should Have
D&O insurance is the shield that protects board members and the association from costly lawsuits and liabilities. From understanding Side A, B, and C coverage to reviewing exclusions and enhancements, prioritizing directors and officers insurance is key to maintaining the safety and well-being of the board.
For a more in-depth look at HOA insurance needs, download the "HOA Insurance Coverage Breakdown." It will provide you with everything you need to know about safeguarding your association with the right insurance policies.
FAQs About D&O Insurance
What’s the difference between D&O and E&O insurance?
D&O insurance covers board decisions and governance matters. Errors and omissions (E&O) insurance, by contrast, typically covers mistakes in professional services. HOAs need D&O insurance because they aren’t service providers; they’re governing bodies.
Is directors and officers insurance worth it?
Yes. The average cost of defending a lawsuit can exceed $50,000, even if the case has no merit. Compared to annual premiums that often fall below $5,000, the coverage provides significant financial protection.
What does D&O insurance cover?
It covers defense costs, settlements, and judgments related to wrongful acts, such as mismanagement, rule enforcement disputes, or breaches of fiduciary duty.
What is not covered under D&O insurance?
D&O insurance typically excludes fraud, personal gain, criminal activity, and bodily injury and property damage (which are covered under general liability insurance). Always review the exclusions carefully.