Do homeowners associations need insurance? HOA board members will easily know the answer to this question: Yes. After all, proper insurance coverage is one of the best ways to protect your community from natural disasters and emergencies. But many associations tend to overlook insurance that protects board members from liability. Here’s everything you need to know about HOA board insurance and why you need it.
What Is HOA Board Insurance?
HOA board insurance is commonly referred to as Directors and Officers (D&O) insurance. It is a type of insurance policy that protects the board members in case there is an accusation or lawsuit from a homeowner. It is very difficult to please every homeowner. So, when a homeowner becomes upset, there is a potential for the HOA and its board to be at risk.
Why Is D&O Insurance Important?
When a homeowner decides to sue the HOA, they may decide to include the name(s) of your board member(s). D & O insurance for homeowners associations serves to protect the board from personal liability.
Board members are simply volunteer homeowners. There is no monetary compensation for the services they provide to the community. In order to attract homeowners to the board, they need to be assured that they won’t be financially burdened by lawsuits and legal expenses. Otherwise, nobody would ever join the HOA board.
HOA D&O insurance will cover board members’ legal costs and damages in case a homeowner sues them. Even if a case doesn’t reach the court, or a judge dismisses the case, there will still be legal expenses. With adequate D&O insurance coverage, the board members won’t have to worry about becoming bankrupt as a result of helping their community.
What Does D&O Insurance Cover?
D&O insurance will cover everyone on the HOA board. It won’t cover anyone who is no longer serving as part of the board. However, depending on your insurance provider, HOA board insurance may also cover select employees or personnel.
A D&O insurance policy typically includes fees associated with a legal defense. In most cases, it will also cover the settlement amount in the event of a judgment. However, some D&O policies will only cover lawsuits that have a final ruling. You may want HOA board insurance that also covers legal expenses for cases that don’t have a final ruling.
Keep in mind, though, that D&O insurance won’t always cover lawsuits that hold HOA board members personally liable. The important thing to establish is whether the board member(s) upheld their fiduciary duty. For example, if a homeowner sues the board member for making a bad decision, as long as they acted within the boundaries of their duties, they will be covered by the D&O policy.
Most — if not all — D&O insurance policies will not cover the board member in the case of willful negligence, fraudulent activity, or intentional breach of governing documents. It also won’t cover any lawsuits that existed before the D&O policy was purchased.
How Much Does This Type of HOA Insurance Cost?
The cost of D&O insurance for your HOA depends on several factors such as your insurance company and the size of your community. But, D&O insurance can range from less than a thousand dollars to a couple of thousand dollars.
Your D&O insurance costs will also depend on the maximum coverage limits. A larger community with hundreds of homeowners and many amenities will typically want a higher limit. However, if you are a smaller community, a modest limit may already suffice. HOA board insurance policies are usually flexible and you can purchase the amount of coverage that you need for your community.
Knowing Your HOA Board Insurance Coverage
Some homeowners association insurance plans will come with a D&O policy attached. However, just because the HOA is adequately covered doesn’t mean that individual board members are as well.
It is important to review your current insurance plan to confirm whether D&O is part of the package. If not, consider purchasing an adequate D&O policy separately.
Although it may seem difficult to add another policy premium to your HOA’s yearly budget, the cost of not having D&O insurance is much higher. You’re likely to pay much more in legal expenses in case a board member is sued.
HOAs also need to know how their D&O insurance payouts will be made. In some cases, the HOA or board members may first have to pay out-of-pocket before being reimbursed by the insurance company. However, if an HOA board member is dealing with a major lawsuit, they may not be able to make upfront payments.
How to Choose D&O Insurance for Your HOA Board
If your HOA has overlooked D&O insurance in the past, now is the time to start researching for a plan. Make sure to compare plans from different insurance providers. This will make it easier to find the ideal D&O policy that works for your community.
When choosing a D&O insurance policy, you should double-check with state laws. Some states like Colorado and California have limitations on HOA board members’ personal liability. You won’t want to choose a policy with higher premiums when your state already offers adequate protection.
Board members may also want to consult their HOA management company, HOA attorney, or insurance agent when choosing a policy. They will be able to provide valuable insight when it comes to D&O insurance for the board. Your HOA management company can also refer you to reputable insurance companies with reasonable but comprehensive D&O insurance policies.
Protect Your Community With HOA Board Insurance
HOA board members should not be riddled with expensive legal fees and fines for simply doing their job. Nobody is perfect so they, too, can make mistakes. What’s important is whether their actions are within the scope of their duties. Nevertheless, D&O insurance is a must.
A homeowners association must be able to protect board members facing legal liability. Though the policy only covers select members, HOA board insurance is vital to the success of the entire community. By having added protection, you can ensure that the association has the manpower it needs to operate properly.