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 Directors and Officers insurance and why you need it.
HOA Directors and Officers insurance, also known simply as HOA D&O insurance, is a type of insurance policy that protects the board members in case there is an accusation or lawsuit from a homeowner. It is nearly impossible to satisfy every homeowner. So, when a homeowner grows angry or unsettled, there is a potential for the HOA and its board to be at risk.
Can a board member be sued individually? Even the smallest of disagreements between a homeowner and the HOA can quickly escalate into a lawsuit. More often than not, these lawsuits also mention individual board members by name. When that happens, board members like you need to have sufficient protection so that you don’t need to pay for legal fees out of pocket.
You may be thinking, “Why should I have directors and officers insurance?”
It is not uncommon for homeowners to pursue legal action against the association and, by extension, the board members. D & O insurance for homeowners associations serves to protect the board from personal liability. A master insurance policy for homeowners association typically does not cover board members, but a D&O policy will.
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 and 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 HOA Directors and Officers insurance coverage, the board members won’t have to worry about becoming bankrupt as a result of helping their community.
While it is equally important to have General Liability insurance for your HOA, it simply doesn’t offer the same coverage as a D&O policy does. General Liability insurance is designed to protect the association itself. It does not include protection for individual board members or officers.
Even if you have Personal Liability Protection under your policy, that still won’t cut it. That type of coverage only protects you as a private individual and not as a member of your board.
HOA Directors and Officers insurance will cover everyone on the HOA board. Though, it typically won’t cover past members of the board — those who are no longer serving. But, depending on your insurance provider, HOA board insurance may also cover select employees or personnel.
Keep in mind that some policies explicitly exclude some people from coverage. For example, a D and O policy may state that coverage is not included for non-owners. In that case, your HOA manager will likely not be part of the policy’s coverage.
The act of suing the HOA board of directors happens more often than you might think. Even if it’s about the smallest of things, homeowners who have the resources aren’t afraid of taking their grievances to court. But, what do HOA board members even get sued for?
While this list carries a lot of weighty items, you should know that homeowners have sued board members for a lot less. For the best protection, an HOA Directors and Officers insurance policy is essential.
A D&O insurance policy typically includes fees associated with a legal defense. Most of the time, it will also cover the settlement amount in case of a ruling. But, some D&O policies will only cover lawsuits that have a final ruling. In that case, if you need to hire a lawyer without going to trial, your policy may not pay for the legal fees.
You may want HOA board insurance that also covers legal expenses for cases that don’t have a final ruling. This way, you can ensure added protection for the association and your board.
Does D&O insurance cover breach of fiduciary duty? It depends on the type of policy you have. Some D&O policies do provide coverage in case a board member breached their fiduciary duty, while others don’t.
Most — if not all — D&O insurance policies don’t provide coverage for acts of willful negligence, fraudulent activity, or intentional breach of governing documents. It also won’t cover any lawsuits that were initiated prior to the purchase of your D&O policy.
Keep in mind, though, that HOA Directors and Officers insurance won’t always cover lawsuits that hold 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.
Homeowners can sue the board for a myriad of things, but not all of them are typically covered by HOA Directors and Officers insurance.
Although policies can vary, a majority of them don’t offer coverage for wrongful eviction, discrimination claims, non-monetary claims, defamation, invasion of the right of privacy, and emotional distress damages.
In addition, most policies also don’t provide protection for breach of contract defense, election disputes, architectural review committee decision disputes, and defense of failure to maintain or purchase insurance.
The cost of D&O insurance for your HOA depends on several factors such as your insurance company and the size of your community. Payout limits will also affect how much you pay in premiums. But, D&O insurance can range from less than a thousand dollars to several thousand dollars per year. On average, though, you can expect to pay $1,000 for a $1 million limit and a $1,000 deductible.
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.
Some community association insurance plans will come with a built-in D&O policy. But, just because the HOA is sufficiently 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 might appear needless or hard to budget for an additional insurance premium, the cost associated with a lack of a D&O policy is much higher. You’re likely to pay much more in legal expenses in case a homeowner sues the board.
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. But, if an HOA board member is dealing with a major lawsuit, they may not be able to make upfront payments.
Additionally, you should always report any claims in a prompt manner. Most policies will provide protection for claims made and reported during the policy period. Therefore, if you fail to report claims on time, your provider can deny you protection against that claim. Make sure to thoroughly check your policy for any HOA insurance requirements.
If your association has neglected to purchase D&O insurance in the past, now is a good time to begin looking for one. Make sure to compare plans from different HOA insurance companies. This will make it easier to find the ideal D&O policy that works for your community.
It’s also worth taking the following into consideration:
When choosing an HOA Directors and Officers 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.
Many HOA boards make the mistake of prioritizing price over coverage.
While price should certainly play a role in your decision-making process, don’t just go with the cheapest policy you can find. Consider what the policy offers in terms of coverage. If a certain D&O policy is cheap but doesn’t offer much protection, then look for another one.
Remember that it’s part of your board’s fiduciary duty to make decisions that are within the association’s best interests. That means going with the best possible insurance policy that you can.
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.
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, HOA Directors and Officers 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.
Insurance can be very confusing, which is why many associations turn to HOA management companies for help. Start your search for the best one in your area using our comprehensive online directory.