Rent Real EstateCondo Board Members Need Insurance Protection
Q: I am an owner in a community association and just recently elected to the Board of Directors. I ran for the Board because our monthly condominium fees increased on an average of $20 per unit. I am told the increase is due to the large increase in our master insurance policy and the need to increase reserves. Where can I find out more information about what is happening in the insurance market today and in the future and the various ways to compute replacement reserves? I am also wondering if I can be held personally liable while serving on the Board.
A: Let’s answer the last question first, since I suspect that is – or should be -- of prime importance to you.
As a new member of your Board of Directors, there are two things which you should do immediately. First, check to see if there is adequate Directors and Officers (D&O) liability insurance; second, read – and re-read – the legal documents for your Association.
We are a litigious society. When I first started practicing community association law many years ago, there were very few lawsuit in this area. Now, on a daily basis, lawsuit are being filed throughout this country: owners against other owners; owners against their Board of Directors, Association against owner, and even one Board member against another.
No one wants to take on the thankless, unpaid job of a Board member, and subject themselves to litigation and possible financial exposure. Thus, your Association has to obtain a form of insurance, called the D&O liability coverage.
Oversimplified, such insurance will provide you coverage as a Board member for most lawsuits which are filed against you. What does “coverage” mean? First, the insurance carrier will pay for your legal defense. Often, the cost of litigation exceeds any dollar recovery which a Plaintiff may obtain in Court.
Second, the insurance carrier will pay for any legal monetary judgment against you.
However, you must read the D&O policy very carefully. Make sure you understand what is covered and what is not covered. Most policies will provide coverage for such matters as breach of fiduciary duty; however, if for example, you are found to have defrauded the association, there will not be coverage for you.
In analyzing the insurance policy, there are two concepts which you must understand:
– duty to defend: does the insurance carrier have the obligation – the duty – to defend you, regardless of whether they will ultimately pay any judgment against you? A recent District of Columbia Court of Appeals case states the general rule governing the duty of an insurance company to defend as follows:
The obligation of the insurance company to defend an action against an insured, as distinguished from its obligation to pay a judgment in that action, by the overwhelming weight of authority is to be determined by the allegations of the complaint... If the allegations of the complaint state a cause of action within
the coverage of the policy the insurance company must defend. On the other hand, if the complaint alleges a liability not within the coverage of the policy, the insurance company is not required to defend. In case of doubt such doubt ought to be resolved in the insured’s favor.
(Travelers Indem. Co v United Food Union, 2001)
– reservation of rights: if you are sued, you or your attorney (or the property manager) should immediately notify all insurance companies involved with your association. Usually, there will be the traditional liability insurance policy, and a separate D&O policy. Often, different companies are involved, and you must make sure that everyone is put on notice of the lawsuit. It should be noted that many policies require prompt notice (between 30-60 days) from the date of the suit, or coverage will not be available.
Once the carrier has been put on notice of the lawsuit, you will receive a letter advising you that the company will investigate the claim and get back to you as soon as possible. Often, this causes problems, because when you are sued, you must file an answer (or other responsive pleading) within a set period of time after you have been served. And this time period may approach before the carrier decides on coverage. Thus, you either have to get an extension from the Plaintiff to file your answer, or have your attorney file the answer pending a determination from the carrier.
Finally, the carrier will advise you whether or not you will receive coverage. Usually, the carrier will state that while we will provide for the legal defense, we “reserve the right” not to pay any judgment which may be awarded in Court.
If you get such a “reservation of rights” letter, and if there are any questions or concerns as to the ultimate coverage by the carrier, clarify those issues immediately. You don’t want to learn that the carrier will not pay any judgment against you after that judgment has been determined.
Insurance is a complex issue. And as a result of the September llth terrorist actions, insurance has become much more expensive, and the insurance companies are looking very carefully at each and every claim. Indeed, many homeowners have been advised that their insurance policy will not be renewed, just because they filed a claim in the preceding year.
You also asked where you can find more information about insurance coverage and reserve accounts. If your Association is not currently a member of the Community Association Institute (CAI), I encourage you to consider joining. CAI is a national organization composed of homeowners, Boards of Directors, property managers, insurance carriers, attorneys, and others involved in the development and growth of community associations. Their mission, according to their website, is “to assist community associations in promoting harmony, community, and responsible leadership. We believe that by giving board members, managers, and homeowners the knowledge to better run their associations, they can turn ‘owners’ into ‘neighbors,’ increasing harmony, and leading to more prosperous, safer communities.(www.caionline.org).
CAI has a number of valuable publications which will be useful to you and your Board, and specifically their 28 Guides for Association Practice (called “GAP reports”) which cover a wide range of subjects, including Insurance and Reserve Accounts.
Additionally, on Saturday, March 15, 2003, the local Washington Metropolitan Chapter of CAI is sponsoring its annual “Conference and Expo”, to be held at the Washington Convention Center. There are a number of educational programs – as well as an exhibition hall featuring over 120 service providers – and you may want to consider attending this worthwhile conference.