Serving on a community association board is often a thankless job. In addition to the long hours and no pay, there are myriad problems that a board member has to deal with. The governing documents (hopefully) spell out the board’s responsibilities for the association. If something goes wrong, most associations have Directors’ and Officers’ insurance (“D&O Insurance”) available to protect individual board members.
D&O policies are meant to cover any “wrongful acts” committed by board members. While the term “wrongful acts” may sound sinister, the definition typically includes “any negligent acts, errors, omissions or breach of duty committed by an insured in their capacity as such.” Hopefully, when a board or individual member of the board neglects to undertake a given responsibility, the D&O Insurance will provide a safety net.
But what if one of those responsibilities is buying insurance in the first place? Nearly all governing documents for community associations require the association, through its board of directors, to purchase various types of insurance. Depending on the language of the governing documents, the required insurance may apply to common property, unit owner property, and the liability of the association, board, and unit owners. Obviously, if the board neglects to purchase D&O insurance, there is no safety net anyway. But what if the board either purchases the wrong kind of insurance, or no insurance, for the property and/or liability of the community as required by the governing documents? Surely, that would qualify as a “negligent act, error, or omission” of the board, wouldn’t it? In the real world, the answer to that question is certainly yes.
Unfortunately, insurers have closed the door on this type of claim. There is a standard exclusion in D&O insurance, which excludes “any failure to effect, maintain or procure any insurance policy or bond, including any failure to obtain proper amounts, forms, conditions or provisions on any insurance policy or bond.”
While D&O insurance does offer a safety net for board members in some situations, that net will be abruptly yanked away when it comes to purchasing the right insurance. Board members should pay special attention to the insurance requirements of the governing documents. If necessary, they should consult with their broker and/or their association attorney. If they don’t, they are walking a tight rope without a safety net.
D&O insurance shouldn’t be confused with Errors and Omissions (“E&O”) insurance. The former is meant to cover directors and officers of an entity for their wrongful acts. The latter is typically meant to cover companies and their agents in the rendering of professional advice or services.