By: AJ Scott, CPCU, CIRMS,. Community Partners Insurance Agency, LLC
If your Association is professionally managed, it’s critical that your Directors & Officers Liability (D&O) insurance extend coverage to your management company.
Pause – which one is D&O again?
D&O protects the Association, the Board of Directors collectively, and individual board members against “wrongful acts” allegations, much like an errors & omissions policy. Essentially, if someone objects to how the Association is being operated, administered, or governed, this is the policy most likely to respond. Common claims include failure to enforce the governing documents, improper handling of an election, challenges to assessments, breach of fiduciary duty, objections to architectural review decisions, and so forth. Like other liability policies, D&O insurance contains coverage for both defense costs (legal expenses to defend the claim) and indemnity payments (money damages, such as a settlement or a judgment, IF awarded to the claimant).
Whether you are a board member or a community manager, it is important to determine the quality of the Association's D&O insurance because the scope of coverage can vary significantly from one provider to the next.
OK, so why should our management company be covered under our policy? Shouldn’t they have their own insurance?
Yes, management companies need their own errors & omissions insurance for their business dealings. However, when acting under the Board's direction as the Association's designated agent, it is reasonable and appropriate for them to be covered by the Association's insurance.
Most importantly, though, your Board (either current or prior) almost certainly signed a contract with your management company that requires your Association to defend, indemnify, and hold them harmless if they are named in a suit merely by virtue of their management relationship with you. Since it is common for a plaintiff’s attorney to name every conceivable party in a lawsuit, you can see the likelihood of this happening.
The existence of that contract means that the Association is legally obligated to defend and indemnify the management company in certain situations. If the Association’s D&O coverage does not contain an affirmative extension to your management company, then the HOA will have to fund this contractual obligation out-of-pocket.
How do I find out if our policy contains this extension?
Ask your insurance agent or broker if the Association’s D&O insurance extends to the management company, and (if needed,) explain to them that your management agreement requires this. If your current policy does not include this provision, ask if it can be added for an additional premium.
Got it. Anything else?
Again, there is a wide spectrum of D&O coverage available; the forms range from skeletal to robust. The management company extension discussed above is just one of several important provisions that your D&O policy should include to ensure reasonable protection for both the Association and the volunteer board members who run it. Consider asking your insurance professional for an explanation of your D&O coverage and what alternatives may be available or recommended. Typically, a stand-alone D&O policy will offer broader coverage than a low-cost endorsement bundled into a Package policy. While the stand-alone policy will have a somewhat higher premium, that slightly higher price tag will pale in comparison to the cost of just one uncovered claim.
AJ Scott, CPCU, CIRMS is a co-founder and Principal of Community Partners Insurance Agency in Meridian. She has worked in the community association insurance realm since 2006 and is active with CAI National via the CIRMS Planning Group for the CAI Law Seminar and the Foundation for Community Association Research.
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