Members of co-op, condo and HOA boards often give a great deal of their personal time to make decisions in the best interest of their association, cooperative or condo community. These volunteers are charged with protecting the community they live in, as well as their own and fellow residents' investments. But as hard as they work, board members are human, of course—and it's almost inevitable that they will make mistakes from time to time.

But what protects individual board members if an honest mistake or administrative misstep loses the association money, or results in a lawsuit from an association member? If the cost of a judgment against a board—no matter how honest the mistake that caused it—was taken directly out of the board members' pockets, who in the world would ever serve on a building or HOA board in the first place?

The answer to this conundrum is Directors and Officers coverage—D&O for short. It's insurance that offers protection to board members so they are not held personally liable when trouble arises, and it's something no board can really do business without.

The Basics of D&O

"Directors and officers insurance provides liability protection for economic loss resulting from business-related negligence or wrongdoing on the part of board members," explains Karim G. Kaspar, a senior counsel with the law firm of Lowenstein Sandler in Roseland. "D&O policies generally protect individual directors and officers from losses not indemnified by the company and reimburses the insured for amounts that it is obligated to pay on behalf of its directors and officers for claims made against them."

"D&O insurance generally covers members of the board of directors," says Wayne G. Dow, Esq., director of underwriting at Kevin Davis Insurance Services in Tampa, Florida, a company specializing in community association insurance. "The president, vice-president, treasurer,

secretary, plus employees, committee members of a duly constituted committee, volunteers of the organization, the organization itself and in certain instances the builder/developer of an association."

If the threat of a bank-breaking lawsuit constantly hovers over the boardroom, it's going to be difficult to recruit board members—unless you can offer them some form of protection, in the form of D&O.

"Nobody is going to serve on the board if there's no D&O coverage, because each board member would then be individually liable," says Kaspar.

If you don't have proper coverage, the board may be forced to indemnify directors and officers for their actions.

"If and when a claim arises, the association would have to pay defense costs and any judgment out of their own proceeds," explains Dow. "That's usually the operating accounts or reserves—and if there were a shortfall, then the association might have to impose a special assessment on the members of the association to

fund the judgment amount or the costs of defense. A majority of states mandate that a non-profit organization indemnify its directors and officers for actions they take on behalf of the organization. Upon creation of an HOA, the governing documents generally mandate that the association carry D&O coverage."

Generally, property managers can also be included for an additional premium, says Sal Sciallo, an agent with State Farm Insurance in Manalapan. "You'll need to make sure the policy has a property manager endorsement," he says. "Additional policy benefits could include coverage for punitive, exemplary and multiple damages associated with a claim, where it's permitted by law."

Dow points out that most contracts between a property manager and an organization mandate that the organization provide indemnification to the property manager for actions the property manager takes on behalf of the organization. This means that the organization must provide a defense for and pay any judgment.

D&O policies are designed to provide coverage for HOA, condos and co-ops, although the specifics of a given policy might differ based on a community's coverage needs.

"Although the exposures facing condos and HOAs may differ a bit than the exposures facing a co-op," says Dow, "most D&O policies are designed to provide coverage for all three types of entities. Policies are also designed to cover planned unit developments, timeshares, utility districts [like] watersheds and lakes, and commercial associations," says Dow.

What D&O Does (and Does Not) Cover

According to Dow, a typical scenario when D&O would come into play is when association members claim that the members of the board of directors have breached their fiduciary duties to the association in some manner, or have governed the association in violation of the documents governing the creation and management of the association.

Examples of scenarios in which D&O insurance is vital include situations wherein a resident sues the board over a pet rule, or someone alleges that the board has commingled funds, or an employee sues for wrongful termination.

"D&O covers errors and omissions for trustees in an association," says Sciallo. "In general, non-monetary damages aren't covered, but defense costs are. So say a member of an association sues the board over its pet regulation. Because this type of claim seeks non-monetary damages, the board's legal defense costs are eligible for coverage."

"Another instance might be if a former employee sues the association alleging wrongful termination. If the condo association prevails in courts, costs are covered under employment practices liability insurance (EPLI)," says Sciallo.

"Some of the most common problems that occur are claims by residents or owners for negligence in the maintenance of the common elements that affect an individual's unit," says Kaspar.

But don't make the mistake that D&O offers protection from everything. It's not all-inclusive, and there are definitely limitations. As Dow notes, D&O does not cover issues covered by other policies. For example, bodily injury claims - which are covered under general liability—and property claims—which are covered under property insurance—are not part of a D&O policy.

Additionally, D&O will not cover the board in cases of fraud, bad faith or intentional wrongdoing.

"There might be a host of reasons why a D&O policy might not respond," says Dow. "Such instances might include a board member having prior knowledge of a wrongful act giving rise to the claim, or intentional criminal or fraudulent conduct."

Although things like fraud or deliberate mishandling of funds are not covered by D&O, you can work with your agent to make sure that your board is covered in other areas.

"Unlike general liability policies, key terms are not standard and may differ from policy to policy," says Kaspar. "Recent developments in D&O case law highlight the need for insureds to work closely with their brokers to make sure that they're purchasing comprehensive coverage. Failing to negotiate appropriate language in a D&O policy, or failing to understand the terms in that policy before a claim is made can leave a board without coverage. For example, you must make sure you understand the literal definition of a claim in determining whether coverage is extended under your policy."

Because D&O policies are claims-made policies, the insured persons are covered for claims asserted to the insurance company during the policy period. "Late notice of a claim often forecloses coverage," warns Kaspar. "Most boards don't like reporting speculative claims that aren't likely to ripen, since it may increase their premiums. However, under D&O policies, if the policyholder does not give timely notice of the informal claim that later ripens after the policy period, they may have forfeited their coverage."

Choosing a Plan

As each board likely has unique needs, you should first determine what your coverage needs are before writing out a check for D&O coverage. Take stock of your particular situation to see who and what needs to be covered.

"There are different kinds of policies," says Sciallo. "You'll want to find out if you need a policy that includes employment practices liability insurance (EPLI) coverage. An association with no employees and no payroll doesn't need EPLI, but one that has maintenance guys, clerical employees and a payroll does need a D&O that includes it."

"There are several different offerings on the market," adds Dow. "You generally see two types of coverage: D&O added to a general liability or package policy, and standalone policies designed to provide specific coverage features." When choosing coverage, Dow says it is important to consider several factors, such as the types of exposures your board faces and if you have a large number of service contracts where defense expense coverage for breach of contract claims might be an issue.

"Co-ops may face a greater exposure to discrimination claims based on the nature of the process of interviewing prospective buyers," says Dow, "and as such would need to ensure a policy form provided coverage for discrimination claims.

"The policy can be connected to the insurance of an association as a whole," he continues. "Carriers often provide package policies that bundle general liability coverage with D&O coverage. Our experience has shown that such package coverage is generally not as comprehensive or broad as a standalone policy designed specifically to provide D&O coverage."

Like all other recurring costs, D&O should be factored into the annual budget each year.

"The cost of D&O should go into the insurance budget and should be part of the annual budget," says Sciallo. "Reserves would be used to pay deductible and should be able to cover that amount. The higher your deductible or retain limit, the higher the reserve should be."

Where to Get Coverage

The necessity of D&O insurance is evident. So where can boards get it?

"Most commonly, D&O is purchased through the agent of a carrier," says Sciallo. "You can get it through an agent, who works on behalf of one insurance company, or a broker, who works on behalf of the customer, and can offer insurance through a variety of carriers."

"A board should look to its insurance broker or risk manager for advice on D&O coverage. D&O coverage is usually different than the liability and property liability insurance for the association. However, it can be purchased through the same company that insures the condominium," says Kaspar.

Make sure you read the fine print, however. Because each board has unique needs, it's crucial to ensure that the policy you choose provides the type of coverage you need. Work with your broker to carefully outline what your board needs versus what extras might provide members more peace of mind.

"D&O policies are constantly changing, and the courts differ dramatically in their interpretation of critical provisions," says Kaspar. "Key terms are not standard and differ from policy to policy. D&O policies continue to evolve to meet policyholder concerns and thereby are influenced by the insurance marketplace. An association should rely upon the advice of its insurance broker and carefully consider the terms of its D&O policies to make certain that it has adequate protection."

And like with all insurance policies, it's important not to let coverage lapse. As Kaspar points out, the statute of limitations will be strictly construed to deny coverage. "As such, the association needs to continue purchasing D&O coverage and should not allow any gaps in time," says Kaspar.

In these litigious times, it goes without saying that board members need to be protected. Keeping your D&O policy current and working with your agent to ensure sufficient coverage can help avoid costly legal expenses and protect individual board members as they do their job.

Stephanie Mannino is a freelance writer and published author living in Hoboken, New Jersey.