In 1997, a racially mixed couple wanted to sublet a co-op apartment at the Beekman Hill House Apartments in New York City. Nicholas A. Biondi, then-president of the Beekman Association's board of directors, refused to approve the couple's application. The couple sued the association for illegal discrimination and the judge found Biondi liable and ordered him to pay the couple $230,000 in compensatory damages and $125,000 in punitive damages. The other board members were also ordered to pay $25,000 in punitive damages.

The association's directors and officers insurance policy—also known as D&O—covered the compensatory damages, but the punitive damages were not covered and had to be paid in full by the individual directors.

Every HOA board member has a personal responsibility to conduct association business in the best interests of the shareholders and unit owners that they represent. However, board members are human and therefore fallible, and there are occasions when they may make a wrong decision—or what a homeowner believes is a wrong decision.

Many claims stem from disputes over homeowner restrictions—like painting a front door, or putting a satellite dish on the roof, for example—or from a less-than-brilliant financial decision that winds up costing association members. Issues like these account for the vast majority of cases, but sometimes the problem at hand can be as serious as racial discrimination against a potential resident.

"Any decision that a board member makes can be subject to a claim if the homeowner disagrees with the decision," says Ronald Perl, a partner in charge of Hill Wallack's community association group in Princeton, New Jersey. "These disagreements blow up into lawsuits and claims for damages."

D&Overview

According to Robin Flynn, an account executive at Brown & Brown Insurance in Bethlehem, Pa., D&O coverage covers any wrongful act, errors & omissions or potentially misleading statement that a board member could make while conducting association business in good faith. In this, D&O differs from general liability insurance, which mainly covers liability against third party bodily injury and property damage.

Lately, Flynn says she has seen an upswing in D&O claims. "You would think it's because of the mentality that people want to sue," she says, "but most of the time, it's just that an association's business has been mismanaged, or that the board is not filing good documentation or keeping adequate minutes for the decisions they're making."

New Jersey homeowners associations are required to carry D&O and other general liability coverages. According to Flynn, the cost of the policy will depend on several factors, including the association's size, the number of directors, and a review of any previous claims that have been filed against the association. The annual amount of a standard policy begins at around $1,500. There is a minimum of $1 million in coverage, but additional umbrella policies can be purchased. "It's cheaper to get an umbrella policy than to increase the underlying liability in a policy," says Flynn.

A D&O policy covers the actions of past, present and future directors. Individual directors do not need to be named in the policy, and nothing changes when the board seats turn over—the association's name is put on the policy.

"Your HOA's insurance agent should review what the policy will cover, but each policy varies," says Flynn. "Most policies include discrimination, some don't include wrongful termination, and some are all encompassing."

The Price You Pay

If your association is sued and found liable, your D&O policy will cover compensatory damages. "However, punitive damages are not covered by insurance because it's against public policy," says Wendell Smith, an attorney and partner of the Real Estate Department, chair of the Planned Real Estate Practice Group and member of the Land Use Practice Group, at Greenbaum Rowe Smith & Davis LLP in Woodbridge. "If an insurer paid for punitive damages, it would not deter people from committing these egregious acts. If a board member commits an act of illegal discrimination, any punitive damages awarded comes straight out of their pocket."

Smith explains however, that in some circumstances, certain types of discrimination are allowable—high-profile celebrities are a good example.

"You can prohibit someone from moving into a co-op or HOA, as long as it's not for a constitutionally protected reason," says Smith. "For example, Richard Nixon was once refused, and other celebrities often are too, because the other residents don't want all that attention."

Unfortunately, directors who volunteer their time to help run their homeowners associations can ultimately have their personal assets attacked if they are found liable in any claim. It is possible to reduce—but not eliminate—the chances that they will be the subject of a claim by following a few simple guidelines:

"Document, document, document," advises Flynn. "Outline in writing who gave you which advice, and what you did in order to make that informed decision." Board members should document all official actions at each meeting and follow all current policies. This also prevents any one board member from acting without authority—including the president.

"Stay informed," adds Perl. "Each board member has to recognize their responsibility to keep informed of the activities of [any] officer."

Perl goes on to say that it is not enough to say in a claims case that you didn't know that was going on, or that poor—or even illegal—decisions were made because you weren't paying attention, or were often absent or did not review the minutes. He stresses that ignorance or negligence will not free you from liability.

If there is one ray of light in the matter, says Perl, it's that "In New Jersey, there is a statute that absolves board members from personal liability if they are acting on the advice of their professionals, whether it's a certified public accountant, lawyers, manager, or engineering firm. So seek and follow the advice of your retained professionals, and learn to use and rely upon their judgments." If you don't have a professional and need to make a decision, says Perl, hire one and document the advice that you sought.

Covering Yourself

Board members cannot go out and buy their own individual D&O policies, but Flynn explains that directors can review their own homeowners or renters insurance policies and see if they are protected under the personal liability section. Remember, it doesn't prevent the director from being sued, but it can help with certain damages that may have to be paid out of pocket.

Keep in mind that following these guidelines may reduce your chances of a claim against the association, but it really doesn't affect the bottom line cost of your D&O policy. It's also recommended that you review your policy annually to make certain that it reflects the changes and current needs in the association. With all that in mind, you should be able to avoid situations that might put your HOA board at risk.

Lisa Iannucci is a freelance writer living in Poughkeepsie, New York.