The Most Common Directors' & Officers' Claims Taking Steps to Avoid Litigation

The Most Common Directors' & Officers' Claims

Community associations, whether a homeowners' association, property owners' association, cooperative, timeshare/interval association or commercial association are legal entities that are governed by bylaws and applicable statutory and governmental regulations. The directors and officers of community associations are the core infrastructure for the entities charged with the governance of the entity. These boards are virtually always comprised of volunteers who generally have the greatest intentions when serving. However, boards are confronted with some basic inherent challenges. First, boards often lack experience or training. Second, boards often succumb to a false sense of security by handling matters informally. Third, boards ignore basic rules and governing documents. Finally, boards too often shy away from professional guidance.

Proposed Solution:

• identify the most common claims;

• identify why these common claims occur;

• learn how to avoid these claims in the first place;

• if a claim still occurs, learn how to informally resolve claims before they explode;

• lastly, learn how to maximize claim resolution.

Before any claim is identified, it is helpful to put the world of community association directors' and officers' claims in context.

First, claims against directors and officers of community associations are mostly comprised of defense fees, claim expenses and litigation costs, mostly paid by the insurance carriers.

The common claims identified below rarely get to trial and rarely result in any type of monetary damage payment.

As opposed to property or casualty damage claims, most claims against community association boards are easily avoidable.

The Most Common D&O Claims

The 10 most common claims are a result of the following:

• The board's failure to adhere to bylaws

• The board's failure to properly notice elections and properly count votes/proxies

• Bylaw challenges by members regarding power granted the board

• Improper removal of board members

• Decisions by the board resulting in physical damage to the association's property

• Approval of variances, generally by an architecture committee and challenges of review board decisions

• Breach of fiduciary duty

• The board's failure to maintain common areas

• The board's failure to properly disburse funds

• Defamation by the board of a member

Most Claims are Avoidable

In the area of directors' and officers' liability, as opposed to other types of casualty insurance, the most common types of claims are avoidable. For reasons again that can be the subject of a sociological study, people do not take seriously the governance of their community association. As employees, the association members go to great lengths to make sure they do their job by the book. On the other hand, when they are on a board that governs a community wherein they have invested their greatest asset, they do not take things as seriously.

What can be done to avoid the most common claims? Here are a few tips:

Follow the rules.

• Know the bylaws and any other governing documents.

• Require all board members to read the bylaws.

• Ensure that new association members receive and sign off on the bylaws and governing documents when they move into the community.

• Know the rules governing elections and follow them. The current members may not have a problem, but what if a third party or a new association member challenges decisions of a board that was not property elected?

• Know the rules regarding assessments.

• Know the rules regarding failure to comply with assessments.

Make sure rules are current

• Conduct a periodic review of the governing documents.

• Retain counsel to make sure that the association is advised of new laws and developments.

Memorialize changes

• Make changes pursuant to the bylaws.

• Make sure the changes are memorialized and the bylaws are properly amended.

Elect responsible board members

• Make sure potential board members know what the job entails.

• Make sure the potential board member is willing to take the job seriously.

• Provide training for board members as a governing board.

Use professional guidance

Regardless of the size of the association, counsel should be retained for major transactions. Unless the association has a management company that is experienced with collecting assessments and liens, hire counsel to handle these transaction and procedures.

There is affordable counsel for community associations. All counsel will negotiate for an appropriate engagement relationship. It is cheaper to invest a known amount up front than having to submit a claim to an insurer or hire an attorney after something goes wrong.

Retain the services of a community management company or manager, even if it is only for certain activities such as running board meetings and managing the boards activities. Unless the association has a volunteer board member who is willing to handle the formalities, it is worthwhile to use a professional.

Avoid emotional involvement

• Avoid emotions and personality conflicts. These have led to some of the greatest wastes of time and resources in the area of directors' and officers' claims.

• Follow basic rules for running meetings as a method of avoiding the opportunity of emotions and personality conflicts getting in the way.

Keep good records

• Keep board minutes and provide them to board members to be corrected and approved.

• Keep good financial records.

• Keep complaint logs and records on how they are responded to.

Advance legal information and claims

• The directors' & officers' policy is a claims made policy that generally requires that the association forward all claims as soon as reasonably possible (and very often within the policy period).

• The directors' & officers' policy is a claims made policy that generally requires that the association forward notice of facts or circumstances that may give rise to a potential claim.

• There is no downside to forwarding potential notices of facts or circumstances. Most insurers in this area will not penalize, and should not penalize, an insured for providing notice. The insurer is in the business of risk management and can assist in early resolution of claims or situations.

Consider Alternative Dispute Resolution

• Associations should consider early on the possibility of mediation to resolve any claim or litigation.

• Communication is the key to resolving problems. The association should consider having a mechanism in place for the community association to address conflicts and grievances.

Joel W. Meskin, Esq., a senior vice president with Ian H. Graham Insurance, has been the lead underwriter and underwriting manager the past two years. Stephanie Solomon, Esq., is director of claims for CNA, and James J. McConn, Jr., Esq. is a partner in the law firm of Hays, McConn, Rice & Pickering, P.C. of Houston, Texas.

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  • Need an attorney who understand D & O Liability that has litigated against condo associations representing condo owners.