Most homeowners’ associations (HOA) are run by a board of directors (BOD). The board is typically led by a small group of homeowners living in the community. The HOA board makes decisions for the community as a whole regarding the budget; dues and fees; rules and regulations; and upkeep and maintenance of common areas or building structures.
Occasionally a homeowner will take issue with a decision the board makes and files a lawsuit against the HOA naming individual board members as well. If the board does not have adequate D&O insurance coverage, the board and/or those individual members could be liable for legal fees, damages, and other expenses. An unexpected lawsuit could easily wipe out a board member financially. Therefore, HOAs need to acquire and maintain reliable D&O insurance coverage at all times.
Board Member Risk
As humans, members of an HOA are at risk for making mistakes. Those mistakes can subject them to liability. Some of the most common liabilities for HOA board members are:
- Misuse of HOA funds.
- Failure to agree on a budget.
- Not keeping up with maintenance on common areas or structures.
Sometimes, the courts will dismiss cases against board members who have not breached their fiduciary duties. Regardless of whether the case is settled out of court or dismissed, getting to that point will require legal fees for the HOA and the individual board member(s) named in the lawsuit.
Evaluate Your Policy and What/Who is Covered
Often HOAs will have insurance coverage for the association but not for board members. D&O insurance fills in the gaps where liability insurance leaves off. While liability insurance covers only the HOA, D&O insurance protects each board member from any liability as a result of their actions as a member of the board.
It is important to note who is covered when reviewing your D&O policy. Typically, board members are covered, but sometimes this coverage extends to committee members, volunteers, and other temporary stand-ins. It is not uncommon for a lawsuit to name board members who are non-owners or who have left the board. Be sure your D&O policy covers those situations as well.
Most D&O policies cover legal expenses and claims incurred in a lawsuit. However, some policies do not cover legal fees if the claim is settled out of court or negotiated. Read the fine print to ensure your policy does not only pay out upon a final ruling.
Other D&O Considerations
The coverage under each policy is different. Some D&O policies will pay the expenses as incurred; others wait until the issue has been resolved to reimburse legal fees and settlement payments. Obviously, the amount of coverage will be important. If you have too little coverage, you may still be at risk.
The cost of D&O coverage can range from a few hundred dollars to thousands per year. Consult with your attorneys and insurance professionals for help deciding what type of D&O coverage your HOA needs before you serve on the board.