An Ounce of Prevention: How To Protect The Policy That Protects You

16 October 2017 By Sean Ahern

Community associations typically take great care to protect their package policies by taking measures to prevent fire losses and slip-and-fall claims and by proactively addressing conditions on their properties which may cause such losses. Boards understand an association’s package policy premium (as well as an association’s insurability) can really suffer as a result of claim activity, frequency and severity. Plus they want to keep their associations safe and running smoothly. But often too little thought is given to protecting the Directors and Officers (D&O) policy, which arguably is the most valuable coverage purchased by the board as it is designed to protect not only the association but the board itself.

D&O policies were first developed by Lloyds of London in the 1930s after the crash of the stock market in reaction to the large number of lawsuits filed regarding bad investment decisions. Coverage is designed to protect against acts, or failures to act, which cause harm to someone else. Misstatements, negligent acts, omissions, discrimination, misleading statements, breaches of fiduciary duty and wrongful employment practices (hiring and firing) can all lead to legitimate Directors and Officers suits. To make matters worse, even groundless, false, or fraudulent allegations can trigger the need for a legal defense!

Most associations’ bylaws require the purchase of D&O coverage, but it would be foolhardy not to have it regardless as such coverage covers not only past, present and future board members but also their estates, heirs and the management company itself.

Now that the importance of proper Directors and Officers coverage has been discussed, what can be done to make sure coverage stays in place at a fair price? Some associations may need to take a hard look at how their regular meetings are conducted and at how interactions and communications with the unit owners they serve are performed. Though most associations’ bylaws clearly lay out how things are to be done, there are some associations that just “wing it,” and that’s where problems can occur.

Boards should be disinterested, that is, their decisions should only benefit the common good of their associations, without any expectation or intent of personal benefit, financial or otherwise. Boards should employ diversity where possible, taking advantage of the variety of professionals and experienced people who comprise their associations. Boards must analyze themselves periodically to make sure they are operating within the framework of their associations’ bylaws. In addition, boards should take full advantage of their associations’ attorneys, property managers, insurance brokers and other professionals when making decisions.

Meetings should be held at scheduled intervals as per the requirements of association bylaws. Cool heads should always prevail, and any “us versus

them” mindsets should be abandoned! Information should never be suppressed or hidden, and board members must abide by duty-to-inform regulations whereby information regarding problems experienced by one homeowner

must be made available to all. Proper documentation of discussions and decisions (aka, developing a defense) is critical in protecting associations should problems occur.

Directors and Officers insurance policies are extremely valuable tools in the management and protection of a community association, and in particular, the board itself. These policies need to be protected in the same way that property and liability policies are protected by implementing proactive measures to prevent claims.

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Last modified on Tuesday, 28 November 2017 14:37

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