Insurance is one of the most essential purchases any homeowners association can make. Boards, in particular, will benefit from D&O insurance. Unfortunately, many boards don’t even know what this type of policy covers and how much coverage is enough.
What Is D&O Insurance?
Directors and officers insurance, otherwise known as D & O insurance, is designed to protect HOA directors and officers against personal liability if they are ever sued. It is an important insurance policy for any homeowners association. Without it, directors and officers could find themselves personally liable for legal fees and damages if they are named in a lawsuit. As such, homeowners should be careful not to volunteer for an HOA board without adequate D&O coverage.
You might wonder, though, why there is even a need for D&O insurance. But, you would be surprised at how many disgruntled employees or homeowners file lawsuits against board or committee members. Allegations can range from lack of corporate governance to failure to adhere to regulations, with the most common allegation being a breach of fiduciary duty.
What Does D&O Liability Insurance Cover?
The exact coverage of D&O insurance can vary from one provider to another. Generally, though, standard policies cover the cost of the following:
- Legal fees
- Financial losses (both personal and organizational)
Some policies also extend coverage to trial defense costs as well as criminal and regulatory investigations.
Typically, this type of insurance policy covers all members of the HOA board but not all policies are made equal. Some policies extend their coverage to protect all HOA employees and volunteers (including committee members) as well. Meanwhile, others only offer protection limited to the HOA board. If your HOA has sub-committees, it is important to check your policy to see if it covers members of those subcommittees, too.
Additionally, there are some D&O insurance policies that exclude certain individuals. For instance, it is common for policies to exclude non-owners or those who are no longer part of the HOA board.
Other coverage features include:
- Defense for breach of contract claims
- Defense for non-monetary claims
- Defense outside of the limit of liability
- Third-party harassment
- Third-party discrimination
- Employment practices liability
- Coverage for the HOA management company
What Does D&O Insurance Not Cover?
With coverage against liability, some board members might feel invincible and start to commit all sorts of heinous acts. But, D&O insurance only normally protects you from liability if you acted in good faith. Most, if not all, policies don’t offer coverage for willful misconduct, fraud, and other criminal acts.
How Much D&O Insurance Is Enough?
To understand how much D&O coverage your HOA needs, it is essential to look at state laws. Some states have minimum coverage requirements. For instance, California Civil Code Section 5800 stipulates at least $500,000 in coverage if a development has 100 separate interests or fewer. For those with more than 100 separate interests, on the other hand, at least $1,000,000 is necessary. Other states, like North and South Carolina, don’t have such requirements.
Another thing you should consider is the size of your development. If you have a large community with multiple common amenities, such as tennis courts, swimming pools, and gyms, you will most likely need a higher limit. In contrast, a smaller development with only a few common amenities will only need a smaller monetary coverage limit.
Aside from your insurance policy, the federal Volunteer Protection Act also provides some level of protection to volunteers of nonprofit organizations and governmental entities. Several states also have their own laws limiting the liability for volunteers. Examples of these states include New York and California. Of course, to qualify for such protections, volunteers must have acted in good faith and within the organization’s best interests.
Standalone Policy vs. Package Policy: Which Is Better?
Many homeowners associations maintain a package policy that already includes D&O insurance in addition to property and general liability insurance. The problem with this is that such package policies don’t emphasize D&O insurance, leading to inadequate coverage. And this is often due to the provider’s inexperience with D&O, the fact that D&O doesn’t bring in a lot of premiums, or that HOAs don’t generally demand for more comprehensive coverage (or some combination of these).
For this reason, instead of opting for D&O coverage that comes with a package policy, it is better to purchase a standalone policy that will give you the best protection. And the cost differential between standalone D&O and package D&O isn’t that big anyway.
To better understand how standalone D&O policies trump package or endorsement policies, take a look at their key distinctions below.
- Insured. In addition to directors and officers, standalone policies insure trustees, employees, committee members, and other volunteers of the association — past, present, or future. Package policies, on the other hand, only cover directors and officers during the policy period.
- Coverage. Package policies only cover indemnity, while standalone policies offer coverage for both defense and indemnity.
- Defense Against Non-Monetary Damages. Standalone D&O provides defense against both monetary and non-monetary damages. Package policies, though, don’t even include defense.
- HOA Management Company. In general, standalone policies extend to the HOA manager as well, whereas package policies do not.
- Failure to Obtain Insurance. If the insured is sued for failing to get proper insurance, standalone policies will provide a defense. In contrast, typical package policies explicitly exclude this.
How Much Does D&O Insurance Cost?
There are a few factors that can influence the cost of D&O insurance for HOA communities. These include the size of your development, what inclusions you want to be covered, the coverage limit, whether you buy a standalone policy or a package policy, and the insurance provider you go with. As such, D&O insurance costs can vary greatly, ranging from only a few hundred dollars to several thousand dollars per year.
To get the best coverage at the best price, it is critical to shop around and ask for quotes from D&O insurance providers. This way, you can compare their policies against one another and decide on the right policy for your HOA. Keep in mind, though, that standalone policies generally give you better protection with only slightly higher premiums than package policies.
The Importance of D&O Insurance
Among the many insurance policies homeowners associations should have, D&O insurance should be one of the main priorities. Volunteers must have sufficient protection while rendering their services in good faith and within the community’s best interests. Otherwise, your HOA will have trouble finding anyone willing to serve on the board and committees.
Deciding on the best insurance policy and provider for your association can be a difficult task. Make it easier by hiring an HOA management company like Cedar Management Group. Call us today at (877) 252-3327 or contact us online to request a free proposal.
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