The board of directors runs on volunteers. They put in hours of unpaid time and effort into making sure your condo or coop runs efficiently and effectively. And then they make a mistake and wham! There is a lawsuit and suddenly they are being sued. No, not the building, the board or even the property management company is being sued (although that can happen too). It's the volunteer—the one who has dedicated his or her time for the good of the building—who is suddenly facing a lawsuit for thousands if not millions of dollars. Sound scary? Without Directors & Officers insurance, that scenario is not only scary, it's probable.
Unfortunately, directors and officers may make mistakes and, without D&O insurance, these mistakes can be costly, so we've prepared this list of ten things you need to know about D&O insurance.
1. D&O insurance is all about protection. Simply put, says Arthur Schwartz, senior vice president of Masters Coverage Corporation in New York City. D&O insurance, "protects directors and officers from damages resulting from allegations of wrongful conduct and lawsuits. It provides legal defense coverage as well as indemnification of damages."
"A director and officer each have certain fiduciary duties and fiscal responsibilities when serving in their respective capacity for the organization," explains Ronald A. Sher, a partner at Himmelfarb & Sher, LLP, a law firm in White Plains. "The director and officer have an obligation not to violate or breach those fiduciary duties and fiscal responsibilities."
Sher says that the general standard of care is that the director or officer perform such duties with due care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances.
"The director and officer may be held responsible and found liable for a material breach or substantial default; therefore, D&O coverage provides protection to both the organization and to those directors/officers in the event of such a claim," he says. However, he explains further that directors and officers can be found responsible and liable if they violate or breach their duties with illegal, improper or discriminatory conduct.
"The insurance carrier can (then) disclaim coverage and that individual may not have insurance coverage, albeit the carrier may still be required to defend, and may be held personally liable for their actions."
D&O insurance is designed to fill the coverage gaps of the commercial General Liability (CGL) policies. "The CGL policy is designed to respond to claims related to bodily injury or property damage. D&O policies respond to claims relating to "wrongful acts," says Glenn Albert, managing director, Real Estate Practice, Sterling & Sterling Inc., an insurance firm in Woodbury, New York. "Claims for wrongful acts generally relate to monetary or economic loss without bodily injury or property damage."
2. D&O coverage is the same for co-ops and condos.Although co-ops and condos differ in many areas, directors and officers coverage is essentially the same, says Schwartz. "It falls under the heading of 'Non-Profit Community Associations.'"
3. D&O insurance is necessary… "Coverage is necessary to protect the individuals who serve on boards and committees from personal monetary loss as well as protecting the building corporation," says Schwartz. "Most common problems are contractual disputes, wrongful termination and discrimination, potential violations of the American Disabilities Act, claims and allegations by unit owners or shareholders against the board for monetary damages."
4. …But it is not mandatory.A board can choose to opt out of D&O coverage, unless required under the bylaws, but experts agree this is not a wise decision.
"Board members can be exposed to substantial personal liability for serving in this capacity," says Albert. "In order to attract the finest talent and properly protect their interests, quality D&O insurance is required."
Schwartz agrees. "D&O is not mandatory but I cannot imagine a building attracting anyone to serve without this coverage in place. If there were no D&O in place, the board would have to engage a law firm every time an allegation was made against it. There may be an indemnification agreement between the building corp and board in the event of a successful suit, but ultimately the shareholders or unit owners would have to pay."
5. D&O insurance does cover…"The type of D&O lawsuits (include) claims of negligence and allegations of mismanagement on behalf of the board; housing discriminatory complaints, usually associated with a denial of a purchase/sublet application involving a designated minority class; employment discrimination, sexual harassment and wrongful discharge complaints by employees," explains Sher.
6. But D& O insurance does not cover…D&O insurance is not a cure-all to preventing all types of litigation. "Bodily injury and property damage claims are not covered by D& O but should be covered under the building's basic liability coverage," says Schwartz.
D&O coverage also doesn't indemnify a board or board member against decisions made "in bad faith," or with illegal intent. If a board is found to have acted in an illegal manner and are hit with punitive damages, members are on their own when it comes to paying them.
This limitation of D&O coverage was shown in Technicolor in the case of Gregory and Shannon Broome in their much-publicized discrimination suit against Nicholas A. Biondi and the Beekman Hill House Apartment Corporation in 1995. In a nutshell, the legal battle that soon became known as the "Biondi case" involved allegations of racial discrimination and bad faith on the part of the Beekman board against an interracial couple trying to buy an apartment in the upscale co-op building. When the dust finally settled, the judge in the case felt the Broomes' allegations were legitimate, and awarded them some $640,000 in compensatory and punitive damages. Since Biondi and the board were found to have acted illegally, any D&O coverage they had would not shield them from having to pay that judgement out-of-pocket.
The lesson here, say the industry pros, is clearly to not act in a discriminatory manner in the first place—and to not expect your insurance coverage to come to your rescue if you do.
7. Insurance companies do offer D&O policies."There are several large insurance companies that write D&O policies including Travelers, Chubb, CNA, AIG, which can be obtained through an insurance broker who can recommend what best fits the building's needs," says Schwartz. "It may be connected to the building's property and liability policy but most often is placed separately. It is not necessarily placed with the same insurance company that insures the building but is best placed through the same broker so that coverage may be coordinated and 'umbrella' liability coverage may be written to supplement the basic D & O coverage."
D&O insurance can be complex and Albert says that the extent of coverage offered will vary from company to company.
"It is usually best to obtain this coverage from companies offering specialized coverage for co-ops and condos. D&O coverage offered as part of a CGL policy may be less expensive but coverage will be limited."
8. Quality D&O coverage will provide coverage enhancements, including protection for past board members."Quality D&O coverage will provide coverage enhancements including: 'Definition of insureds' which will include the association or corporation, past and present directors, trustees, officers, volunteers, committee members employees and property manager," explains Albert.
He also says that a good policy will include: full prior acts coverage (no specific time limit); defense coverage for claims alleging breach of contract; no exclusion for libel, slander or invasion of privacy; employment practice liability coverage (discrimination, wrongful termination, harassment etc.); and final adjudication language for claims alleging fraud or other dishonesty.
A "managing agent's" endorsement can be purchased or provided to include coverage for the property manager," says Schwartz.
9. A typical D&O policy is affordable compared to the consequences.
D&O insurance premiums should come out of your board's annual budget, says Albert. "A typical D&O policy with coverage limits of $1,000,000 should range in price from $1,000 to $2,500 depending on the operating budget of the entity and number of directors and officers," he says. "Higher coverage limits are available on umbrella policies at a slightly additional cost."
And as the Biondi case illustrated, the cost of coverage most certainly pales in comparison with the payouts board members can face in the wake of a lawsuit. According to Kevin Davis, a California-based insurance broker and industry veteran, for the first two decades in which insurers wrote D&O policies, most D&O claims paid out around $25,000, with the rare bank-breaker maybe reaching $200,000.
In the late 1990s however, Davis says that claims began inflating rapidly, costing $150,000 on average, with big hits topping $1 million. Those big losses were triggered by more lawsuits, combined with stagnant premiums and modest insurance rates. Today, an uncovered claim against a board could be financially ruinous for everybody involved.
10. For more information, talk to your insurance agent or broker. Your insurance representative is the best expert to advise your board about the different types of policies available.
If your board does not carry D&O coverage— or perhaps doesn't have quite enough coverage in your current policy —now may be the time to consider getting or improving your coverage. Regardless of your size, if you have people volunteering their time, you have exposure that general liability insurance may not cover. The standard general liability insurance policy only covers claims for bodily injury or property damage. Complete coverage for the board requires both a general liability policy that includes directors and a D&O policy.
According to the Nonprofit Risk Management Center (NRMC), every state has a volunteer protection law and the federal Volunteer Protection Act (VPA) became the law of the land in September 1997.
The Volunteer Protection Act provides that, if a volunteer meets certain criteria, he or she shall not be liable for simple negligence while acting on behalf of a nonprofit or governmental organization. The VPA also provides some limitations on the assessment of noneconomic losses and punitive damages against a volunteer. The Volunteer Protection Act does not, however, protect a volunteer from liability for harm "caused by willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer." The act does not prohibit lawsuits against volunteers nor does it provide any protection for nonprofits.
The final decision on whether to purchase D&O insurance rests with the board. It's important to determine how much risk the co-op or condo board wants to assume. Can the board pay out settlements? What is the likelihood of a claim?
The NRMC says that every nonprofit must consider how it will pay for injuries, damages, legal expenses and other costs that stem from the harm it causes.
"For some organizations, reserve funds are sufficient to pay for anticipated losses. For the majority of the nation's 1.5 million nonprofits, reserves are inadequate. For this reason, a growing number of nonprofits choose to purchase insurance and pay an annual premium in exchange for the promise that funds will be available in the event a covered loss occurs."
The NRMC recently released a new resource on nonprofit directors and officers liability insurance titled D&O: What You Need to Know. The new publication discusses the role of D&O coverage in an overall risk management program aimed at governance risks. The book is available for $15 plus shipping and handling by calling (202) 785-3891, or on their website, http://nonprofitrisk.org.
Lisa Iannucci is a freelance writer, published author and mother of three living in Poughkeepsie, New York.