Q: Do I need insurance if I'm on an HOA board?

Members of condominium association and homeowners association boards make tough decisions all the time – decisions that can have a tremendous effect on others around them.

As a result, board members are often sued, both along with the association itself and separately, as a result of actions they take and actions they fail to take in their capacity as board members.

Almost all of them have something to lose, as well, from being targeted in a lawsuit: After all, everyone knows they at least own one of the units in the development. Unless your state has a substantial homestead exemption in bankruptcy laws, that’s frequently a collectible asset.

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Trial lawyers know this – and they know that boards and board members frequently carry liability insurance to handle claims and make sure they get paid – and so are happy to file lawsuits against associations and board members.

If you’re on the board, you don’t want to be going naked. You need to consider a special kind of insurance coverage designed to protect both association members and board members:

Directors and Officers’ Liability Insurance, or D&O

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What is Directors and Officers’ Liability Insurance?

Most people understand medical malpractice insurance and why doctors need it. It’s a form of professional liability insurance. Nobody is immune from human error, and no one is immune from being falsely or unjustly accused of a mistake or malfeasance beyond his or her control. Stuff happens even to the best of us. Your D&O insurance provides you the same kind of protection that a doctors’ medical malpractice insurance does:

It guarantees parties who are actually wronged or damage that there is sufficient liquidity available to make them as whole as possible – financially speaking anyway.

It guarantees members of HOA or condominium boards that they will not be personally ruined or driven into bankruptcy as a result of a lawsuit (provided damages fall within the coverage limits of the policy.

The insurance company will help provide a legal defense on the board member’s behalf. This alone is significant, because mounting a defense against a determined lawsuit can easily cost tens of thousands of dollars.

What kinds of things do directors get sued for?

Condo and HOA board members have been sued for all kinds of things. Homeowners’ association disputes may seem petty to outsiders, and the stakes may seem trivial to others – but they don’t feel very petty to the aggrieved party. Any dispute connected to one’s hearth and home quickly becomes fraught with emotion – and lawsuits against board members can be pursued with jihad-like ferocity.

Here are some of the more frequent causes of action against condo and HOA board members:

Insufficient oversight
Misuse of association funds, such as commingling
Conflicts of interest
Libel or slander
Violation of privacy. It can be shockingly easy to be exposed to a lawsuit like this. It can happen simply from the accidental disclosure of an email.
Failure to pay HOA debts.
Self-dealing
A mistake or oversight in paperwork
Unfair enforcement – someone could be unhappy you had her boyfriends’ car towed when it was parked in the wrong place, for example.
Unlawful discrimination in housing – whether actual or perceived.
Sexual harassment against an association employee.
Blackmail or bribery
Violation of governing documents
Aiding and abetting criminal or negligent actions of others
Illegal or improper eviction
Injuries on the property (yes, individual board members have been sued for slip-and-fall and crime incidents on managed property).
Failure to take due care of property disposed of after an eviction

The list is endless.

Doesn’t the Association’s Liability Policy Protect Me?

No, silly!

The association’s liability policy protects the association as a whole – not any one member, and not any one board member. If it is in the interests of either the association or the insurance company to throw an individual board member under the bus in the vigorous defense of the interest of the larger group, they’ll do that in a heartbeat. Expect it.

General liability is simply not designed to protect individual board members.

I have personal liability protection under my homeowners policy? Does that protect me?

Frequently not. General liability insurance of the sort that is included in a homeowners policy is designed to cover your actions as a private individual. These policies are not designed to protect those who take on additional possible liability because they serve as board members or otherwise paint a target on their backs! If the claim arises specifically because of your actions in an official capacity as a condo or HOA board member, you need the specialized coverage – and substantial coverage limits – of a D&O insurance policy. However, you may check your own policy’s language to be sure.

What is covered – and not covered

Most states hold HOA and condo board members to a fiduciary standard, which is the highest standard of care recognized under the law. That’s great for your residents, but it’s a pretty heavy burden, because there is no tolerance for any kind of self-dealing or breach of good faith. It is more difficult for defendants to mount a defense against accusations of malfeasance or self-dealing than it is for any other lesser standard of care. Your D&O policy should help cover you against accusations of violation of fiduciary duty. However, if you are shown in court to be in willful violation of the law, your policy may not provide protection.

After your term

Pay special attention to what happens after your tenure on the board. Will your insurance policy protect you against claims arising from your time on the board, even though you are no longer paying premiums? This is an important consideration, and one to discuss in detail with your insurance agent.

Similarly, if the policy is newly purchased, does it protect today’s board members against claims arising from incidents that may have already occurred? This is a vital consideration when changing insurance carriers, or enacting a new D&O insurance regimen. The best policies cover both past and present members.

For this reason, it’s usually more efficient for the association to purchase a D&O policy to cover all members, as well as the property manager, employees and volunteers.

Author Bio Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.