Purpose. Directors and Officers ("D&O") Insurance is essential. It protects volunteers from personal liability for decisions they make while on the board. D&O insurance is in addition to the association's general liability coverage and covers board negligence, breach of fiduciary duties, etc., provided the errors or omissions were:

• within the scope of the officer or directors' duties,

• performed in good faith, and

• not willful, wanton, or grossly negligent.

Defense Costs. Typically, insurance policies pay the cost of defending against a claim in addition to paying for any settlement or judgment that might against an association or its directors (within policy limits). Insurance carriers handle defense costs in one of the following ways:

Unlimited Defense. There is no limit in the policy on defense costs. If an association has a $1 million policy and the carrier pays $600,000 in legal fees and expert costs, the association still has $1 million to pay for any settlement or judgment that might arise.

Wasting Policy. A "wasting policy" pays defense costs out of the policy limits. If an association has a $1 million policy and the carrier pays 600,000 defending the board, only $400,000 will be left to settle the case or pay any judgments. These policies are also known as self-liquidating, cannibalizing, self-consuming or defense within limits policies.

Coverage. Boards should talk to their insurance broker to make sure the following are included in the policy:

• current and former directors and officers,

• committee members and other volunteers,

• employees, and

• manager and management company.

Policy Limits. Certain minimum levels of coverage must be carried by the association. Extra coverage can be obtained through the use of an umbrella policy for the board. Such coverage should be obtained for the entire board, not just one director.

Claims Made. Most D&O polices are "claims made" which means they only cover claims that occur and are reported while the policy is in effect. As a result, boards should immediately notify the insurance carrier whenever a claim or potential claim is made against the association. Reporting potential claims are more problematic since every threat by an owner to sue the board could be considered a potential claim. Reporting every "potential claim" could cause the carrier to drop the association as high risk.

Employment Practices. If your association has employees, you should ask for "employment practices liability" coverage.