Purpose. Directors and Officers ("D&O") Insurance 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 policy 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 be levied 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 available 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.
Exclusions. All policies contain exclusions, i.e., claims the carrier will not cover. Following are examples of common D&O exclusions:
- Insured vs. insured (the board is sued by one of its directors),
- Breach of contract (an action by members or third parties for breach of CC&Rs or breach of contract). However, some carriers will pay for associated defense costs.
- Failure to carry sufficient insurance (a lawsuit by owners against the board for its failure to carry sufficient limits or its failure to purchase insurance to cover certain losses)
- Bodily injury and property damage are always excluded in D&O policies.
- Discrimination and employment practices liability are typical exclusions but still available from some companies. If an association has employees, the board should ask for "employment practices liability" coverage.
Statutory Protection. The Davis-Stirling Act protects volunteers from personal liability while on the board of directors provided the association maintained and had in effect at the time the act or omission occurred and at the time a claim is made D&O insurance of (i) at least $500,000 if the development consists of 100 or fewer separate interests or (ii) at least $1,000,000 if it has more than 100 separate interests. (Civ. Code §5800.) EXCEPTION: The statutory protection against personal liability in excess of insurance coverage afforded volunteer directors is not available to director who own more than two units:
This section shall only apply to a volunteer officer or director who is a tenant of a residential separate interest in the common interest development or is an owner of no more than two separate interests and whose ownership in the common interest development consists exclusively of residential separate interests. (Civ Code §5800(e).)
Definitions. Not all policies use the same definitions. When it comes to matters such as: "who is an insured" and what constitutes a "wrongful act," the definition can significantly alter coverage.
Minimum Policy Limits. As with general liability policies, certain minimum levels of coverage must be carried by the association's D&O policy. Extra coverage can be obtained through the use of an umbrella policy. Such coverage should be obtained for the entire board, not just one director.
Reporting Requirements. Actual and potential claims must be timely reported to the association's insurance carrier or the association risks loss of coverage.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.