Insured v. Insured Exclusion
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INSURED vs INSURED EXCLUSION

For HOAs, the definition of “Insured” often includes directors, officers, managers and committee members. Insurance carriers face significantly higher defense costs when one insured sues another.

No Exclusion. When everyone is covered regardless of who sues, i.e., one insured can sue another insured with no loss of coverage, there can be negative consequences for the association.

Example #1. Director A sues Director B, and Director B cross-complains back against Director A. When that happens, both directors submit claims against the association's D&O insurance and the carrier is forced to retain and pay for two law firms--one for each director. The directors have no incentive to settle since insurance is picking up the cost. This increases the association's loss history and its premiums (or causes loss of coverage).

Example #2. A rogue board member who is willfully conducting himself in direct contravention of a board decision is sued by the association to stop his destructive behavior. He is defended by the association's insurance, which means the association is paying out of pocket to fight it's own carrier. Again, insurance premiums go up.

Exclusions. Because of the excessive costs involved, insurance carriers try to reduce their risk by excluding the above scenarios from their coverage. If the exclusion is not in their policy, associations should consider asking for the "Insured Entity v. Insured" exclusion.

A.  Insured v. Insured Exclusion. There is no coverage for anyone within the definition of “Insured” who sues anyone else within the definition of “Insured.”

B.  Insured Entity v. Insured Exclusion. This is sometimes called the “rogue board member” exclusion. When the association through its board sues a "rogue" board member, the carrier will not defend the that board member. That means a rogue director will have to put his money where his conduct is and pay for his own defense. Even so, virtually every set of governing documents has a provision that requires that the association indemnify a board member if his or her work as a board member is challenged by unit owners, other board members or third parties. The exception to this in most sets of governing documents is that the indemnity obligation may not exist if it is established that the board member’s conduct was willful or grossly negligent. To establish willful or grossly negligent conduct normally requires a judgment to that effect. However, there is a significant exception, which is probably also the most common situation. The exception is where a majority of the board votes one way on an issue and the minority director(s) who lost the vote acts in direct contravention of the decision or vote. This would inherently be “willful conduct.” Accordingly, that minority/rogue board member would not be indemnified.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

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