In recent instances, a number of boards that have come to us for representation have been chagrinned to discover that their insurance policies for directors and officers liability (“D&O”) did not fully cover claims by shareholders or unit owners. The result has been anxiety for board members, litigation expense for the building that would have been avoidable, and conflicts with the managing agent who had worked with a broker to place the insurance. It is important for board members and managing agents to understand the terms of D&O policies at the time they are purchased. All D&O insurance is not the same.
These are a few of the key policy terms to consider.
D&O policies generally provide coverage on a “claims made” basis; that is, they provide coverage for claims first made during the policy period. All managing agents know that claims must be reported to insurers promptly, but that begs the question of what constitutes a “claim”. When a matter constitutes a “claim” is determined by the policy language. A “claim”, for the purposes of an insurance policy, may arise before any suit is commenced, e.g., if the potential plaintiff has sent a demand letter, or the Board or managing agent has been notified of a potential suit in some other way.
D&O policies are written with various deductible amounts. Boards should consider whether the deductible amount they have selected is appropriate in light of perceived risk, the financial ability of the building to cover uninsured losses, and the additional premium cost associated with lower deductibles.
Often the most important benefit afforded under a D&O policy is that the insurer will pay for a defense. However, boards should be aware that the scope of the defenses provided under different policies may vary. Shareholders and unit owners often combine in a single suit claims that are covered by D&O insurance with claims that are not. Some D&O policies obligate the insurer to provide a defense to all claims, even if not all claims implicate the D&O policy. Under other policies, the insurer is obligated to pay only for costs of defense in proportion to the covered claims. For example, if the plaintiff asserts five claims and only one is within the policy coverage, the insurer may pay only 20% of the costs.
It is important to know what types of claims are covered and what claims are excluded from coverage. Claims arising from breach of the lease, or that seek compensation for damage to or loss of use of property, e.g., the apartment, or personal injury, are frequently excluded. While claims for property damage or personal injury may fall within the scope of the building’s separate Commercial General Liability insurance, there may be cracks between the two policies that can be minimized.
If your building has a practice or wants the option of establishing committees that include members who are not board members or officers, you should check whether those committee members are protected under your D&O insurance. D&O policies typically issued to garden variety business corporations do not expressly provide coverage for committee members. There are, however, readily available D&O policies that were developed specifically with non-profit, membership organizations in mind that typically do cover committee members. Your policy form should be checked. In instances where committee members are not covered, we have been successful in having a special endorsement added to cover them at no additional cost.
In addition to checking your D&O policy, you should review the indemnification provisions of your bylaws. Some D&O policies reference the cooperative’s or condominium’s obligation to indemnify board members as establishing the limits of the insurer’s liability for claims against individual directors. For this reason, as well as others, the indemnification provisions should be as broad as possible.
In conclusion, as a board member or managing agent, you should not try to balance the budget with the least expensive insurance, nor should you limit your review of insurance policies to the coverage limits and premiums. Review the policy with your insurance professional, bearing in mind the above issues.
This memorandum was initially issued by the cooperative/condominium practice group of Balber Pickard Maldonado & Van Der Tuin, PC which joined Smith, Gambrell & Russell, LLP on February 1, 2017 and now practices as part of SGR’s cooperative/condominium practice group.