Most Common Directors & Officers (D&O) Insurance Claims

Serving on the board of a condominium association comes with significant responsibilities and potential liabilities. Understanding where most claims arise from and how to avoid them can help mitigate the risk for the associations board members

The Most Common Non-Profit Community Association Directors' & Officers' Claims are as follows:

The Board's failure to adhere to by-laws
The Board's failure to properly notice elections
The Board's failure to properly count votes/proxies
Challenges by members regarding power granted the Board by by-laws
Improper removal of Board Members
Decisions by the Board resulting in physical damage to the association's property
Challenges to assessments
Approval of variances, generally by an architecture committee
Breach of fiduciary duty
Challenges to decisions of the Architectural Review Board
Questions or challenges regarding easements
The Board's failure to maintain common areas
The Board's failure to properly disburse funds (i.e. insurance proceeds)
Defamation by the Board of a member

Causes for The Most Common Claims

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Failure to follow the By-Laws

This failure is very understandable. Community Associations often are very small or are comprised of community members who are very close - for all intents and purposes like family. Accordingly, very often things are done informally with simple procedures. Very often this is fine because there is no problem, no complaint and things just go on. As long as there is no problem, no one is concerned.

However, the associations are too often lulled into a false sense of security. Once a problem does occur, association members have a short memory and every one of the formalities set forth in the governing documents will be thrown back in the face of the board. Not only will it be thrown back in the board's face, the board will probably loose. A court will give full faith and credit to the governing documents and challenges to those procedures will not be easily won, even if the association has been doing things that way for years.

Failure to Update or Memorialize Amendments

If the governing documents themselves are not accurate or in compliance with current laws, the association has two layers of problems and errors. First, many associations were created and organized years ago. Virtually every state has had many changes to laws that govern community associations, including laws that contradict the existing governing documents. A second related issue is the association's failure to formally amend changes to the governing documents. The association could have done everything perfectly in making a change, however, if it is not properly memorialized, they have both wasted time and defeated the purpose and intent of the change.

Failure to hire the Critical Professionals

Failure to hire competent and experienced property management companies or property managers for community associations of certain size and complexity is another common mistake. The property managers are professionals who know what the board and the association needs to do, can facilitate board functions and carry out board directives. This is a substantial investment to obviate many problems that turn into claims.

Failure to know and Follow New Laws

The association will not be able to raise a defense of ignorance of the law. If the association chooses to maintain self governance without property managers or counsel, which many, many associations do very successfully, the board itself will have a certain added degree of obligation and due diligence.

Failure to Document and Keep Records

Association operations can be document critical. Unfortunately, the same informal attitude of governance carries over to the issue of keeping good records and proper records both with respect to financial issues, budget issues, maintenance issues and anything else that is required of the specific association. Good file keeping goes a long way toward successfully defending the Associations position.

Failure to put Emotions and Personalities aside

Community Association Directors and Officers have a very difficult time distancing their duties and obligations from their personal emotions, egos and relationships. Maybe it is the notion that: "What's more important than one's home?" Very often, these board members run companies, businesses and other entities with professional demeanor and sense. However, when it comes to electing a board, painting a house a certain color, designating a parking space, allowing a member to have four dogs instead of two, emotions prevail and get in the way when trying to resolve issues prior to litigation.

What can be done to avoid the common claims

Follow the rules

Know the by-laws and any other governing documents.
Require all board members to read the by-laws.
Ensure that new association members receive and sign off on the by-laws and governing documents when they move into the community.
Know the rules governing elections and follow them. The current members may not have a problem, but what if a third party or a new association member challenges decisions of a board that was not property elected?
Know the rules regarding assessments.
Know the rules regarding failure to comply with assessments.

Make sure the rules are current

Make changes pursuant to the By-laws.
Make sure the changes are memorialized and the By-laws are properly amended.

Elect Board Members who are serious

Make sure potential board members know what the job entails.
Make sure the potential board member is willing to take the job seriously.
Provide training for board members as a governing board.

Use Professionals

Regardless of the size of the association, counsel should be retained for major transactions. Unless the association has a management company that is experienced with collecting assessments and liens, hire counsel to handle these transaction and procedures.
There is affordable counsel for community associations. All counsel will negotiate for an appropriate engagement relationship. It is cheaper to invest a known amount up front than having to submit a claim to an insurer or hire an attorney after something goes wrong.
Retain the services of a community Management Company or manager, even if it is only for certain activities such as running board meetings and managing the boards activities. Unless the association has a volunteer board member who is willing to handle the formalities, it is worthwhile to use a professional.

Do Not let Emotions and Personality Get in the Way

Avoid emotions and personality conflicts. These have led to some of the greatest wastes of time and resources in the area of directors' and officers' claims.
Follow basic rules for running meetings as a method of avoiding the opportunity of emotions and personality conflicts getting in the way.

Immediately forward Demand Letters or Lawsuits

The directors' & officers' policy is a claims made policy that generally requires that the association forward all claims as soon as reasonably possible (and very often within the policy period).
The directors' & officers' policy is a claims made policy that generally requires that the association forward notice of facts or circumstances that may give rise to a potential claim.
There is no down side to forwarding potential notices of facts or circumstances. Most insurers in this area will not penalize, and should not penalize, an insured for providing notice. The insurer is in the business of risk management and can assist in early resolution of claims or situations.

Alternative Dispute Resolution

Communication is the key to resolution of problems. The association should consider having a mechanism in place for the community association to address conflicts and grievances.