Insurance Is Definitely a Requirement for Board Associations
Byline: Jordan I. Shifrin
I have always subscribed to the theory that insurance is like religion ... either you believe in it, or you don't. When it comes to directors and officers liability however, anyone serving on a board of directors of a condominium or homeowners association better be orthodox.
In the ordinary course of business an association will, from time to time, be sued. Slip-and-fall cases, contractor disputes, owner claims, etc., all of these would typically fall within the scope of corporate liability.
Unfortunately, an enterprising plaintiff or defendant might decide to drag the board or even the individual directors into the suit to achieve an upper hand. Although in most instances, this is inappropriate, sometimes, one or more directors may have acted in a fashion that borders on negligence or are guilty of some misconduct that would trigger the careful reading of the declaration and the insurance policies.
Every association, regardless of size, should have a comprehensive insurance package in place and one of its components is going to be directors and officers coverage. Directors and officers insurance provides basic coverage for actual or alleged wrongful acts by an association's directors and officers.
A wrongful act can include errors or omissions, or negligence on the part of any director while acting in their official capacity. This can get tricky because if one is going to be accused of a wrongful act and need the protection of their insurance, they want to always be sure this conduct took place while acting on behalf of the association and not themselves.
Association governance is addressed in the Illinois General Not For Profit Corporation Act, which includes provisions for the limited liability for directors, officers and other persons who serve the association. These provisions of the statute are frequently mirrored by similar protections written into declarations.
Typically, a director or officer shall not be liable for damages resulting from their exercise of judgment or discretion in connection with carrying out their duties and responsibilities.
This type of language is built into the law and the governing documents so that disagreement with a board decision does no give someone the right to sue the directors individually, unless it can be shown that the actions of the individual directors was willful and wanton or actual and deliberate and intentional.
If not then deliberate then at the very least shows an utter indifference to a conscious disregard for the safety of others or the property. (108 ILCS 105/108.70 Illinois General Not-for-Profit Corporation Act)
Obviously, the elements of these types of allegations are difficult to prove, but if you are sitting on a board relying upon the protections of the statute to cover all of your actions, do you want to be in a position of waiting for a court to properly interpret the law in your favor?
I am frequently asked why an association needs directors and officers insurance with these types of laws on the books. Simple. The overwhelming majority of the costs of litigation are not the amounts paid out for board wrongdoing, but rather attorneys fees and the costs of defense. …