Insurance Umbrella a Board's Best Friend
Byline: Jordan Shifrin
When most people run for the board of directors of an association, they rarely think of the biggest downside - not the long meetings, the angry owners and the hard work, but the exposure.
We live in a world of people who never accept responsibility for their own actions, particularly when it comes to getting their own way. The worst in them comes out in association politics. However, the first thing that these people will think of, is, who can I blame?
Assessments too high? Blame the board. Can't get your leak fixed in a day? Blame the board. Car towed? Well, you get the idea.
It is a shame, but a reality that a board or even individual directors make mistakes, but so long as they are made in good faith and all the prerequisites are met, the directors and officers insurance coverage should kick in. But not always.
Every board and every director should be schooled in risk management so as to make sure that all mistakes real or imagined are protectable and the necessary safeguards are in place so, at worst, a lawsuit against the board or the directors is a minor annoyance.
First, all decisions must follow certain guidelines. For example, were they made in good faith, using sound business judgment, without self-dealing or conflict of interest? And, where there were potential legal issues, was legal counsel consulted? Using this criteria, a board can be assured that even the dumbest mistake in judgment will not result in an actual breach of fiduciary duty.
Second, directors and officers insurance coverage must be in place at all times. Next to personal liability and property and casualty, directors and officers coverage is now on the must-have list. A conscientious director will try and become familiar with their coverage, particularly the exclusions. Everyone probably knows you will not have coverage for punching a heckler in the nose, but most people do not realize that director and officer coverage is for claims for monetary damages or loss, and often does not cover injunctions and claims for non-monetary relief. These are, of course, the largest number of suits against associations after personal injury and foreclosures.
Third, a director should become familiar with the indemnification provisions of the declaration and bylaws. If for any reason the insurance company denies coverage, or reserves its rights, directors must at least be able to take comfort in the fact that the association will indemnify them and hold them harmless for decisions made in the ordinary course of business.
Other areas where board members may find they have exposure:
- Even though an association is a not-for-profit corporation, an aggrieved party can pierce the corporate veil if proper corporate formalities are not followed and it appears that the association is really an alter ego for the individual directors. …