Mitigating Board Liability & Personal Exposure – Part Two

As a board member, your fiduciary duty is to protect the best interests of the building, homeowners, shareholders, and residents. Part of that responsibility includes securing adequate and affordable property insurance – but how much coverage is enough? Also, do the insurance policies placed by your insurance broker include restrictions or exclusions on the level of coverage?
 
Part two of our Mitigating Board Liability & Personal Exposure series reviews some of the most common insurance policies maintained by cooperatives and condominiums in the New York City metropolitan area.
 
In case you missed it, click here to watch leaders from FirstService Residential and its insurance affiliate examine potential claims against condo and co-op properties, advise how board members can limit liability exposure, and discuss the importance of verifying the insurance policies held by third-party contractors.
 

Commercial General Liability Insurance

Commercial general liability insurance is the prime protection against tort claims. Tort claims are generally the result of carelessness, failure to take proper precautions, neglected maintenance, or a staff member who performs the maintenance poorly. Personal injuries fall under this category and are often referred to as “slip and fall” claims. If someone gets hurt at the property, or if there is damage to property of others – such as the personal property or furnishings of an apartment owner – this insurance will defend the co-op or condo including its board members. It will also pay the damages that are due to the injured party if there is liability.
 
Traditionally, general liability carriers provide what is called broad form coverage. In simplest terms, almost any tort claim you could imagine would be covered. Many carriers are now narrowing the scope of coverage particularly for claims related to work performed by uninsured contractors. Labor law claims involving a contractor can run in the tens of millions of dollars. Unfortunately, the majority of contractors that are retained to complete typical building repairs and maintenance will likely not carry more than $1 million in coverage. While this limit will cover a vast majority of claims levied against the building, the question is how much should a board require?
 
For buildings managed by FirstService Residential, we recommend coverage limits no less than $1 million for each occurrence of bodily injury, property damage, advertising injury and automobile injury. A minimum of $2 million in general aggregate coverage is recommended. This represents the maximum amount of money the insurer will pay out for all claims incurred during a policy term.
 
For larger, more complex projects that require a contractor to work above ground on the building’s exterior and other similarly high risk projects (i.e. facade repairs, elevator modernization, etc.), the board should only retain contractors that have between $5 and $10 million in umbrella liability coverage. This is additional coverage above or over the limits in general liability coverage.
 
Making sure a contractor has high enough limits on coverage is only half the issue. It’s imperative to have an agreement in place in which the contractor indemnifies and holds harmless the co-op or condo from any claim that is the contractor’s fault. Without this agreement, the insurance will defend and cover the contractor, but not the building.
 
Read more about insurance market trends and statistics affecting boards and building owners in New York City.
 

Directors & Officers Liability Insurance

Directors & Officers (D&O) liability insurance provides protection from personal claims or disputes that arise between the board and an individual. These claims include disputes between the super and a building staff member or between the board and one of the unit owners, shareholders or residents. Discrimination, harassment, and employment practice claims are among the many types of personal claims.
 
Many policies will also provide a defense if someone in contract with the board claims that the board breached the contract.
 
Perhaps the most critical component of a D&O liability policy is the coverage for defense costs incurred when there are allegations of wrongdoing against the board members. Legal expenses can accrue quickly and it’s important to secure a policy with broad coverage specifically tailored for condos and co-ops.
 
For this reason, FirstService Residential recommends policies with defense costs outside the limit of liability. This means that if the claim is successful the coverage limit will not be eroded as legal expenses add up. Most D&O liability policies are offered with a $1 million per occurrence limit of liability, but it’s also important to secure an umbrella policy that extends coverage to the D&O liability policy so it covers claims that exceed the primary $1 million limit.
 

Umbrella or Excess Liability Insurance

Given the increasing amount of claims awarded in New York City and throughout the country, an umbrella or excess liability policy is a must. When acquired through a Risk Purchasing Group, $100 million to $200 million umbrella liability policies were typically quite affordable. However, insurance markets have grown increasingly volatile in the last two years. As a result, there are fewer programs offering coverage in excess of $100 million.
 
Similar to general liability policies, boards must be wary of new exclusions appearing in many available policies. These exclusions primarily pertain to contractors and labor laws.
 
Our experts recommend umbrella or excess liability insurance with limits not less than $25 million for each occurrence and aggregate and providing follow-form coverage over the commercial general liability and employers’ liability policies which covers negligence lawsuits over work-related injuries.
 

Cyber Liability Insurance

Protection against cyberattacks and data breaches is a crucial investment for property management companies, as well as for condo and co-op boards. Any entity that maintains personal identifiable information of owners and shareholders (i.e. names, home addresses, social security numbers, credit card information, etc.) has an obligation to protect this information.
 
FirstService Residential maintains a cyber liability policy to protect against the consequences of an attack on its servers. It’s also recommended that the board procure a cyber liability insurance policy of its own to cover claims that are not within the scope of coverage of the management company’s policy.
 
For example, board members regularly receive, exchange, and discuss confidential data. This could include tax returns, banking documents, and brokerage statements of applicants containing personal identifiable information. If a data breach involves a board member’s computer or an unsecure online database used for board business, a building’s cyber liability policy would provide coverage.
 

Properly Vetting a Contractor’s Insurance Is Critical

Boards should be cautious of the insurance contractors maintain and the level of protection provided to the board. Policy exclusions introduce increased risk to the board and often render a contractor’s policy meaningless. For example, if the general liability insurance policy excludes coverage for injuries to a worker employed by the contractor, there will be no coverage for the board if that employee sues the co-op or condo. The board’s insurance must now respond to the claim. This scenario will likely drive-up existing premiums or make it more difficult for the board to place its own policies in the future.
 
It’s also more important than ever for the board to review the insurance policies placed by your insurance broker. Liability carriers of both general and umbrella product lines are placing more restrictions and exclusions on the extent of coverage offered. Excluding coverage for a co-op or condo that uses contractors who do not have adequate coverage is increasingly common.
 
FS Insurance Brokers, FirstService Residential’s affiliate and licensed insurance broker, offers a complimentary review of each contractor’s and vendor’s insurance policies to verify that there is a transfer of risk to another responsible party with valid insurance. The broker also leverages the size of FirstService Residential’s property portfolio and historical claims and loss data to negotiate policies that result in lower annual premiums with better terms and coverage limits. Boards have access to a comprehensive program that covers strategic planning and analysis, program design, alternative risk financing, loss control, and claims management.
 
Enhanced insurance products available to buildings managed by FirstService Residential include:

• Crime/Fidelity
• Workers’ Compensation
• Directors and Officers Liability (D&O)
• Commercial General Liability
• Umbrella or Excess Liability
• Cyber Liability

In addition to tracking your renewal policy expirations and submitting bid quotes, FirstService Residential’s in-house insurance team assures that certificates of insurance are processed and sent to lenders and invoices are paid in a timely manner to avoid lapses in coverage. Our in-house claims administrator coordinates reporting and filing of any insurance claims on behalf of your building or board.
 

Ask Our Experts: Protecting Your Co-op or Condo from Legal Liability & Board Members from Personal Exposure

A recent FirstService Residential Ask Our Experts webinar covered the various types of claims asserted against condo and co-op properties, actions to take to mitigate risk, protections offered by D&O liability insurance, modifications and exclusions in insurance policies that might diminish the protections, Business Judgment Rule protections, and the importance of expert assessment of insurance policies for your building, contractors and vendors.
 
Click below for a preview of the webinar. You can also watch a full replay of the webinar here.