Understanding HOA D&O insurance

Serving on your homeowner association's (HOA) board of directors comes with many responsibilities, including protecting your community and its leaders. And one key aspect of this is understanding Directors and Officers Liability (D&O) coverage or HOA D&O insurance can be invaluable.

Andrew Lester, president of FirstService Financial, believes this knowledge is critical for board members. "If you have a fundamental understanding of insurance policies and the decision-making process, you're empowered to ask the professionals the right questions," Lester explains.

In this article, we'll explore the essentials of HOA D&O insurance, including what it covers, why it matters for your community, and how it benefits the parties involved. We'll also address commonly asked questions to help you feel confident in your role and decisions while protected under tailored insurance policies.
 

Who does HOA D&O insurance cover?

D&O insurance may protect a wide range of individuals associated with the community, including:

• Current board members
   
• Past board members
   
• Spouses of board members
   
• Volunteers
   
• Associates
   
• Management personnel

This comprehensive coverage protects those who dedicate their time and effort to managing the community from personal financial risks.
 

What does HOA D&O insurance cover?

D&O insurance primarily protects against "wrongful acts," including claims for:

• Breach of contract
   
• Breach of fiduciary duty
   
• Defamation
   
• Discrimination
   
• Employment disputes
   
• Foreclosure actions
   
• Harassment claims
   
• HOA fee disputes
   
• Misrepresentation
   
• Negligence
   
• Property damage related to mismanagement
   
• Violation of CC&Rs

When HOA board members are liable

While D&O insurance provides broad protection, it's subject to exclusions. For instance, if a board member acts beyond the range of their responsibilities— such as engaging in personal misconduct— they wouldn't be covered under the policy. Furthermore, HOA D&O insurance doesn't cover bodily injury or property damage;  these are covered under the community's general liability (GL) or workers' compensation policies.
 

Are HOA D&O insurance policies claims-made?

Yes, D&O insurance policies are typically claims-made.

The main difference between claims-made and occurrence policies lies in timing. This is because many liability policies are occurrence policies, which cover accidents or incidents during the policy period. This is different from D&O policies. D&O policies are claims-made, so they typically cover claims made while the policy is in force, regardless of when the incident or conduct occurred.

"People don't always come forward right after an incident occurs. Sometimes they wait and file a claim at a much later date, sometimes right before their state's statute of limitations expires," mentions Jamie George, insurance product manager for the West/Texas regions of FirstService Financial.

She adds that with a claims-made D&O policy, claims filed while the policy is active are covered, including actions of officers and board members— past, present, and future.

George also emphasizes the importance of working with a skilled insurance broker to include a retroactive date or complete prior acts clause into your policy, ideally dating back to when the community was incorporated.  This will help cover all of the incidents from that date forward even if the policy is purchased later.
 

Frequently asked questions about HOA insurance

What is an "insurance package"?

The insurance needs of every association differ, so its insurance package can include various lines of coverage, such as property, crime, commercial auto, general liability, umbrella, directors and officers, and workers' compensation. Sound like a lot? Not to worry— a trustworthy insurance broker can help you navigate and tailor a package to meet your needs. D&O insurance is often added to their tailored insurance package, always depending on a community's specific needs.
 

What are the types of D&O insurance coverage?

There are two kinds of coverage: first-party and third-party coverage.

• First-party coverage protects your community against direct losses. But this type of coverage helps your financial stability isn't jeopardized by internal risks.
   
• Third-party coverage protects your community from litigation by external parties, such as vendors and other entities.

Both are essential for your community as they help provide a safety net against financial and legal risks.
 

What are the legal requirements for HOA D&O insurance?

Depending on your state or circumstances, you may be required to provide D&O insurance for your community. It's recommended to review the following to help determine your obligations:

• State statutes: Check if your state requires HOAs to carry D&O insurance.
   
• Governing documents: Review your community's bylaws or Covenants, Conditions, and Restrictions (CC&Rs) that may hold coverage requirements.
   
• Government regulations: Confirm other external governmental factors. Aside from just state regulations, local policies regarding coverage may be in place.
   
• Contractual obligations: If you have contracts with vendors or other parties, verify if the clauses mention D&O policies.

What are examples of HOA D&O insurance claims?

To better understand the importance of HOA D&O insurance, consider these real-world claim examples:

• Architectural modification dispute: An HOA board denies a homeowner's request to make modifications to their property, such as adding a deck or changing the residence's exterior color. The homeowner then sues the community, mentioning that this denial violates the HOA's own rules. In this case, HOA D&O insurance would typically cover the legal defense costs and any settlements or judgments resulting from the lawsuit.
   
• Therapy pet dispute: A community wrongfully denies a resident's request for a therapy animal, resulting in a complaint. D&O coverage would help with legal representation and potential settlement costs.
   
• Failure to enforce HOA rules dispute: A homeowner sues the board for failing to implement the community's rules. And therefore implying that it's leading to declining property values. The D&O policy would cover the legal defense and any settlements or judgments.

D&O coverage extends to current and former board members, spouses, volunteers, and employees, protecting that they're not held personally responsible for legal costs, settlements, or judgments related to allegations of wrongdoing or mismanagement.

"It's always best to choose an insurance agent or broker with a successful track record in community association insurance, they can tailor a cost-effective program that helps provide adequate coverage and meets your community's needs."

Sean Kent, senior vice president of insurance at FirstService Financial

FS Insurance Brokers merges industry-leading, in-depth, and risk management expertise with property management knowledge. Our team is committed to providing communities with advice and solutions for complex insurance situations.

Contact our team of experts today to learn how our property insurance expertise can help protect your assets and secure your community's future.