Mitigating Board Liability & Personal Exposure – Part One

Board members typically feel they can make a difference in the lives of fellow residents and protect or improve the value of the building. Unlike a typical volunteer opportunity, each individual member serving on a board must embrace best practices to protect the cooperative or condominium and to limit personal exposure.
 
A capable management company will provide guidance to board members that helps limit legal liability and mitigates personal exposure. This includes the retention of comprehensive insurance policies for the co-op or condo, a thorough review of insurance policies held by third-party contractors, investment in technologies that reduce the risk of cyberattacks and data breaches, and adherence to the building’s governing documents and bylaws for all board business.
 
This first installment of Mitigating Board Liability & Personal Exposure will review the most common claims levied against co-ops and condo and the insurance policies designed to protect them. 

1. Tort Claims

Sometimes accidents just happen. 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, as well, and are often referred to as “slip and fall” claims.
 
The best way to avoid these claims is to make sure the building staff or third-party contractors know what their job is and how to do it properly.
 
However, even with the best maintenance practices, some claims are unavoidable. The classic example is a deteriorating water pipe that is located behind a wall or another location that prevents inspection. The pipe suddenly bursts resulting in damage to the building.
 
Commercial General Liability Insurance is the prime protection for tort claims. If someone gets hurt at the property or if there is damage to the personal property of an apartment owner or other third party, this type of insurance will defend the co-op or condo and its board members. It also will cover the determined financial damages if there is liability.
 
Contractors working on-site are responsible for a large percentage of the tort claims asserted against multifamily residential buildings. Even if the accident is the contractor’s fault, New York State labor laws will at times make the co-op or condo strictly liable for injuries at the property. Most often, the injuries involve one of the contractor’s own employees.
 
To protect the board and the building, it’s imperative to require that the contractor has its own insurance policies and that there is an agreement in place that indemnifies and holds harmless the co-op or condo from any claim that is the contractor’s fault.
 
Properly vetting a contractor’s insurance is also critical. Some insurance policies contain exclusions that make the coverage essentially useless. Experts from FirstService Residential's in-house brokerage specialize in insurance policy review to ensure all vendors and contractors have valid trade licenses and adequate policy limits. This helps ferret out any exclusions that would expose the building and the board to unecessary risk.
 
 

2. Business Operations Claims

Similar to any business, co-ops and condos may fall into dispute with another business. Business operations claims generally involve contracts, written or otherwise, that are in a dispute. These could be with a contractor, a vendor, or regarding a commercial lease at a mixed-use building. Disputes typically develop if there is not a clear understanding of the agreement.
 
The board should engage professionals to assist in entering into a project including review of contract terms and requisite insurance coverage. If everyone is on the same page at the outset, it is less likely that disputes or misunderstandings arise.
 
Directors’ and Officers’ (D&O) liability insurance will provide some protection from these business claims. Most policies will cover the legal fees incurred in defending the claim.
 

3. Personal Claims

Personal claims are 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. Discrimination, harassment, and employment practice claims are among the many types of personal claims.
 
The best way to avoid such claims is to make sure board members, building staff, and anyone representing the board understands issues that give rise to personal claims. To specifically help curb workplace sexual harassment, New York State and New York City have enacted laws that require all employees to take an anti-sexual harassment course scheduled annually. Be sure that the employees take this course each year and understand its contents.
 
D&O liability insurance, particularly policies that include employment practices claims will cover these personal claims.
 

4. Cyber Liability Claims

Cyberattacks and data breaches are increasing in the government sector and Fortune 500 companies, as well as property management companies. The latter are required to maintain owner and shareholder personal identifiable information – names, home addresses, social security numbers, credit card information, etc. – and have an obligation to protect this information.
 
The most reliable property management companies invest significant resources in technology that maximize the security of its databases containing sensitive information pertaining to the boards and properties they manage. FirstService Residential maintains a combination of SSL certificates, firewalls, secure network transmissions, authentication requirements, and anti-virus/malware applications, among other security measures.
 
While FirstService Residential also maintains a cyber liability policy to protect against the consequences of cyberattacks 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 review purchase applications that contain copies of tax returns, banking documents, and brokerage statements containing personal identifiable information. If a board member retains copies of these applications in an unsecured network or location, the personal identifiable information belonging to the applicant is at heightened risk of exposure to a breach. If a breach involves a board member’s computer, that is where a building’s cyber liability policy would kick in with coverage. In many co-ops and condos, the superintendent also has confidential information on his computer.
 
No matter what the scenario may be, it’s imperative for individual board members to engage in practices that minimize the risk of personal identifiable information falling into the wrong hands. As a rule, boards should not rely solely on the managing agent’s cyber liability policy and coverage.
 
FirstService Residential was one of the first management companies to introduce online applications. As a leader in the industry, we also understand the unique vulnerabilities of online platforms and continuously invest in ways to securely receive and transmit data in a virtual environment. To help boards manage the application process with confidence, our secure e-Apply platform allows boards to access and review submitted applications through a secure portal eliminating the need to print or download a copy of the application to a personal device.
 

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

The latest installment of FirstService Residential’s Ask Our Experts webinar series 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 policy 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 here to watch a replay of the webinar.