CAN YOU “BLOW” THE BUSINESS JUDGMENT RULE?

Question: “Under the Palm Springs Villas case, board members get the protection of the Business Judgment Rule only where someone later second-guesses an informed decision by the board. Would board decisions made that accidentally violate a current state statute “blow” the Business Judgment Rule? Would they be considered “uniformed”and potentially not covered by the Directors & Officers liability insurance?”

What you are describing is the board doing what it thinks is right, and it turns out to be wrong. That is the essence of what the Directors and Officers liability coverage insures.

The full title of the professional liability policy is Directors and Officers Errors and Omissions. If the board makes an honest mistake trying to do what’s right, and it goes wrong, they haven’t blown the business judgement rule…stuff happens.

Keep in mind the purpose of insurance. Each person, each entity, everything has an exposure to loss. For liability, that exposure is the cost of defense when that person or entity is alleged to have caused harm to another. Insurance is an agreement between two parties that, when this allegation is brought forth, the insurance company will cover the cost to the insured. The insured (the person, or in our case, the association) pays a premium. The insurance company dictates the terms under which coverage will apply.

The board needs to make the decision and take the action that is in the best interest of the membership, at the advice of experts and in good faith. If you can walk away saying, “We made the decision we felt was right. We made the same decision someone else would have made in a similar situation,” it’s more likely your insurance carrier will cover the cost of defense and pay a judgement or settlement if you made a mistake. Michael Berg, MBA, CIRMS, CMCA, is President and CEO of Berg Insurance Agency and may be reached at michael@berginsurance.com.