The question is always, “Why do we need Directors and Officers Insurance?” And the answer is, simply, because you are a board of directors. While Directors and Officers (D&O) Insurance may not be new-car sexy or Paris-fashion chic, it is an integral part of the insurance program of any association.

The Directors and Officers policy protects the volunteers serving on the board of directors for alleged wrongful acts. The policy does not cover bodily injury or property damage, that’s for General Liability. D&O covers errors, omissions, misstatements and breach of duty of a person serving on the board. Basically, if someone claims you (the board) made a mistake during the decision-making process to resolve an association issue, the D&O policy will provide payment for defense costs and judgments awarded to a claimant (subject of course to policy provisions).

“But, I have liability insurance on my home (or condo). That should protect me if someone sues me while I’m on the board, right?”

Wrong. Your personal liability policy provides coverage for bodily injury or property damage you cause to another party. Your activities in or with a business are strictly excluded. The bottom line is, if you serve on a board of directors, the board needs to have a D&O policy in place to protect the directors. Otherwise, don’t serve on the board.

So, now that everyone understands the need for the insurance, let’s discuss what the insurance should include:

Wrongful Acts

This is the beginning of the D&O coverage. The definition of a wrongful act will be in the policy, and will likely include negligent acts, errors, omissions, or breach of duty. This does not include wrongful acts that are known to be wrong.

Claims Made Form

D&O policies written such that they cover claims made during the policy period. This means, if a claim occurs in the past, but is not brought to light until later, the claim is addressed by the carrier in place when the claim is brought to light. Keep an eye out for retroactive dates on your policy. If a claim occurs prior to this date, even though it’s a claims made policy, the carrier may not provide coverage. Ask that any retroactive date be removed from your policy.

Policy Limit

Most governing documents detail a necessary policy limit. If the documents are dated (i.e. pre-1985) that limit may not meet the Davis-Stirling Act requirements for Common Interest Developments. For associations up to 100 units, the minimum D&O limit should be $500,000. For associations over 100 units, the minimum is $1 million. Umbrella (Excess) Liability policies serve to provide additional protection over most of the coverage included in a D&O policy.

Defense Costs

Each insurance carrier has its own way of providing this coverage:

Inside the insurance limit – Assume an association has a $1 million policy and the cost to defend a lawsuit amounts to $750,000. The association only has $250,000 to pay any court awarded judgment.

Outside the limit of insurance – Payment of defense cost or judgment does not reduce the limit of insurance. Assume an association has a $1 million policy and the cost to defend a lawsuit amounts to $750,000. The association still has the full $1 million to pay any court awarded judgment because the defense costs are ‘outside’ the limit of liability.

Separate limit – Some carriers include a sublimit for defense costs. Assume an association has a $1 million policy, with a separate $250,000 sublimit for defense costs, and the cost to defend a lawsuit amounts to $750,000. The carrier will pay up to the sublimit for the defense. The association would still have $1 million to pay any court awarded judgment, but the membership of the association will likely split the additional $500,000 worth of defense costs.

Employment Practices Liability/Employment Related Practices

Most commonly, issues like sexual harassment and wrongful termination fall into this category. Most carriers include the coverage in their D&O policy, if the policy is written stand alone (by a different carrier than the master policy). Carriers that include D&O in their master policy package sometimes endorse this coverage to the policy.

Breach of Contract

It is quite common for carriers to exclude breach of contract. For the specific alleged wrongful act of breach of contract, carriers with the language in their policy will provide a defense for such allegation. If the wrongful act is accompanied by other allegations, such as a breach of fiduciary duty, most carriers will defend their client with a reservation of rights, even if breach of contract is explicitly excluded from the policy. However, always keep in mind that no carrier will provide a judgment payment for breach of contract.

Directors and Officers insurance protects the board of directors for decisions made during the normal course of serving the association. If the board members act in the best interest of the association, make prudent decisions after seeking the advice of a professional and act in good faith (the Business Judgment Rule fiduciary duty trifecta) the board will avoid most of the concerns that would be addressed by a D&O policy.

Michael Berg has been a licensed insurance agent and member of the Berg Insurance Agency since 1999. He received his Masters in Business Administration from Chapman University and has received his CMCA and CIRMS designations from the Community Association Institute. Michael is very active in Community Association Institute, currently co-teaching the insurance section of CAI Orange County’s Community Leadership Training Program.