Let’s continue our deeper dive into some more complicated aspects of insurance policies with the Directors & Officers Liability (D&O) policy. For a community association, this is the professional liability policy for the board of directors and helps to protect the association and the board members from liability incurred as a result of the decisions they make, or decisions that they fail to make.

Let’s say a unit owner puts in a request to rent the clubhouse to throw their four-year old a birthday party. The board decides to deny the request, citing that, “…children are more likely to cause damage and create a mess.” The unit owner finds another location for $400 more than they would have paid renting the clubhouse and…. yes, you guessed it… sues the association for discrimination based on age.

The D&O policy will not only pay the legal costs, but it will ALSO pay out when the court finds in favor of the unit owner and there is a judgement for $400 against the association.

But what IF the judgement was $1 million dollars and that was the limit of the D&O insurance policy? Where would all of the money for the defense come from? Well, that depends. Does your D&O policy have defense INSIDE or OUTSIDE the limits? If the defense costs are OUTSIDE the limits, that means it doesn’t MATTER how big the judgment is, you will always have money for a defense. If the defense costs are INSIDE the limits, then they eat up the limits, and only what is left over on the D&O limit is what can be used for any judgment rendered against the association.

So having defense costs outside the limits can make ALL the difference in how much insurance coverage you actually receive from your Directors & Officers Liability policy. Double check with your agent to find out which type of policy you have for your D&O.

Terri Guest, CIRMS, CMCA, EBP, is the Northern California Sales & Marketing Representative for Berg Insurance Agency and can be reached at terri@berginsurance.com.