Directors & Officers Liability: Silence is not golden for HOAs.
We`ve all heard the proverbial saying “silence is golden” for situations where biting one`s tongue is preferable to speaking on a particular matter. For community associations, applying the “silence is golden” approach to known issues can expose the association and its members to uninsured liabilities.
Directors & Officers Liability (“D&O”) Insurance is the policy that community associations carry to protect its elected or appointed representatives, employees, managing agents and others from allegations of “Wrongful Acts” in their duties to the association. As any manager or board member can attest, there`s no shortage of such allegations within community associations.
Do the policies cover everything? Not by a long shot, but in order for a community to give itself a chance of coverage the association and management need to familiarize themselves with the requirements of the policies. Most notably, when to notify the carrier of a potential claim.
When are claims supposed to be reported? While many boards, managers and even attorneys will wait to report a claim to the carrier until the association is served, this can jeopardize coverage on the D&O policy. Each D&O policy in place for an association requires that the association report any claims to the carrier as soon as it is known. But….
If litigation isn`t the start of a claim, what is a claim? In short, a claim begins before most people think it begins. This is due to how claims are defined by D&O policies. As a rule of thumb, a claim means:
- A written demand for monetary relief against the association;
- A written demand for non-monetary relief against the association;
- Commencement of a civil or criminal judicial proceeding or arbitration against the association;
- Commencement of forma criminal, administrative or regulatory proceeding or investigation of the association
In essence, it is a claim as defined by the policy once a written demand is received. This means that if there is an allegation of wrongdoing paired with a demand, the insurance carrier should be notified immediately. By notifying the carrier as soon as a demand is received, the association will not run into a situation of claim denial for not having reported the claim in a timely manner.
Example: In 2014, a master association of over 1,000 single family homes received service of litigation from an owner claiming discrimination for the association not having approved his new driveway. The association was served in November of 2014 and sent the lawsuit to the D&O carrier to tender defense. Upon the carrier investigating the history of the issue, it was shown that the association first knew of the issue in October of 2013 when the owner threatened litigation if their decision was not reversed (demand for non-monetary relief). The association never informed the D&O insurance carrier of this threat and their policy renewed in January of 2014. When association was served in November of 2014 and provided the demand to the carrier, the claim was reviewed and denied based on the fact that this was a known issue from a prior policy period. All D&O insurance policies exclude coverage for known issues on prior policy periods. The D&O policy would have covered defense of the claim, but neither the association nor its legal counsel informed the insurance broker or carrier of the issue. Unfortunately, the claim was not covered by insurance as a result of the failure to notify the carrier.
When in doubt, talk it out. To maximize protections for any community, it is incredibly important to keep your insurance broker and carriers apprised of possible claims. Discuss any and all possible claims (reference numbered items above on what constitutes a claim) with your insurance broker, as a five minute phone call could be the difference between who foots the bill when an issue materializes from written threat to litigation.