What is the difference between directors and officers of a small condominium association and those of a million dollar company? Oftentimes, the differences are found in levels of experience and expertise, and in the large salaries and stock options. In the eyes of the law, however, they are more alike than they are different. Yet, despite the fact that directors and officers of condominium associations often share the same legal duties and responsibilities as their highly paid and high profile counterparts, many do not realize the significance, or the ramifications, of their decision to volunteer for their condominium board.
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Those deciding to serve on their condominium association board typically do so with the best intentions. They make every effort to abide by the rules, act fairly, and above all, do that which is best for their community. However, since directors and officers are charged with protecting not only their own homes, but also those of their neighbors, the stakes can be very high, and the consequences of mistakes can be severe.
Given that directors and officers are required to comply with numerous different legal standards, it would be unrealistic to expect them to perform their responsibilities without ever making a mistake. Common law duties, fiduciary obligations, condominium bylaws and declarations, and numerous applicable statutory requirements, all govern the manner in which directors and officers undertake their obligations.
Consider the following situations which may ultimately result in liability for the condominium association, as well as its directors and officers: breach of the duty of care, libel and slander, loss resulting from improper management, ignorance or misunderstanding of condominium bylaws or declaration, failure to maintain proper books and records, conflicts of interest, negligence or recklessness in conducting the association’s business, violations of applicable statutory and common law duties, breach of fiduciary duty, employment-related misconduct, and improper or discriminatory application of condominium rules. Consequently, volunteers with little or no experience or knowledge about what it means to be a director or officer are likely to make a mistake during their efforts to navigate through all of the applicable legal requirements.
Since the combination of strict legal requirements and inexperience generally create a favorable environment for error, prudence dictates that condominium associations insure against the resulting risk. This can be accomplished with a Directors and Officers (D&O) insurance policy.
D&O policies generally protect directors and officers against monetary damages resulting from lawsuits or claims resulting from actions taken in their official capacity. These policies protect against claims that directors and officers have acted improperly, or otherwise failed to act, in their individual or group capacity on behalf of the association. They can offer protection against economic damages resulting from the negligence or wrongdoing of board members. And, depending on the policy form, D&O coverage may apply to the association, as well as its directors, officers, employees, committee members, and volunteers.
While D&O policies do not cover all potential liabilities, such as those resulting from fraudulent or intentional acts, they do provide a much needed security blanket for those directors and officers wanting to serve their community, but who may not possess all of the necessary experience or knowledge. Such policies also reduce the likelihood that assessments will be imposed to pay amounts that would have been covered by a D&O policy.
Another benefit of obtaining D&O insurance is that it removes a significant obstacle in getting the best and brightest individuals to serve their condominium association. Upon discovering that they will be on their own in the event something goes wrong, many individuals decide not to volunteer for service. Additionally, the existence of a D&O insurance policy gives directors and officers the freedom to make the right decisions, even if they are not popular, without fear of liability. The alternative may be a group of directors and officers so paralyzed by fear that little is accomplished.
While making the decision to obtain D&O insurance is easy, choosing the appropriate policy form for a particular situation is not. Since variations among D&O policies can be significant, it is important to select a policy form which addresses any particular risks with appropriate coverage terms. When shopping for a Directors and Officers insurance policy, it is important to use the services of an insurance agent with substantial expertise in this field.
If you would like more information about Directors and Officers Insurance for your condominium association, please contact us.