August 2009


California – along with Texas, Florida and New York – is a trend setter.  But not in a good way: these four states lead the country in HOA Directors & Officers Liability claims.

With such a huge volume of California-based D&O litigation, you would think that Golden State residents would be a little more concerned about the quality of their D&O coverage.  Surprisingly, many board members (and, frankly, even a few insurance practitioners) operate under the misguided notion that all D&O policies are the same.  

Not so.

D&O policies actually vary widely from carrier to carrier.  A $250 D&O policy from a well-known direct writer can omit as many as four essential coverage components.  Unfortunately, the Board of Directors (and their community manager) won’t discover the policy’s shortcomings until the time of loss. 

What should you look for in your D&O protection?  Here are some good starting points:

Broad Definition of “Insured” – A properly written policy should cover all past, present and future elected or appointed directors, trustees, officers, employees, committee members or volunteers.

Community Manager/ Management Company as an “Additional Insured” – If your Association is  professionally managed, you likely have a management contract that requires you to “indemnify” and hold the management company “harmless” in most circumstances (other than gross negligence).   Without a properly-crafted D&O policy that names the manager/ management company as an “additional insured,” the burden falls on the Association to pay the manager’s defense costs and any resulting judgment. By naming the manager/ management company as an “additional insured,” you have shifted that responsibility over to your D&O carrier for losses covered under the policy. 

Defense Outside the Limits – The better D&O carriers pay for defense costs out of their pocket, not out of your limit.   This is called a “defense outside the limits” policy.   With “defense within the limits,” each dollar spent on defense is one less dollar available to indemnify the Board, should the claim have merit.  

Coverage for Non-Monetary Losses – The largest number of D&O claims presented today are not those alleging that an act, error or omission resulted in a financial loss.  Instead, most claims are for “non-monetary” actions.  For example:

  1. An owner contests the results of an election and demands a new election. 
  2. An owner decides to spend thousands of his own dollars to challenge an architectural review committee (ARC) decision. 
  3. An owner sues in an attempt to force the Board to enforce a provision (or provisions) in the CC&Rs.

With coastal properties, we’re seeing view restriction lawsuits on the rise: these are non-monetary claims challenging an ARC’s decision to allow a neighboring owner to install a fence, plant a tree or add on to his/her back porch.

Coverage for Employment Practices Liability (EPL) – There are 550 lawsuits filed every day in the United States alleging discriminatory hiring, management, promotion and termination.   The average price to defend this sort of claim in 2008 was $250,000. Your Association could be sued for wrongful termination even if you don’t have employees. If an employee of one of your vendors believes he was fired or demoted as a result of your prompting, the attorney representing that wronged employee will sue both your vender and your Association for discrimination. Without EPLI coverage, the Association would be on its own.


Top 10 Most Common Directors & Officers Claims:
  • Members challenging power given to the Board through By-Laws
  • Failure of the Board to properly tabulate votes/vote by proxies

  • Defamation of an association member by the Board
  • Insurance proceeds and/or disbursement funds improperly handled by the Board

  • The Architectural Review Board is challenged due to decisions made


Did you know that 75% of D&O claims involve non-monetary damages?  Here are examples of non-monetary claims:

Demands for action (Example: a new election gets held or an architectural review decision gets over-turned.)

Demands for the cease of action (Example: the ban on smoking in common areas gets lifted.)

Demands for an apology.  (Example: the Board apologizes in writing for defaming an association member.)

  • Board decisions that have the effect of physical damage to association property
  • Removing a Board Member improperly

  • Easement challenges or questions
  • Assessment disputes 
  • Problems arising from a common area that is not maintained properly


This letter contains only a general description of coverage and is not a statement of contract. For a more detailed description of the policy conditions and exclusions, please consult the policy itself.
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