Tifinni A. Tegan
What homeowner associations need to know about
Directors' & Officers' liability - Part 3
With commentary from HOA insurance expert Kim
In Parts 1 and 2 of this article, we discussed how the majority
of Directors' & Officers' (D&O) Liability Insurance
policies on the market today exclude the most common lawsuits
facing homeowners associations, and the value of having a policy
tailored to an HOA.
What is "failure to procure insurance" and why does it
matter to an HOA?
Failure to procure insurance is an another example of a common
D&O claim that is excluded from the commercial property and
liability package policy endorsed for D&O. However, such
claims are covered by the stand-alone D&O policy like the one
offered through Ian H. Graham and underwritten by CNA.
This type of claim can occur when an HOA board approves an
insurance policy (typically for community-owned property) and the
property or risk is underinsured. Then there is a
catastrophic claim such as a fire, hurricane, or flood.
"If the board failed to procure the correct insurance, they
could be held liable for the difference," said Kim Angeli,
President of Powell, Angeli and Langford Insurance in Raleigh,
NC. "That's another example of a claim that's specifically
excluded on most D&O policies, but covered by the CNA policy
offered through Ian H. Graham."
Can your homeowners afford a special assessment due to a
D&O liability claim?
One of the hidden consequences of a special assessment is that
it can hurt the homeowners' ability to sell their unit.
Today, mortgage companies are asking if a special assessment has
been done in the HOA before they will approve a loan.
"This is a huge deal at the moment," said Angeli. "We have
unit owners who can't sell their units. The mortgage
companies who got burned in the financial meltdown now want to know
how many people rent in the community, when the last special
assessment was, and how much it was. If they do not like the
answers, they do not approve the loan."
Having the appropriate D&O liability coverage should be
important to everyone in the HOA, not just board members.
Because it provides more coverage, it helps the community avoid
special assessments, thereby protecting the entire community and
its ability to buy and sell property within the HOA.
What is meant by fiduciary responsibility and how does
it impact the board?
Because HOAs can have large numbers of homeowners, making
decisions on behalf of the entire community would be unmanageable
if not for its elected board members.
Many board members are unaware that the bylaws and governing
documents of the HOA may assign board members a fiduciary duty to
the community, and hold them personally liable for the decisions
they make while on the board.
"The board members are the ones that make the decisions for the
HOA, so they have a fiduciary duty to maintain the property, keep
the values up, and govern the HOA based on the declarations and the
covenants and bylaws," said Angeli.
"If they aren't meeting those responsibilities, they can be
taken to court and sued because they're not doing their job.
A lot of board members don't understand what they're getting into
when they volunteer."
Brokers like Angeli, who have done their homework, do their best
to educate board members regarding the differences in D&O
liability policies on the market, and the importance to the entire
HOA of having the appropriate coverage.
How do I know if my HOA's D&O liability policy
provides the appropriate protection?
You may want to start by contacting Ian H. Graham. IHG
offers the stand-alone CNA D&O liability policy discussed in
these articles and is endorsed by HOA-USA. IHG can provide
you with a checklist that points out the important coverages your
HOA needs to be adequately protected.
"We use Ian H. Graham's checklist a lot," said Angeli. "I
hand out that checklist at seminars that I do across North
Carolina. I challenge the board members or property managers
to take that checklist to their current insurance agent and ask
them what's covered. I had a man call me from Wilmington, NC,
after I did a seminar who said, 'My agent could not answer yes to
any of these. Not one of them.' It can be
enlightening. If you can't check off five items that are
included in your policy, then you need stand-alone coverage."
Tifinni A. Tegan, CIC, is an Assistant Vice President at
Ian H. Graham Insurance, a division of Aon, the world's largest
insurance broker. Ian H. Graham specializes in providing
Directors' & Officers' Liability and a number of other
coverages to community associations.
Kim Angeli is the President of the independent
agency Powell, Angeli and Langford Insurance in Raleigh, NC.
Kim focuses on assisting community associations with their
insurance needs. She is also a frequent speaker on such
topics as Directors' & Officers' Liability.
Ian H. Graham Insurance is the brand name for the
brokerage and program administration operations of Affinity
Insurance Services, Inc. (AR 244489); in CA, MN & OK ,
AIS Affinity Insurance Agency, Inc. (CA 0795465); in CA, Aon
Affinity Insurance Services, Inc. (0G94493), Aon Direct Insurance
Administrator and Berkely Insurance Agency; and in NY and NH, AIS
Affinity Insurance Agency.
CNA is a registered trademark of CNA Financial
Corporation. Copyright ©2011 CNA. All rights reserved.