HOAs need to have directors & officers insurance to function properly and mitigate potential issues that could arise. This vital safeguard protects HOA’s board members from legal liability. Here are some of the most fundamental reasons why HOAs need D&O coverage.
Directors & Officers Coverage Can Address Legal Claims
When board members do great work on their association’s behalf, they often do not receive the due praise and thanks. Unfortunately, when an association has a severe problem with its day-to-day operations or finances, many homeowners within a membership will quickly blame the board. Boards owe the members of an HOA association a fiduciary duty of care because they serve the membership’s collective interests. Any perceived breach of that duty can quickly escalate into legal action.
Having directors & officers insurance gives boards the resources to contend with claims. Policy proceeds can pay for legal costs, settlement agreements, or court-ordered money judgments.
Claims Scenarios
An extensive list of possible causes of action that a board member could face concerning board service falls under the scope of fiduciary breaches. Likewise, mismanagement of the association’s funds that results in direct or consequential damages to the association may form grounds for legal action. Conflicts of interest in which board members derive personal benefits from the association’s expenditures are a widespread basis for lawsuits.
Failure to adhere to an association’s governing documents might also result in liability for board members. For example, if board members fail to follow meeting procedures per the HOA’s by-laws, individuals within the membership or the entire membership may seek a legal remedy.
Understanding Why Coverage Is Indispensable
Do HOAs need D&O insurance if they are confident they always do everything correctly? Even if a claim fails, defending it could be extremely costly. Also, it is essential to remember that civil litigants do not need to prove wrongdoing beyond a reasonable doubt, even if the activity they allege is statutorily criminal.
It is also worth noting that retaining a professional management company to assist with HOA governance does not eliminate the need for coverage. A management company’s negligence or intentional wrongdoing may give a board a cause of action against it. However, board members could still be liable to their membership for the property management company’s mistakes.
Directors & Officers Insurance Is Essential for Recruiting and Retaining Board Members
If associations do not carry sufficient insurance coverage for claims against officers and directors, the prospect of serving on a board may seem far too risky to most people.
People who an HOA association has already elected may relinquish their roles or decline to run again because board service carries serious risk and no reward. Resultantly, people who have exceptional skills and experience to contribute will decline to run for office. If nobody wants to serve on a board, an HOA may be incapable of self-governance and have to go into receivership.
Not all officers and directors fully understand the liability risks involved in board service. Insurance agents who serve HOA boards should work closely with their clients to evaluate coverage needs and explain the practical utility of D&O coverage.
About Kevin Davis Insurance Services
For over 35 years, Kevin Davis Insurance Services has built an impressive reputation as a strong wholesale broker offering insurance products for the community association industry. Our president Kevin Davis and his team take pride in offering committed services to the community association market and providing them with unparalleled access to high-quality coverage, competitive premiums, superior markets, and detailed customer service. To learn more about the coverage we offer, contact us toll-free at (855)-790-7393 to speak with one of our representatives.