By Paul Houillon on Wednesday, 13 July 2016
Category: Board Member Fundamentals

Directors and Officers Insurance

Directors and Officers Insurance

In many ways this is the most complex type of insurance policy that a condo association in Illinois is required to maintain. Directors and Officers insurance (D&O) protects board members from damages resulting from allegations of wrongful conduct and lawsuits. It provides legal defense coverage as well as indemnification of damages, up to the policy limits.

Unfortunately, board members may make mistakes. Without Directors and Officers insurance, a mistake could be disastrous.  Board members have certain fiduciary duties and fiscal responsibilities when serving in their respective capacity for the Association. They have an obligation not to violate or breach these fiduciary duties and fiscal responsibilities. Should an error occur, the board may be held responsible and found liable for a material breach or substantial default. D&O coverage provides protection to both the Association and board members in the event of such a claim.

Directors and Officers insurance is designed to fill the coverage gaps of the General Liability policy. The General Liability policy is designed to respond to claims related to bodily injury or property damage. D&O policies respond to claims relating to wrongful acts by the Board. Claims for wrongful acts generally relate to monetary loss without bodily injury or property damage.

It is important to keep in mind that board members may be found responsible and liable if they violate or breach their duties with illegal, improper, negligent or discriminatory conduct.

Many board members believe that since their role on the board is voluntary, they cannot be held personally responsible for their actions or decisions. This is not the case. The insurance carrier may disclaim coverage in these situations and that individual board member may not have insurance coverage, leaving them personally liable for their actions.

Here are some examples of common Directors and Officers claims brought against boards:

Required levels of Directors and Officers coverage

According to the Illinois Condominium Property Act, all Illinois condominium associations must carry Directors and Officers (D&O) coverage to protect volunteer directors and officers from claims and lawsuits.

A 2015 amendment to the ICPA, Section 12(a)(3)(D) requires that D&O insurance policies provide coverage for non-monetary claims (e.g., a lawsuit seeking an injunction or a declaratory judgment), breach of contract actions, and claims related to placement or adequacy of insurance. In addition, the D&O liability coverage must include coverage for past, present and future board members, the managing agent, and employees of the board or its managing agent.

The number of suits against board members for failing to perform their duties has continued to rise over the years. The 2015 change to the ICPA is in reaction to the increasing number of suits and an attempt to ensure that proper coverage exists to protect Associations.

It is worth noting a second time that board members can be found responsible and personally liable if they violate or breach their duties with illegal, improper or discriminatory conduct. The insurance carrier can disclaim coverage and that individual board member may not have insurance coverage and may be held personally liable for their actions.

Review Policy Exclusions Carefully

An exclusion is a specific event, situation or type of loss that is not included in the insurance policy. Directors and Officers policies vary wildly with no “standard” policy to expect from carriers. D&O is the policy that requires the most careful level of examination, in my opinion, so that the Board is very clear on what is included and what is excluded.

For example, to meet the minimum requirements of the Illinois Condo Property Act, many carriers include a small amount of D&O coverage within their Property/Liability policies. There is nothing wrong with this, and technically it meets the legal requirements set forth by Illinois, but this type of D&O coverage may provide little real protection to the board. In these cases you will typically find low policy limits and a wide range of exclusions. The policy meets the definition of D&O insurance, but if the board runs into trouble, it may end up not receiving much protection.

Many insurance brokers that we work with will commonly suggest that boards consider a separate, and more complete D&O policy in addition to the “thrown in” coverage provided with the Property/Liability policy.