How Director & Officers (D&O) Insurance Protects HOA Board Members

You joined your homeowner’s association board of directors to help your community. You met new people, learned a lot about HOAs, and probably had a dispute or two with a homeowner.

What you probably didn’t consider was being sued. Unfortunately, it happens more than you think. A disgruntled homeowner can sue an HOA board for any number of reasons. Whether the issue is trivial or serious, the board and any individual members named need to hire lawyers.

Where does that money come from? If your HOA doesn’t have the right kind of insurance, it could come from your pocket. Nobody wants that. There’s a way to protect your HOA board. It’s called D&O insurance.

What is D&O Insurance?

D&O insurance is a policy that specifically applies to directors and officers (that’s the D&O). This is your HOA board.

You may be thinking that your HOA already has insurance. It almost certainly does. But those general liability policies don’t cover the board or its members if a homeowner files a suit against them. Liability insurance covers the association in cases of injury or property damage.

Directors and Officers Insurance specifically covers individuals named in lawsuits pertaining to their roles on their HOA board. It covers legal costs as well as settlements or damages.

Why Does Your HOA Need D&O Insurance?

Directors and Officers Insurance offers value that general liability insurance does not. It protects board members from legal expenses arising from doing their jobs for the HOA.

Does it seem unfair that volunteers are subject to lawsuits while performing their duties in good faith? Of course, but that doesn’t change reality.

You know that working with homeowners can lead to disputes. It’s practically part of the job description. And when that happens, you can be sued.

It can be very hard for an HOA to attract board members if they don’t protect from lawsuits. D&O insurance provides reassurance that members acting in good faith won’t face financial penalties simply for doing their (volunteer) job.

Some states, including California, have laws placing limits on HOA board member liability. Check your local and state laws before you purchase a D&O insurance plan. You need to know how much coverage to purchase.

Who and What is Covered by Directors and Officers Insurance?

All HOA board members are typically covered by D&O policies. Some plans also cover HOA employees like property managers. Others may even cover committee members and other volunteers.

These plans cover board members for duties performed in good faith on behalf of the HOA. Your personal liability policy may not apply when the activity in question is part of your HOA duties.

You already know that you have a legal obligation to fulfill your fiduciary duties to your HOA. D&O insurance covers board members when they are accused of doing otherwise.

For example, a homeowner may feel that they were singled out for enforcement of an HOA rule. They may file suit against the board as a whole, the member who carried out the enforcement action, or both. D&O insurance usually covers legal fees and any settlements or damages in such cases.

Think of the disagreements that arise at HOA meetings. Homeowners may have grievances that seem small to the board but large to that individual. If they decide to bring legal action, even over something trivial, it still means legal fees for the named parties.

Imagine the homeowner who insists that every new project is unnecessary. If that person escalates their running complaints in the form of a lawsuit, D&O insurance can protect the board.

Board members can also be sued for more serious matters like bribery, discrimination, embezzlement, or illegal eviction. Don’t assume that every D&O policy covers every scenario.

D&O insurance is designed to assure that HOA board members doing their best on behalf of their community do not suffer financial harm as a result of lawsuits.

Many policies do not cover willful actions that violate fiduciary duties or governing documents. If board members act in bad faith or outside of their prescribed roles, those actions may not be covered.

For example, if a board member intentionally commits fraud or housing discrimination, their D&O insurance is unlikely to cover their legal expenses or other costs.

Think of it like medical malpractice insurance. Mistakes happen, and when they do, you need good insurance. Board members are human beings and not perfect. If a good faith error results in a lawsuit, D&O insurance provides protection.

Say your board makes a bad business decision. Perhaps they hire a landscape company that turns out to be unreliable. If the board had no reason to believe the vendor would neglect their duties, they acted in good faith.

That good faith might not avoid a lawsuit. But D&O insurance protects them from being financially penalized every time a homeowner is unhappy.

Finding the Right Directors and Officers Insurance

You’re going to discover that there are many different plans and many different levels of coverage. Find a good advisor to help you choose one that fits the needs of your community.

There will be a lot of fine print involved in this decision. Read every policy you consider thoroughly. Make sure the board understands what is and is not covered. Also, determine if there are any out-of-pocket expenses for covered incidents.

Your D&O policy needs to fit your community. If you have a property manager or a lot of non-owner employees, find a plan under which they are protected. If your community is large, you may want to consider a plan with a greater level of coverage.

If your HOA is very small and narrow in scope, find coverage that realistically addresses board member risk. Always check for state laws that protect HOAs.

Insurance is a substantial expense for many HOAs. Don’t skip D&O insurance, even if your community has no history of lawsuits. Board members must be able to carry out their duties without risking their financial futures. If they cannot, you will have few if any candidates for empty seats.

An insurance advisor can help you select a D&O policy. Look at multiple companies and what they offer. Choose one that fits your needs, and don’t skimp on coverage. It is an additional expense, but one that provides great value to both your board members and your HOA as a whole.

You can’t predict when or for what a homeowner might sue. You can only do your best to prevent disputes from escalating to that level. Sometimes you’ll fail. Give your board members the reassurance they need to do their jobs properly with good Directors and Officers Insurance coverage.