By Alyssa Chirlin, Smith Jadin Johnson, PLLC
Inflation is noticeable everywhere today and HOAs are not immune to the pressures caused by higher relative costs. One common remedy to these pressures is cutting costs and one area where it is always tempting to do so is in insurance premiums. However, skimping on insurance coverage now can generate significant costs down the road. For HOAs specifically, it is imperative to have comprehensive directors and officers (D&O) insurance in place. Unlike an HOA’s general liability policy, which protects the HOA, D&O insurance, as its name suggests, protects its board members.
As anyone who has lived in an HOA knows, keeping all members happy all the time is impossible. It is inevitable that some homeowners will be unhappy and some of those unhappy homeowners may file lawsuits. D&O insurance kicks in when those lawsuits name individual board members. Defending a lawsuit is expensive and even when the case is dismissed or settles, the costs can still be substantial. Should a homeowner’s lawsuit be successful and judgment be entered against a board member, the costs could be astronomical. Without a D&O policy in place, these costs can fall to the HOA, if it indemnifies its board members, or even to the board members themselves, if the HOA does not indemnify its board members or does not have the funds to fulfill its duty to indemnify them. HOA board members are often volunteers, committing their time, energy and talents to their community, and, in order to attract and retain qualified, valuable board members, HOAs need to offer them protection from expenses that, even when claims are completely unjustified, can be potentially ruinous.
HOAs need to protect not only their board members, but also themselves. Many HOAs already indemnify their board members in their governing documents and even without specific authority therein, the Colorado Revised Nonprofit Corporation Act permits HOAs to provide such indemnification. By doing so, HOAs assume responsibility for the costs that may arise when a board member is sued for his or her HOA work. This can be an expensive assumption and an HOA can face depleting its reserves or, if it does not have the funds in place, assessing the costs to its members. HOAs should not take on this responsibility without D&O insurance in place.
D&O insurance coverage can vary widely, but typically covers the attorney fees and costs associated with defending board members against legal claims that are related to their work for the HOA as well as any settlement or judgment amount. Some D&O policies may limit coverage to only board members, while others include an HOA’s employees, committee members, and management. Some policies cover lawsuits, but not arbitration (which may be required by an HOA’s governing documents) or mediation. Some policies may only cover claims for monetary damages, but many lawsuits brought by homeowners against their HOAs do not seek financial compensation at all and instead seek an order from the court that the HOA perform a certain action. Failure to enforce the governing documents or adhere to the bylaws, challenges to assessments or architectural review decisions, improper removal of a board member, and failure to maintain common areas are all examples of non-monetary claims that may be brought by a homeowner and would not be covered under a D&O policy that limits its coverage to monetary claims.
HOAs that are subject to the Colorado Common Interest Ownership Act (CCIOA) are required by law to carry D&O insurance, so it is likely your HOA has a policy in place. Instead of selecting the least expensive policy in order to meet this requirement, however, boards should discuss their HOA’s specific needs with their insurance agent and ensure that their D&O policy covers them. Although it may be difficult to fund a comprehensive D&O policy now, it can save the HOA, and its board members, large sums of money later on.
Smith Jadin Johnson, PLLC aims to provide comprehensive legal services for HOAs, from daily governance issues, including collections, covenant enforcement, and governing document drafting, to representation on insurance and construction defect claims. Our experienced team of attorneys can handle all of your HOA’s legal needs in house, eliminating the need to hire multiple firms to handle its legal affairs. Call us to discuss your HOA today at 720-550-7280.