If you sit on the board of your condominium or co-op, are you aware that your financial security is at stake? Most board members aren’t! Simply stated, if a lawsuit against the directors and officers of a co-op or condominium is not covered by insurance, then the board members are in financial jeopardy. They must hire an attorney with their own money to defend the lawsuit, no matter how frivolous it might be. See the below article by our President, Edward Mackoul, on steps to protect board members.
The first step in protecting yourself is to verify that the bylaws contain an Indemnification Clause. An Indemnification Clause will dictate that the condominium or co-op association must reimburse board members for uninsured legal fees incurred in their capacity as board members. Having an Indemnification Clause is critical. Legal fees can be exorbitant. Lawsuits against boards for discrimination (sex, race, religion, or age) by rejected applicants of co-ops or terminated employees can take years to wind through the courts and amass legal fees in the hundreds of thousands of dollars.
The second step in protecting yourself is to verify that the condominium or co-op has comprehensive Directors and Officers Liability Insurance. There are generally significant differences in coverage between the comprehensive policy forms and the inadequate ones. The most common Directors and Officers Liability lawsuits lodged in New York and New Jersey are:
• Wrongful termination of an employee
• Discrimination because of race, religion, sex, or disability
• Defamation of character such as libel or slander
• Breach of contract by a third party vendor
• Renovations by the building or homeowner
• Noise by another homeowner, a contractor, or the building’s machinery
• Subletting guidelines and restrictions
• Pet guidelines and restrictions
Comprehensive Directors and Officers Liability policy forms are purchased on a standalone basis, whereas the inadequate ones are generally the ones embedded in the Commercial Package or General Liability policy. The comprehensive, standalone policy will usually respond and provide coverage for the costs associated with the legal defense of these suits. This is important because most suits are settled well before they ever reach a verdict. The claims are made up of defense fees, claim expenses, and litigation costs. The most common Directors and Officers Liability claims mentioned above rarely get to trial and even rarer result in a monetary damage payment.
A 25-unit co-op or condominium can obtain $1,000,000 of coverage for less than $1,000 depending on different factors. A 100-unit co-op or condominium can obtain $1,000,000 of coverage for under $1,500 in some instances. When you take into consideration that legal fees can easily reach six figures, comprehensive Directors and Officers Liability is not the area boards want to pinch pennies. The expression “you get what you pay for” applies more than ever to Directors and Officers Liability Insurance.
What makes a standalone policy more comprehensive? The standalone policy provides coverage for all persons such as elected or appointed directors, trustees, officers, employees, committee members, and volunteers now or in the past. The Directors and Officers Liability embedded in the package policy usually only covers the directors and officers who are or will become directors or officers during the policy period. This alone should be enough of a reason to purchase the comprehensive policy. However, the board needs to be aware that most embedded Directors and Officers Liability policies will not provide coverage for “big ticket” items such as:
• Discrimination because of race, disability, religion, employment etc.
• Non-monetary damage lawsuits: some instances that could result in non-monetary damage lawsuits include approval or rejection of contracts and the interpretation of bylaws
• Personal injury lawsuits such as libel, slander, and defamation of character
Remember the two steps to ensuring your financial security if you are a board member of a co-op or condominium:
- A well crafted Indemnification Clause to transfer legal fees of the board of the co-op or condominium association.
- A comprehensive Directors and Officers Liability Insurance policy to protect the board members and the co-op or condominium association. Consult with the co-op or condominium’s insurance broker to verify the adequacy of the current policy.