Kevin Says Insurance Insider Blog

Directors and Officers Insurance (D&O) – The HOA Board’s Shield

This blog reproduces an ECHO educational webinar presentation on HOA insurance in general, and Directors and Officers Insurance (D&O) in particular. It includes a detailed discussion and Q&A session on D&O Insurance.

Our speaker for this session is Kevin Boland. Kevin is an Elite Farmers Insurance Agent specializing in management insurance for common interest developments. He is a graduate of UC Berkeley, has contributed articles to ECHO Journal on HOA insurance topics and served as chairperson for an ECHO Chapter. Kevin also served as president of his 214-door planned unit development so he’s well aware of the challenges facing volunteer Board members. His insurance agency is in Novato California.

HOA Insurance

Hi everyone, I really wanted to say ‘wow’ before I do anything else, I can’t believe how much useful information we’ve already learned from David Levy and Roy Helsing. I sit on my board, so I was taking a lot of notes, and I think I have about 12 pages! Today, my job in the next 30 minutes or so is to show all the Board members out there how you really do have an insurance shield around you when you must make decisions to manage your Association.

Insurance Policies for Associations

You know that, even if you make a mistake, if you follow certain guidelines, your insurance policy will be there to protect you. With our first slide I’m going to give you a brief review of all the different types of insurances that you want to consider when you sit on a board.

The first policy is called the Master Policy for Liability and Property. I think we all know that’s really important to have and my only point to make about this today, is that because of all the high construction cost in 2020, make sure you really have enough limits on your property policy. The way you go about doing that is to total the square footage of your Association buildings, including the clubhouse. Then look at the quality of your finishes, are they average, or is an upscale, and then multiply that number by around $350 or $400 per square foot. That is about how much coverage you should have. My second tip is to talk to a general contractor who actually rebuilds brand new buildings in your area, because one of the reasons I’m emphasizing this point so much is that I’ve come across a lot of associations in the last year that haven’t really upgraded their coverage after the wildfires. Always keep that point in mind.

The second coverage you see there is called the Umbrella Insurance Policy. An Umbrella gives you more liability coverage if you need it. For example, if as a Board, you decide hey you know what, we just installed some new tennis courts, maybe we should increase our liability coverage. You may only have one or two million underlying liability coverage in your master policy, so you can go out and buy an Umbrella policy for two, three, five, or ten or even twenty-five million dollars. They are not that expensive, and the rule of thumb that I will share with you, is that the bigger your Association and the more amenities you have, like pools, and tennis courts, and fitness centers, the more at risk you are for a liability claim. So, keep that in mind when you look at your Umbrella coverage.  

We are going to skip over the D&O or Directors and Officers Insurance because we’ll talk about that as our main topic today.

Now we want to talk about Fidelity Insurance. A Fidelity Policy, as many of you know, is a crime policy. If anybody were to embezzle funds from the Association, it could be a manager, it could be a Board member, it could be a volunteer, you want to have enough coverage in your Fidelity Policy to make sure that the insurance company stands ready to write you that check within a week or two, and get you back up and running again. One of the things I often see is that the Fidelity limit has not been upgraded in a couple of years. According to the David Sterling Civil Code 5806, your Fidelity limit should always be one-year reserves, plus three months of regular dues. Keep that in mind when you look at your Fidelity Policy. The last tip I’ll give you, if you show up at your next Board meeting and you have every Board member driving up in a brand-new Mercedes, and they also happen to be remodeling their home this year, that may be a clue that there’s some embezzlement going on. Just kidding!

The next insurance we want to talk about Earthquake Insurance. Earthquake Insurance is a really difficult decision for a lot of associations, for one reason the premiums are so high. But I would strongly recommend that every Board consider it, because, as the seismologists like to tell us, ”it’s not a question of if, it’s only a question of when.” We haven’t had a major earthquake since, I think 1994 on the Northridge Quake. For $25 or $30 more per member you really do want to consider earthquake insurance. If you decide not to, that’s great, but what I typically discover is a lot of Boards don’t even talk about it and I think you really have a fiduciary duty for all your members and yourselves to consider getting Earthquake Insurance.

Then Pollution Liability Insurance. If your Association is near the San Francisco Bay and you’re concerned about your sewer lines collapsing and spilling raw sewage into the San Francisco Bay you really want to consider getting a Pollution Liability Policy.

Now I saved the best for last. I started selling to those managing insurance about five years ago and I quickly discovered that a lot of the smaller Associations, for whatever reason, did not have a Workers Compensation Policy in place. I think this is a mistake for two reasons, first imagine if you’re a Board member, like Kevin for example: a week ago I walked around with my arborist and I saw this big beautiful plant that he had marked to get rid of, so I asked him why do you want to get rid of this big beautiful plant? The arborist separated the exterior of the plant, reached his arm in, squeezed, and brought out a bunch of rotting twigs and branches, and he says, “Kevin this is why it’s beautiful on the outside, it’s ugly on the inside, it’s rotting and it’s adjacent to one of your buildings.” I totally got it, however Kevin, being the hands-on Board member that I am, reached my hand in, I squeezed, and guess what I got when I pulled my hand out? I got a major splinter right on the palm of my hand, it’s still there and it hurts. The reason I’m sharing this story with everyone, is that it really drove home the point to me how important it is to have a workers compensation policy in place because this policy will protect you if you’re a Board member, or an appointed volunteer, and as you’re walking around the common area you actually sustained an injury. Imagine if I had broken my leg or my hip, I know of a disability policy, but I would have a Workers Compensation Policy in place and guess what, it’s worth a million dollars! Here’s the second reason I recommend it, besides obviously protecting yourself, the second reason is that it only costs between $350 or $550 a year to purchase a Workers Compensation Policy for Board members and appointed volunteers. To me that’s a no-brainer. I won’t say anything more about it, but I really want to strongly encourage every Association, no matter what size you are, to get a Workers Compensation Insurance Policy.

Directors and Officers insurance (D&O)

Directors and Officers Insurance (D&O)

Now we are going to transition into Directors and Offices Insurance, our main topic today. Here is a list of all the people that are insured under the insurance policy. Obviously, the officers and the directors, appointed committee volunteers, employees, and the manager, and their firm. I underlined the word appointed because you must make sure if someone is doing gardening or volunteering to pick up, say garbage that’s strewn in the HOA. They really should be listed as an appointed volunteer, because if they are listed as an appointed volunteer, they are going to have insurance rights and they’ll even have workers compensation policy working for them as well. Just be aware of that.

What I want to do next, is share with everyone the legal foundation upon which your Directors and Officers policy is in place. This will be a little bit more complicated for the next couple of slides but bear with me, because when I start to share with you some of the other protections you have in place, and at the end we are going to talk about some real-life cases. I think that’ll really make it clearer but let me read this to you. Really briefly, the insurance company will pay for the loss which you become legally obligated to pay as a result of a claim again for any “Wrongful Acts” committed by any “Insured Persons.” The “Wrongful Act” must be committed in the conduct of management duties for the Association. We will have the right and the duty to defend you against any such claims albeit the allegations are false, fraudulent, or groundless. That sounds great, the insurance company is going to make the agreement, they’re going to protect you. But if I stopped right here and I asked you well what type of claims are they going to pay? You probably would not know.

But if you noticed I highlighted two key words:

Wrongful Acts. What is a wrongful act? Let us look at the next slide and find out. As Board members you are always making decisions, and you could make a bad decision, but as long as you follow certain guidelines you’re going to be protected. That is the good news. I am going to share with everyone today what the insurance companies will typically define as a wrongful act, and this is true across the country, not just California. A wrongful act is an alleged act, an error, an omission, a misstatement or misleading statement, neglect or breach of duty, committed by one or more Named Insureds, arising solely out of their management duties for the Association. This is a very broad definition. Actually, the broader your definition, the more coverage you have, the more wide variety of claims that you’re insured for, which is a very good thing. Now you have a better understanding of what a wrongful act is so let me give an example of an error. Let us say the Board gets together, they realize hardly anybody is using the tennis courts and they look at the CC&RS and there’s nothing even mentioned about it. The CC&RS are silent about whether you know they could get rid of the tennis courts. They decide to go ahead and do so. Well, guess what, a couple of homeowners like to use those tennis courts and the Board made an error. They didn’t look at the CC&RS carefully, and if your CC&RS are silent you can’t take away an amenity. I know every seasoned HOA manager knows this one and it is important to know. That would be an example of an error.

“A wrongful act is an alleged act, an error, an omission, a misstatement or misleading statement, neglect or breach of duty, committed by one or more Named Insureds, arising solely out of their management duties for the Association.”

An omission is something that you should have done that you did not do. For an example of an omission, let us say that a homeowner is complaining about a tree limb that’s hanging over his carport. But this person complains about everything, they even complain about St. Patty’s day coming up. So, as Board you know you can put this off knowing he complains about everything. Sure enough, if that branch were to fall/crash into the carport not only could that owner ask the Association to pay, because he warned you about it, they could file a Directors and Officers claim. The good news is your insurance will protect you, the bad news is you are going to have to pay (probably) a deductible and your insurance rates could possibly go up the next year. That’s a good example of an omission and an error.

An omission is something that you should have done that you did not do.”

How about a misstatement? I think David Levy gave us some good examples today. How about if I told all the homeowners during a meeting that our finances are in great shape, we’re like the U.S. Treasury, we have so much money we’re not going to raise dues for years. I do not think any Board member would make that statement, but it is a good example of what a misstatement, or misleading statement, could be.

Then finally neglect or breach of duty? We all have a duty to keep the best interest of the Association in mind. I read a case just last night when I was doing the research for my talk. A Board member decided to chop down a tree because it was it was preventing him from seeing the Bay from where he lived. Was this a breach of duty to keep the best interest of the Association in mind? I don’t think so, and that’s an example of a breach of a duty.

Let’s move on to the next slide. I’ve shared with you some good news so far, that your Directors and Officers policy will protect you if you make a decision. Now I want to share with you what is not covered under some, not all, but some Directors and Officers policies and I’m going to highlight two of them. There is a lot here but I’m just going to highlight two, because they’re going to be one of the key takeaways today. I have discovered in the last couple of years, since I began to look at Homeowner Associations Directors and Officers Policies, that 30 to 40 percent of them out there do not cover first or third-party discrimination claims, and this represents a big gap in your coverage. As you will see later, I am going to share with you a real case that occurred. A first party is the homeowner, or the volunteer, or the manager. A third party would be everybody else, for example, a tenant, their guest, or even a vendor. Let us say a homeowner felt that she was being discriminated against based on race, or age, or skin color, or sex, or disability. It could be frivolous, I mean we never see a frivolous loss, do we? it could be a frivolous lawsuit, but guess what, you are still going to have to retain counsel to defend you.  This has happened often, in fact I remember in our January ECHO legal seminar, we had a good attorney, by the name of Mark Guthus and he talked about how important it is to have discrimination coverage. I was cheering when he said that. My takeaway here is: when you look at your Directors and Officers insurance coverage on renewal make sure that that coverage is in there. Do not hesitate to ask your manager to find out for you or your broker directly.

There are a few other coverages I am going to skip over for now. We can handle those in the Q&A if anybody has any questions.

I wanted to talk about the last one here. Watch out for this one if you have employees in your Association. You really want to make sure you have what is called Employment Practices Liability coverage because a lot of employees today know that if they get fired, they can find some attorney who will come back and say you fired them because of their race, their age, their skin color, because you just didn’t like them. Before you know it, you’ve got a another lawsuit on your hands, or a claim. If you don’t have this coverage in your Directors and Officers insurance the Association has to look to the reserve funds, or operating funds, to pay the bills or even worse make a special assessment which nobody wants.

“If you only remember two things today, I want you to remember to ask about your Directors and Officers insurance coverage. Do they have first- and third-party discrimination coverage and do they have employers’ practices liability coverage inside the Directors and Officers insurance?”

If you only remember two things today, I want you to remember to ask about your Directors and Officers insurance coverage. Do they have first- and third-party discrimination coverage and do they have employers’ practices liability coverage inside the Directors and Officers insurance?

Next slide. Now I want to share some more good news with you. You have coverage to make a decision, make a bad decision, or make a mistake. Under California Civil Code 5800 (Davis-Sterling) you actually have statutory support for making your decisions and I want to read this to you because I think it’s really important. Under Davis-Sterling Civil Code 5800, a volunteer officer, a volunteer director who manages a Community Interest Development that is residential or mixed use, shall not be held personally liable in excess of the coverage of insurance, to any person who suffers injury including but not limited to bodily injury, property damage, emotional distress, and wrongful death or as a result of a tortious act or omission. A tort is a civil wrong, or a wrongful act in which some other party sustains damage, or allegedly sustains damage, or bodily injury so this is actually on the books with Davis-Sterling. I was really happy to see this again because I serve on my Board and it’s really strong legal protection.

What the California legislature is basically saying is you know what, we understand you are volunteers, you have to manage in an Association, we know that you can make mistakes but as long as you follow four criterion we are going to protect you under statutory law. So let’s take a look at what those four criterion are:

  1. Whatever the mistake was, the act or omission, it has to be within the scope of the officer or director’s Association Duties.
  2. The act or omission was performed in Good Faith.
  3. The act or omission was not Willful, Wanton or Grossly Negligent.
  4. At the time of the incident, or when the claim was made, there were two insurance policies in place: a general liability policy and a Directors and Officers insurance policy and their limits were:
    • If you had less than 100 units at least a half a million dollars in coverage
    • If you have over 100 units at least a million dollars in coverage

Keep in mind those limits are really too low. These are state minimums but there you have it. If I were to interpret this and look at this Civil Code 5800, what I understand it to mean is that, as long as you’re keeping the Association’s best interests in mind, as long as you’re acting in good faith, and as long as you do your due diligence, consult with experts, and follow what’s known as the business judgment rule then you’re going to have some statutory support.

In other words, the courts are going to look more favorably upon the Board, and they’re going to protect you, which is good to know, so now you have not only one shield in your insurance, you have two.

On to the next slide. I have some more good news for everybody, and I actually discovered this myself when I was researching for my talk just last week. There is a something in California known as the California Doctrine of Judicial Deference to HOA Boards for ordinary maintenance duties. With Davis-Sterling, it’s statutory law. With the California Doctrine of Judicial Deference, it’s case law, and this also now means you have case law that’s going to support you. The California Supreme court ruled that the court shall defer to the Board’s authority when making a decision using sound business judgment.

What is sound business judgment? Once again, keeping the best interest of the Association and the membership in mind, consult with experts, do your due diligence, discuss it as Board members, be engaged, make a good decision, get a couple of bids for a roofing company so you hire the best and most qualified vendor, research and listen to the experts, review and discuss known facts, and then work in good faith. This is really good news for me and for all the other Board members out there because we have insurance policies in place, we have statutory law, and we now we have case study law which is also a precedent. So the courts really want to let the Board make their own decisions, and as long as you stay within these four criteria that I mentioned earlier, you’ll be fine.

Some Actual Cases

On to the next slide. Now what I want to do is share with you some actual cases, some real lawsuits that have taken place in the last two to three years and this will give you some real concrete examples of how your Directors and Officers insurance can protect you. Back in 2018, I actually have an Association up in Sonoma County and one of the Board members was acting so unruly and so abusive verbally, they had to ban her from the meeting. What happened was she didn’t like it, so she retained counsel and she sued for racial discrimination, handicapped discrimination, and age discrimination. The insurance company, which was my company at the time, had discrimination coverage inside the Directors and Officers insurance (which I mentioned earlier is so important to have). We defended and we proved the Board did everything right. I’ve had the good fortune of working with a lot of very competent HOA managers in our industry and this particular manager had a file about 12 ½ inches high on this particular situation/issue. Because the homeowner, who was acting defiantly and unreasonably for so long, my attorneys were able to use that documentation and they won within a year. It was proven that the Board acted within the authority of their CC&RS and did nothing wrong. Guess what it cost my company? Thirty-two thousand dollars so if you don’t have this discrimination coverage in your Directors and Officers insurance and your Association, that money is going to have to come out of operating funds, reserves or special assessments. That’s why it’s important so this is a really good story and this just happened a couple of years ago.

Let us take a look at another case. Some of you may be familiar with this because I’ve heard our attorneys talk about this at our good ECHO meetings in the past. Lamden versus La Jolla Shores Condominium Association. This is where the doctrine of judicial deference was cited by the judges. An owner sued the individual Board members which is kind of scary to see your name on a lawsuit and they also sued the HOA for termite infestation. The owner wanted a major fumigation and to tent the building, but the Board chose to spot treat the termites. The owner sued for loss of market value and other reasons. The court decided the Board had applied sound business judgment by spot training for termites, in lieu of fumigating, despite the fact that the termites were never eradicated. Apparently, what happened in this case was the Board decided to spot treat, and it might have been, in retrospect, a bad decision because about a year later a lot more termites were found in the building. It was really a termite buffet that year however the courts in this lawsuit decided in favor of the Board of Directors because they followed good business judgment, they talked to one or two pest control companies, and they said I think we can spot treat these and we can take care of this termite infestation. I don’t think we need to tent the entire building and as a result of that the Board of Directors won. That’s another way that you have support within the California court system.

On to the next slide. This is one of my favorites because I used to play tennis when I was a younger guy and I could actually hit the ball when I was able to use swing the racket. A Board decided to remove the tennis courts and there was nothing in the CC&RS that actually addressed it. Nobody was really using the courts for months at a time, and they were costing money to maintain, and the Board members were worried about teenagers coming in as a hazard, which they were, and they were hanging out there and they were they were not really playing tennis. They were just hanging out being teenagers, and they were smoking and drinking too, so the Board made a decision to get rid of the tennis courts. Well, it turns out that there were three homeowners out of 150 that liked to play tennis once in a while. They sued and they sued because they were not consulted. There was no vote of the membership and, guess what, they were right. I learned after talking to one of our claims’ professionals just a week ago, that If your CC&RS (or ours, thinking of my own Association) are silent on a particular issue, you cannot take away an amenity, and you cannot deal with a particular issue. You need to go get a vote of the entire or two thirds of the membership to get your majority to make that decision. That’s a good example again where the  Directors and Officers insurance policy was able to come in and pay all the bills.

The last part of this story, remember Paul Harvey (if you’re if you’ve been around a long time like me, you’ll remember Paul Harvey always had the rest of the story)? Well after the Board had to reinstall and pay for the tennis courts to be reinstalled again, and built from the ground up, guess who got assessed for the cost of that? All the homeowners including the ones that complained about it. So there you go.

Key Takeaways

On to my key takeaways today, and then we can open up for the Q&A that I’m looking forward to.

  • Always remember to have discrimination coverage in your Directors and Officers insurance policy write it down and don’t forget to ask that question.
  • Always remember to have, if you have employees your Association, to have EPLI coverage.
  • Breach of contract, make sure you have that coverage in there. That’s a big one.
  • Matters of insurance we didn’t really talk about this one but it means that as a Board you have a  fiduciary duty to buy the right amount and the right type of insurance and a homeowner can actually come back and see you one day if you didn’t do your job diligently so make sure your Directors and Officers insurance policy covers matters of insurance because I’ve discovered a lot of companies, and some of them are well known brand name companies, don’t cover that type of claim. You want a good comprehensive Directors and Officers insurance policy that’s going to protect you.
  • Get a Workers Compensation Policy because if you’re like Kevin you’re going to need it.

I want to close today by thanking all the Board members and everyone else, all the other HOA professionals for being here today. It’s a Saturday, we all dedicated our time to learn so I want everybody to follow after me, please raise your right hand, please raise your right hand now, and repeat after me, I solemnly swear to pat myself on the back one two, three, four, five times for dedicating my Saturday to learning and growing so I can become a better Board member to serve my community.

Thanks, thank you everyone, thank you Kevin we’re now going to be begin the ask the expert Q&A session and sponsored by CIT Bank and Homeowners Management Company.

Q&A

I have a number of questions for you.

Q: Does the workers compensation policy also cover vendors who do not have a Workers Comp coverage for their employees?  

A: That is a great question and it’s another reason why you do want to have a policy in place. Thank you whoever asked that question because if you were to hire a vendor and they failed to have workers compensation insurance, their employee could actually sue you, and if you have that Workers Compensation policy in place it will be there to protect you. That’s a great, great question.

Q: Our buildings are on pylons sunk into the bedrock. The units are above ground. The insurers always consider us a three level but only the furnaces and water heaters are on the bottom level. Is there any way to resolve this to get lower rates?

A: Are you saying that your rates are higher because of the type of construction that you have? If you are saying that, then I would hate to be the bearer of very bad news, but probably not. Insurance companies are always concerned about any type of structure that has pipelines, either cement or wooden pylons or beams supporting them because they’re worried about the risk of fire. If a fire starts it can actually burn a structure much faster if there’s an empty space under the building and that’s why they do typically charge higher rates for that.

Q: We are a Townhouse Condo Association. Some of the units are in FEMA. In the FEMA flood plain can the HOA get flood insurance? Homeowners have gotten it, but some banks are telling them the HOA must have it?

A: You can absolutely purchase flood insurance today in California. It is available and you can go through FEMA and there are also other markets which I encourage you to consider called Lloyds of London. Very often we look at both and we’ve discovered that sometimes FEMA is not the least expensive, and sometimes their coverage is not the best. You can definitely get that type of coverage, it’s smart to get it. if you’re in the AE zone, or close to that zone, then you’re definitely at risk of a flood at some point in time. The HOA can get that insurance absolutely, you can buy a master policy of flood insurance. in fact, we have it on our Association because we are literally about 30 yards from a major creek in our city of Novato.

Q: One of our attendees isn’t sure what ‘being silent; means with respect to your CC&RS. You mentioned CC&RS are silent can you explain that?

A: Yes thank you another great question. When I say ‘silent’ I mean there is nothing in the CC&RS that talked about whether or not the Board had authority to remove any amenity like a tennis court, or a basketball court, or close down a pool, or a spa. When I say silent that means there was nothing in there,  no language saying you can and you cannot do it, or it’s going to take two-thirds vote of the membership to get it done. That’s what I mean by ‘silent.’ I hope that answers the question? Yes and I think the contrary to that would be explicit, so it would be actually written in there or black letters so those are the terms you use sometimes you need to do that for the contracts and and make sure that it is in there.

Q: Our Board of Directors has funded the large projects where required permits weren’t pulled eg new roofs etc. It won’t seek them out. Can our carrier deny coverage if a claim is made when required permits are missing?

A: I’m not sure I understand the question here, but if they’ve done some major work in their HOA in a new roof let’s say. For the new roof, they didn’t go out and get the permit to replace the roof. It could be a small Association and they did it themselves. What happens if there’s damage to the roof, say a tree falls on it and puts a hole in it. Can the insurance company deny the claim because they didn’t pull the roof permit and have it inspected? You have to be careful when you say yes or no to, is an insurance company going to pay a claim? Frankly they have to investigate all the details of what occurred, but my honest opinion would be that the insurance company would still have to pay this claim. If they fail to pull permits they can be fined by the city. But if they can show that when they installed the roof, they had a competent contractor do it, it was installed using you know good normal construction methods, the insurance company really has to pay that claim because the HOA is paying a premium for that coverage.

Q: Here’s another really good question and I’ve had this one before. About plants or trees that drop oak balls or dangerous balls on the ground, an amber tree in this particular case. The balls are on the ground and people are walking this is, in an active 55 community, they step on the balls, or whatever the tree is dropping that end up on the ground. They break an arm, is the HOA responsible for that, are they liable for them?

A: That’s a really good question too. I love these questions today. I would have to say, in my opinion, that yes, more than likely, the Association would be held liable because if they were aware of the problem and they didn’t do anything that’s an omission. Like we saw earlier in the insurance agreement they were notified, hey this is dangerous, it’s a hazard, a hazard by insurance definition is any potential for a loss to occur and by those plant balls being on there obviously it’s a trip and fall hazard. So they really have a fiduciary duty to protect all the membership as well as guests that come on the property. I would think that one is going to come under your general liability coverage, just like a slip and a fall and there’s definitely going to be some money paid out if that occurred.

Q: Here’s another good one in today’s world. The FHA rules have changed recently and HOAs are required to intervene in some disputes about discrimination or harassment in a community. What type of liability would the HOA need to have to protect themselves?

A: That’s another great question and it is true that the Federal Housing Authority actually now has some language out there that applies to Homeowner Associations. If a Board of directors learns about some type of discrimination going on between neighbors, they do have a duty to try to mitigate that, or stop it. They need to send a letter. They need to knock on the door to the homeowner and say somebody is saying this, is it true, we don’t know but can you come in let’s have a hearing, let’s talk about it. The Board is really at risk if they do nothing about it, but if they take these actions, they don’t necessarily have to be able to stop the discrimination because that’s between two neighbors, and we cannot always control the behavior of a homeowner. But the Board does have to show that they took proactive action to stop it and to answer your question that is what I was talking about earlier today in one of my key takeaways. You want to make sure you have that discrimination coverage in your Directors and Officers Policy and that’s where you’ll find it. Keep in mind that not all Directors and Officers insurance policies are the same, and not all insurance companies will offer that. Many companies, and I say many I mean about 40%, that I have discovered in California, which is why this is my key takeaway about 40% of the insurance companies in their Directors and Officers insurance they actually have an exclusion right there in writing saying sorry we don’t cover discrimination lawsuits.

Q: Here is a corollary to that, if a property management company has an employee who’s been discriminating against a homeowner, or maybe even just a resident, or it could be a non-homeowner resident.

A: If I were on the Board, I would be talking to the President of that management company, or the owner, and saying let’s have a meeting Monday morning at 10 o’clock because I’m hearing allegations about one of your managers. Let’s find out if the allegations are spurious or real. Then, if they are real, let’s do something about it. Even if they are false what can we do about it? Let us talk to the homeowner and get their perspective on things. If that particular homeowner were to sue the Board saying ‘I’ve been telling you about this manager, they discriminated against me.’ If the Board does nothing, the homeowner then sues, if you have discrimination coverage in your Directors and Officers policy then you’re going to have legal defense and indemnification inside your policy. In other words, your company is going to pay the bill which is good for the HOA. Now going back to the management firm, we also offer Directors and Officers insurance for managers and some Directors and Officers insurance policies for managers or E&O policies for management firms that don’t cover discrimination claims. So the management firm might end up being the loser in this one. if it’s indeed true, if it’s not just allegations.

Q: So let’s go back one step here. You mentioned a couple of acronyms D&O and E&O. I think E&O is new, can you just tell us what those are?

A: Sorry about that, I’m an insurance geek and my jargon just comes out. D&O means Directors and Officers Insurance, E&O means Error and Omission Insurance. Every CPA, every attorney, every Insurance Agent, every Architect, every Engineer has an insurance policy called E&O so if we make an error, or if we make an omission, it’s okay because we’re going to have insurance behind us to pay the bill. We’re all human out there, all professionals are human, and that’s why insurance is there to protect us If we make a mistake. D&O AND E&O are different types of policies.

Q: Do you recommend that we do did you get both of them if you’re an HOA?

A: No no no, A Directors and Officers insurance policy is sufficient and it’s very similar to an E&O and if you’re an Association all you need to purchase and have is a D&O or Directors and Officers insurance policy. If you’re an insurance agent, an architect, an engineer, an attorney, a GPA, the type of policy that these professionals have is called E&O or  Errors and Omissions Policy. It’s just a different name.

Q: With respect to the pandemic, the weather’s warming up or will be warming up soon, and we’re looking at pools reopening and a lot of HOAs find that their Directors and Officers insurance is not going to cover damage or infections caused by or related to pool activities. Or we could say more generally the amenities, it could be a weight room, or that you have or equestrian stable or walking trails. What’s going to happen here in a couple of months is people are going to start asking  Boards about opening the pools again what do we do about that?

A: Another great question. About a week ago I was taking a walk and there were two young couples actually with young kids and they know that I’m the President of my Association so they said, ‘Kevin you’ve got to open the pools this year’ and I really my heart went out to them. But I went back to my office and I emailed a couple of Board members, we talked a little bit about it and because in our County (Marin County) you can still really not open any public pools and they advocate against it, because even though it looks like we’re trending downward in the Covid-19, we’re still not out of the woods yet. So in our Association we decided not to open our pools. We had a good chat about this in my chat room earlier this morning and from what I hear in Santa Clara County and other counties it’s the same way. It’s just not safe to open the pools, it’s not safe to open your fitness centers, and your spas, and everything else and I would think we just have to be disciplined. We want to get through this and it’s just not worth the chance, heaven forbid, if someone actually were to get Covid-19 from our pool.

Q: Does it give HOAs any protection if homeowners waive responsibilities? For example, say the homeowner and their kids want to use the pool, does it protect the HOA if you have them sign a waiver of responsibility saying they’ll hold the HOA harmless?

A: That question is above my pay grade.  You would really want to talk to an attorney about that, you know we have a lot of good ECHO attorneys, Glenn Youngling, David Feingold, Mark Guthus, Barbara Zimmerman, you know the ones that I work with.

Q: If a person has a disability and they use the pool to exercise is that covered under the policy? Should we let people into the pools that need it for exercise?

A: That’s a tough question. I do know that if a disabled person wants to you have a special equipment installed in the pool you know you really want to accommodate somebody but if the rest of the  membership can’t use the pool I don’t think it’s probably fair to let one person use it. But again this is a tough question I would want to have a really good vet of this question, discuss it with my Board members, and even consult our attorney about it. We want to help our disabled people in our community for sure, and if they’re the only person using the pool I don’t see any risk of Covid-19, thinking out loud as we’re talking about this issue, I would just keep an open mind and I would go about it that way. Just use the business judgment of the Board members with the consultation of the attorney, to make sure you make the right decision.

Q: If a Board member or a Board of Directors is presented with photographic or other direct evidence of serious damage or problems and doesn’t investigate that matter or seek an expert professional opinion are they still acting in good faith?

A: That’s an easy one. No they’re not and that again goes back to the insurance agreement. If the Board member makes an error or omission. An omission is something you should have done and you didn’t. I heard a few months ago about a case in an Association in Southern California where, unfortunately, the Board was made aware of a dangerous Oak tree and sure enough the limb fell and, I’m surprised I’m getting choked up about this, but sadly there was a fatality and the Board is definitely going to pay the price, I wouldn’t say it acted in bad faith, that’s not the right way to describe it, but obviously they dropped the ball, they made it an omission, they didn’t do something they should have done. My Association just spent a lot of money this year in making sure that we created defensible space and we got rid of a lot of limbs that were dangerous to pedestrians so that’s one of the fundamental duties I think we all share as Board members to make sure that our community is safe. Board members out there make sure you respond quickly to any complaints of this nature and do an investigation it’s very important.

Q: How much insurance coverage per building per square foot? What’s your suggestion?

A: It’s very interesting because if you have a single family home today you need at least $450 or $500 a square foot. My agency has been around for 22 years and we insure about 800 homes and landlord properties.

If you’re in an Association you benefit a little bit because you typically share and I’m talking about condominium associations versus a planned unit development kind of association the you share common walls and common roofs. So there, if you’re going to have a major rebuild, you’re going to have the benefit of economies of scale. In other words a contractor can order a lot of sheetrock, a lot of wood, a lot of  materials and if it’s a minor fire you know that’s gonna not really cost that much. Then you’re okay. What you’re really concerned about is that major wildfire that we’ve incurred in the last couple years. My recommendation is probably somewhere between $350 and $400 a square foot for an average community, and by that I mean, I know a few homeowner associations in San Francisco in the Pacific Heights that are on top of a huge hill and they’re 2500 square feet per homeowner. In that situation and in San Francisco you’d probably be more like six or seven hundred dollars per square foot but again I am not a general contractor so I always recommend you consult a good general contractor because they’re the experts when it comes to replacement costs. I always encourage my clients to get a bid or have a general contractor come out and write up exactly what he or she thinks it would cost to rebuild. [also see this blog post: Home Reconstruction Cost: How Much Coverage Do You Need?]

Q: Should you get Workers Compensation Insurance if you only have volunteers do the work around the building?

A: Absolutely. And why not, because it’ll give them a million dollars in protection in case they break a leg, a hip, or an arm or let’s say a tree limb were to fall on them and seriously injured them. You know most people can’t afford disability insurance, and most people don’t have it, so if you have a Workers Compensation Policy in place that’s going to protect those volunteers and the Board members and for $350 or $500 a year. I think it’s a no-brainer.

Q: Here’s a question from someone in Southern California. If you’re in a mid-rise or high-rise condominium complex and you have an earthquake and the building falls down, or it’s considered uninhabitable, how do you rebuild if you don’t have earthquake insurance? How do you protect against that and how do you protect against the loss of the personal property?

A: If you don’t have earthquake insurance on the master policy you’re up creek without a paddle, you’re out of luck, and if you look to the CC&RS there’s always the language in there pertaining to dissolving the entire Association. So that’s a big problem. The only solution to that problem is to have earthquake insurance. Secondly though, if you wanted to recover your personal property every homeowner in an Association can purchase their own individual earthquake insurance policy. In that case they would have coverage for their own home personal property and even some money to live somewhere else for a few months while they found a new place to live.

Q: So would the homeowners have action against the Board of Directors and then the Directors and Officers insurance?

A: That’s a good question. You would have to look to the CC&RS because most CC&RS that I read never require that the Board have Earthquake Insurance. I can tell you right off the bat 90% of the ones I’ve seen in five years, and that’s probably 100 CC&RS I’ve read, typically say you’ve got to have property liability Directors and Officers insurance, Fidelity Insurance but they don’t require Earthquake Insurance and that’s a big difference there. However, if your CC&RS actually said we require the Board to go out and get Earthquake Insurance then that’s a different kettle of fish, and in that circumstance there certainly could be a lawsuit.

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