Serving on an HOA’s Board of Directors can be a thankless job. No matter how hard board members try to be fair and impartial, it’s easy to be second-guessed by disgruntled homeowners.

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It’s also easy to be sued by them: Board members are sometimes named along with the HOA itself when lawsuits are filed. So if you’re on the board, drop everything and make sure that your HOA has the right kind of Directors and Officers (D&O) insurance.

Without it, you and other board members could one day have to pay the legal costs of answering a lawsuit, along with any damages awarded. Or the HOA itself could be on the hook for covering those expenses on your behalf, potentially depleting the community’s reserves in the process.

Mike Bingham, senior risk transfer consultant for Honeycomb Insurance notes that anyone can file a lawsuit for any reason. It doesn’t need to be a logical claim, or even a rational one.

“The thing is, once I file it you have to respond. It starts costing you money,” Bingham says.

Volunteering your time to serve on the board should not mean risking your own finances. Here’s what you need to know about D&O insurance.

Why have D&O insurance?

The HOA has general liability coverage to protect itself. The separate D&O policy covers the actions of HOA board members. It could also cover inactions, such as failing to perform due diligence or neglecting to maintain shared spaces like playgrounds and clubhouses.

The insurance also covers “breach of fiduciary duty,” such as misusing HOA funds. Such claims are fairly rare, however. Lawsuits are much more likely to be filed for issues like:

  • Not following the HOA bylaws
  • Insufficient advertisement for elections
  • Not counting votes or proxies correctly
  • Residents challenging an assessment
  • Insufficient maintenance of common areas
  • Removing board members improperly
  • Variance issues
  • Easement complaints

Unless they’re based on a breach of fiduciary duty, lawsuits against individual board members are generally dismissed in court fairly quickly. Until then, though, it costs money to defend yourself – which is where the D&O policy comes in.

What does D&O insurance cover?

There’s no such thing as a “standard” policy. That’s why it’s vital for board members to investigate the legacy D&O insurance.

For example, some of the claims noted above don’t include a request for damages. Instead, litigants file suit to force changes in the way an HOA operates.

“The really inexpensive D&O insurance doesn’t cover these non-monetary claims,” says Tim Cline, whose Los Angeles-based insurance company specializes in common-interest housing.

The low-end D&O insurance also tends not to extend coverage to management companies hired by the HOA. Yet most agreements between such companies and HOAs include a “hold harmless” clause. So if the D&O insurance doesn’t cover those third-party companies, the HOA would be on the hook for any legal issues.

How would the association pay those legal costs? Either with a special assessment, if homeowners would approve it, or with money from the HOA’s reserve fund. However, not every fund is healthy enough to withstand a lawsuit.

“It could literally bankrupt the HOA,” says Sandra Gottlieb, a California attorney whose firm specializes in homeowner association law.

Why you need a D&O policy review

As with other types of insurance, it isn’t just having “enough” coverage. A board of directors needs to get the right coverage.

Bingham cites a board of directors that felt comfortable with a $1 million policy. “The problem is, they didn’t understand that their defense costs sat inside their standard limits,” he says. The board did get sued, and legal costs depleted the policy, leaving virtually nothing for damages. Each board member wound up paying $100,000 out of pocket.

Another issue is retroactive coverage. Cline knows of an HOA that for a couple of decades has collected monthly assessments on a pro rata basis. However, the CC&Rs actually require dues to be based on square footage. A lawsuit might be brewing, and “potentially every board member who’d ever served could be sued,” Cline says. “A correctly written D&O policy would cover prior acts.”

A typical insurance agent won’t understand these and other nuances of D&O coverage. It’s absolutely essential to find a company well-versed in handling this type of insurance.

Once you’ve found an experienced agent, ask for a policy review. Give the agent a copy of the current D&O policy, the CC&Rs and any third-party. With this information, the agent will be able to let you know if you’ve got the right coverage.

Best-case scenario: The current policy provides the right D&O coverage.

And if not? Be grateful you found out before anything happened, and ask for a price quote.

How much does D&O insurance cost?

The price can run under $1,000 per year, or many thousand of dollars. But cost should not be the deciding factor. If your HOA opts for a bare-bones policy, it’s not doing the board – or the residents – any favors. As noted above, legal costs could lead to special assessments for homeowners or the need to raid the HOA’s reserve fund.

In other words, you can pay now or pay later.

“I can give you the cheapest price available, but that is going to cost you more in the long run,” Bingham says.

“If you buy insurance based on price, you’re not saving yourself money.”