Is Your Condo and Board Covered in Case of a Catastrophe?

The building’s board members could be sued for the decisions they made on behalf of the homeowner’s association (HOA). Structural repairs the board called for in 2018 — to be paid through unpopular form of special assessments — were delayed, leading to board member resignations but did not result in expedited repairs.1

It is possible that individual lawsuits against HOA board members and regulatory investigations could exhaust the limits of the building’s property and casualty (P&C) and directors and officers (D&O) coverage; lacking adequate D&O coverage, each board member’s personal assets may be at risk.

For all boards, from HOAs to school boards, religious non-profits and even public company advisors, the tower collapse brings to light issues for protecting directors and officers, as well as D&O coverage overall.

Lessons learned

Here’s how the D&O insurance landscape is expected to change:

1. Expect far tighter underwriting. Underwriters will be taking a closer look at buildings’ reserve funds and are less likely to cover buildings without adequate reserves. They are also likely to examine the qualifications of the board members, putting a magnifying glass to board members’ experience, financial judgment and decision-making. It’s possible that insurers may even deny D&O coverage to boards that have underperformed.
2. It may grow harder to find qualified board members. That HOA board members could be personally responsible for poor decisions is unlikely to encourage prospective new board members to apply, even those who may have relevant experience and expertise. Existing, experienced board members are likely to reconsider their positions as well.
3. Mandates for reserves may become common, and recertification more frequent. In light of the Florida building collapse, it’s possible that local, state and perhaps federal government agencies will mandate reserve levels for associations. This will alleviate the need for unpopular special assessments that often have the effect of delaying repairs. It’s also possible that timelines for recertifying buildings will shorten, so instead of 40 years, a building will be required to recertify every 20 or 10 years.

What directors, officers or building board members should do

These probable changes in the D&O and P&C markets for HOA boards has made it urgent for those boards to act. Here’s how they can respond:

• Review policies immediately. With so much at stake, boards need to review their D&O policy, limits and protections — ideally with their insurance broker. Review other P&C valuations as well. Boards need to closely examine exclusions within the policies and determine what would be covered in case of a disaster.
• Seek expert advice. If a building has not undergone inspections lately, building officers should find an expert and evaluate the building’s structural integrity. It’s incumbent on board members to have maintenance done before it becomes urgent, and honestly assess if deferred maintenance could lead to a crisis.
• Benchmark policy limits. Working with its insurance broker, the board of directors should determine optimal policy limits. If a building is worth $100 million, it’s essential to evaluate if property and D&O limits are sufficient. (Inadequate limits has been identified as an issue for Champlain Towers in Florida.) Benchmarking against similar businesses and properties can help give an accurate picture of a building’s coverage needs.

Those who shoulder responsibility for others may be facing heavy risk — and they may not realize it. Ensure directors and officers are covered from the unthinkable.