A co-op apartment corporation Board was sued for alleged failure to properly hire and supervise a contractor, which led to damage to an owner’s apartment.
A homeowners association Board was sued due to an alleged delay in repairing a building after a fire, resulting in monetary damages suffered by a homeowner. A condominium Board was sued for allegedly failing to properly maintain and repair a building, resulting in damages to several units. In each instance, the shareholder/homeowner claimed that the Board members had breached their fiduciary duty by mismanaging the association..
In all three instances, the Boards referred the lawsuit to their Directors and Officers (D&O) insurance company, expecting the carrier to assign legal counsel to represent the Board and provide a defense to the claims. A D&O policy is specifically designed to provide a defense and indemnification when Board members are accused of acting improperly.
In all three of the above matters, the D&O insurance carrier denied coverage.
Nonetheless, in all three of the above matters, the D&O insurance carrier denied coverage. Each of the Boards had to retain its own legal counsel to defend it in the action at the community’s expense. The reason for the denial in each case was an exclusion in the insurance policy that stated any claims arising out of “damage to property” would not be covered.
Such an exclusion is somewhat surprising – and especially so for the three above-referenced Boards – because virtually the entire business of any community association is the maintenance and management of real property. Indeed, one of the above-referenced Boards subsequently sued its insurance company regarding the denial of coverage, arguing that nearly every claim filed against the association would, in some way, involve property damage, thus rendering the D&O policy largely ineffective. The federal trial court and appellate court were unmoved by that argument and the lawsuit was dismissed.
The lesson to be learned?
Co-op, condominium and homeowners association Boards should read through their D&O insurance policy to see if it contains a clause that excludes coverage for property damage. If such a clause is found, the Board should contact its broker to see if the clause can be eliminated or if a different policy is available without this exclusion. The cost of a policy without a property damage exclusion may be more expensive. However, the additional premium will likely be substantially less than the thousands, and possibly tens of thousands, of dollars in legal fees that a community may otherwise pay to defend and resolve a property damage case in court.
