Community Associations:
The Personal Liability Issue

In all 50 states, directors and officers of community associations can be sued and held personally liable for decisions they make in their capacities as board members. This means that a plaintiff can seek to attach the personal assets of directors and officers - their checking accounts, their savings accounts, their investment portfolios, their homes, their cars, etc. - if the associations for which these directors and officers serve do not purchase the correct types and limits of insurance.

An example might be helpful utilizing Association "A":

Association "A" carries a $1,000,000 Directors & Officers ("D&O") Liability Policy, and no Umbrella Liability Policy.

The buildings at Association "A" are 30 years old and will quickly be in need of new siding. The new siding will cost the association $3,000,000. A prudent board of directors over the course of 30 years would have set aside a certain amount of operating income each year towards a "Siding Reserve," such that at the end of the usable life of the current siding, there would be a $3,000,000 "Siding Reserve" fund to pay for new siding. However, the board of directors of Association "A" has historically failed to set aside such reserves.

The board of directors decides to replace the siding. After selecting the lowest bid of $3,000,000 to put on new siding, the board informs unit owners that there will be a "special assessment" to cover the cost of the new siding. Joe Schmoe, one of the unit owners, feels that the board of directors was negligent in failing to set aside a "Siding Reserve" and sues the board of directors. The court sides with Mr. Schmoe and awards him, and the other unit owners on whose behalf he sued, $3,000,000. The board of directors submits the claim to its D&O carrier.

Assuming that the D&O Policy covers the claim, there is still a gap in coverage of $2,000,000. With a verdict in hand, Mr. Schmoe can seek to attach the personal assets of the board members - their homes, automobiles, checking accounts, and savings accounts. He can also sue the property manager for failing to provide the board with appropriate advice.

If the association had purchased a quality Umbrella policy, with high limits and broad coverage (e.g.- one which provides excess Directors & Officers Liability coverage), it would not have had to worry. After the Directors & Officers Liability paid the first $1,000,000 of the $3,000,000 claim, a quality Umbrella would have paid the next $2,000,000.

The fact that directors and officers of associations can be held personally liable should offend any rational person. Directors and officers volunteer to work for their community associations out of a sense of civic pride and duty. Their efforts are altruistic. It offends any sense of fair play and righteousness to hold them personally liable for their volunteer activities, but this is the state of the law. As such, it is critical for associations to carry high limits of liability and broad coverage.

That is where our "Common Assurance" Umbrella Program comes into play. By providing associations with high limits of coverage and broad coverage, we greatly reduce the likelihood that their directors and officers could be held personally liable.