HOA Directors and Officers Insurance Explained for Board Members

Quick Answer

Directors and officers (D&O) insurance protects an association and its volunteer board members against claims that they made a wrongful decision while running the community, such as a claim of breach of duty, discrimination or improper enforcement. It usually pays defense costs and covered settlements, and it generally does not cover bodily injury, property damage, theft by insiders or intentional wrongdoing. Most D&O policies are claims-made, so timing, renewal and notice matter. Read the actual policy and ask your broker about exclusions before you rely on it.

What D&O Insurance Covers

When people sue an HOA, they often name the individual directors as well as the association. The claim may say the board broke the governing documents, played favorites, mishandled money, failed to maintain something or violated a civil rights law. D&O coverage responds to claims of this kind, called "wrongful acts," made against the people who govern the association.

Policy wording varies a great deal from carrier to carrier, so the list below describes what policies commonly include, not what yours does.

• Defense costs. Legal fees to respond to a covered claim, which is often the largest part of the value.
• Settlements and judgments. Amounts the insurer pays on a covered claim, up to the policy limit.
• Common claim types. Alleged breach of fiduciary duty, selective or wrongful enforcement, failure to follow the governing documents, and some employment-related and discrimination claims. Whether a type is covered, limited or excluded depends on the policy.

Who is covered

Policies usually insure current directors and officers, and many also cover past directors, committee members, volunteers and sometimes the manager or employees. A property manager typically carries its own policies, so ask whether the manager is covered under the association's policy, its own, or both. Look at the definition of "insured" in the policy.

What D&O Insurance Usually Does Not Cover

Claims-Made Policies Explained

Most D&O policies are written on a claims-made basis. That means the policy responds when a claim is made against an insured and reported to the insurer during the policy period, rather than when the underlying act happened. In practice, three terms matter.

• Retroactive date. Some policies only cover wrongful acts that occurred after a stated date. If you switch carriers and the new policy resets this date, older acts may fall outside coverage.
• Reporting requirements. The policy sets how and when you must notify the carrier of a claim or a circumstance that could become a claim. Late notice can jeopardize coverage.
• Extended reporting period (tail). If a policy ends or is not renewed, an optional tail may allow you to report claims for a period afterward. Ask what it costs and how long it lasts.

In practice: do not let the policy lapse, and ask how prior acts are covered before changing carriers.

D&O Compared With Fidelity or Crime Coverage

These two are often confused. D&O covers claims made against people for how they governed. Fidelity (crime) coverage covers the association's own loss of money or property through dishonest acts such as theft, forgery or embezzlement by those who handle funds.

• If an owner sues the board over a decision, think D&O.
• If a bookkeeper or board member takes association funds, think fidelity.
• Ask who is covered. Some policies require the manager and any outside bookkeeper to be insured under the association's policy or their own, and some exclude people who are not employees.
• Ask how the coverage limit compares with the money the association holds, including reserves and funds in transit.
• Ask whether the policy requires certain controls, such as dual signatures or bank reconciliations, as a condition of paying a claim.

Our HOA insurance guide explains the full set of policies, including property, general liability and umbrella coverage.

Volunteer Protections in the Law

Insurance is one layer. Law gives volunteer directors another, but the protection is narrower than many board members assume.

The federal Volunteer Protection Act

The federal Volunteer Protection Act, 42 U.S.C. 14501 and following, says that, except in stated cases, "no volunteer of a nonprofit organization or governmental entity shall be liable for harm caused by an act or omission of the volunteer on behalf of the organization" if conditions are met. The conditions include that the volunteer was acting within the scope of their responsibilities and that the harm was not caused by "willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed." The act also excludes harm caused while operating a vehicle that requires a license or insurance.

A "volunteer" is someone who receives no compensation other than reasonable expense reimbursement, or other things of value, above $500 per year, and the definition expressly includes a volunteer director or officer. Punitive damages against a volunteer require proof, by clear and convincing evidence, of willful or criminal misconduct or a conscious, flagrant indifference to rights or safety.

Important limits in the statute:

• It does not affect the liability of the organization itself for harm to any person.
• It does not affect a civil action brought by the organization against its own volunteer.
• States may add conditions, including requiring that the organization maintain a financially secure source of recovery, such as insurance, and the federal law treats those state conditions as consistent with it.

The act protects volunteers of a "nonprofit organization" as it defines that term, which refers to organizations described in section 501(c)(3) of the tax code, or certain not-for-profit organizations operated primarily for charitable, civic, educational, religious, welfare or health purposes. Whether a particular homeowners association fits that definition is a question for your attorney. Our reading is that boards should not assume the federal act protects them.

State examples

State laws on director liability differ in who is covered, what conduct is protected, and whether insurance is a condition. Two examples show the range.

• California, Civil Code section 5800. A volunteer officer or director of an association managing a residential or mixed-use common interest development "shall not be personally liable in excess of the coverage of insurance" to a person injured by the volunteer's tortious act or omission if the act was within the scope of association duties, in good faith, and not "willful, wanton, or grossly negligent." The association must have had specified insurance in effect, including coverage for general liability and for individual liability of officers and directors, at minimums of $500,000 for developments with 100 or fewer separate interests and $1,000,000 for those with more than 100. The protection applies only to a volunteer who is a residential tenant or owns no more than two separate interests, and it does not limit the association's own liability.
• Florida, section 617.0834. An officer or director of certain nonprofits (those recognized under 501(c)(3), (4) and (6)) "is not personally liable for monetary damages" for decisions on organizational management or policy, unless a breach of duty amounts to a criminal violation, an improper personal benefit, or recklessness or bad faith. Whether a given HOA is covered should be confirmed with counsel.

Michigan boards can read our separate guide on Michigan board member liability and D&O insurance. For other states, ask an attorney which statute applies to your type of association, because protections for HOAs, condominiums and cooperatives are often found in different laws.

What to Ask Your Broker

• What are the limit and the retention (deductible) per claim and in total, and do defense costs reduce the limit?
• What is the notice requirement for claims and for circumstances that might lead to a claim?
• Who is an insured: current and past directors, officers, committee members, volunteers, the manager?
• Is the association itself covered, and is a claim by an owner against the association covered?
• Which exclusions apply, including insured-versus-insured, employment, discrimination, fair housing, construction defect, fines and prior known matters?
• What are the options and cost for an extended reporting period?

What Boards Should Do

• Get a copy of the actual policies, not only a certificate, and read the exclusions and definitions.
• Confirm you have D&O, general liability, property, umbrella and fidelity or crime coverage, and understand which responds to which kind of loss.
• Check your state statute and governing documents for required coverage and for indemnification of directors.
• Report any claim promptly and in writing, as the policy requires.
• Keep the policy continuous and ask about the retroactive date before any change of carrier.
• Document decisions: agendas, minutes, written reports and, where useful, professional advice.
• Review coverage annually with your broker and when the community changes. Read our board member responsibilities guide for the duties behind these claims.

Frequently Asked Questions

What does D&O insurance cover for an HOA?

It generally covers defense costs and covered settlements or judgments for claims that the association's directors, officers or volunteers committed a wrongful act in managing the community. Coverage terms vary, so review the policy for the covered acts and exclusions.

Are HOA board members personally liable?

Sometimes, but in many situations state law and the association's insurance reduce the risk. Protection depends on state law, whether you act in good faith within your duties, and whether the conduct was grossly negligent, reckless or intentional. Confirm how your state treats volunteer directors with an attorney.

Does the federal Volunteer Protection Act protect HOA board members?

It protects volunteers of a "nonprofit organization" as the act defines the term, subject to conditions and exceptions. Whether your HOA qualifies is a legal question, so do not rely on it without advice from counsel.

What is the difference between D&O and general liability insurance?

General liability responds to bodily injury and property damage claims. D&O responds to claims about how the board governed, such as alleged breach of duty or wrongful enforcement. Most associations need both.

What does claims-made mean?

The policy responds to claims made and reported during the policy period, subject to a retroactive date, not simply to when the incident occurred. If the policy lapses or changes, a past act may not be covered unless you arrange a tail or prior acts coverage.

Is D&O insurance the same as fidelity insurance?

No. D&O covers claims against people for their governance decisions. Fidelity or crime coverage covers the association's loss of money or property to theft or dishonesty by those who handle funds.

How APM Helps

Association Property Managers provides HOA and condo management from our offices in East Lansing, Michigan and Dublin, California, and remote management elsewhere starting at a flat $99/month per community with no per-door fees or long-term contracts. We help boards keep minutes, records and vendor documents organized so insurance questions are easier to answer. See pricing, learn about remote management or request a free proposal, delivered within three business days. Laws and licensing rules differ by state, and we confirm the requirements for your state when we build your proposal.

Legal disclaimer: This article is general information, not legal advice. Laws change and associations differ. Confirm the current requirements and how they apply to your governing documents with a licensed attorney in your state before acting.