Directors’ and officers’ insurance for homeowner associations: What is it? Do I need it?

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The basics of homeowner associations

A homeowner association is a community council which makes sure everything in a neighborhood is properly maintained and complies with the association’s rules.

Overseen by an elected board of directors, members of the association pay monthly or yearly dues to cover upkeep and repairs.

The rules of the association are intended to preserve the value of the real estate and the interests of all concerned.

For example, if you were a member of a homeowner association, you’d have to get permission before making any changes to your home, and there’d be limits to the type of vehicles you could park in your driveway.

Though homeowner associations can be criticized for restricting what people can do to their own property, a fair and properly run association can greatly improve the experience of living in a community.

What is directors’ and officers’ insurance?

A board member of any organization, including homeowner associations, can be found personally liable for an alleged wrongdoing on the part of the organization.

If the organization can’t cover the costs, the individual would have to pay for it themselves.

Even if the board member is not at fault, they still have to defend themselves; doing nothing will only make the situation worse, certainly outweighing the costs of defense lawyers.

Directors’ and officers’ insurance helps protect board members from lawsuits which may be filed against them while they are acting on behalf of the organization.

If a board member of a homeowner association was sued, directors’ and officers’ insurance could pay for any legal fees as well as cover damages or settlements, if the individual were found to be at fault.

Why would a board member of a homeowner association get sued?

There are a variety of different reasons why a lawsuit could be filed against the board member of a homeowner association. Most commonly, directors’ and officers’ insurance protects board members from lawsuits filed by their fellow neighbors.  Since members of the homeowner association pay regular dues, the board of directors has an obligation to act for the best interests of the neighborhood.

For example, if members of the association are unhappy with the way the board is spending money, they could sue the board of directors for mismanagement of funds.

Similarly, a board might complain that a neighbor has changed his association-approved plans to alter his property, causing his driveway to come out onto the street. However, the neighbor could sue the board for a thing called “declaratory judgment”, claiming that they don’t have the authority to tell him where his driveway can be placed.

However, it’s not just neighborly disputes that directors’ and officers’ insurance protects against.

Let’s say, for instance, that you are a board member of a homeowner association which needs to carry out repairs on the community pool.

You agree terms with a contractor that the work will begin in three months and be finished in two weeks. The contractor scheduled time to do the job, and turned down other offers of work for the two week period.

However, after clearing the pool area in preparation for the work you noticed further problems. You inform the contractor, a week before they were due to start work on the pool, that the project would have to be delayed for another three months.

The contractor would be able to sue you for a breach of contract.

A covered board works better

Clearly, volunteering as a board member of the local community homeowner association may not necessarily always be a pleasant, neighborly experience.

However, directors’ and officers’ insurance can help make sure that community tension doesn’t do lasting damage should it escalate into a lawsuit.

Without directors’ and officers’ insurance to cover board members, homeowner associations may also find it difficult to convince community members to volunteer their time on the board.

A well covered homeowner association can make sure its neighborhood is being well looked after, without having to worry about looking after itself.

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