I am frequently asked by small associations why they need director’s and officer’s coverage if all of their owners are on the board.  They express to me that they can not see why they need to pay $140 per year per unit for coverage that they think they do not need.  Effective on July 1, 2005 there was a change in the financial disclosure laws.  With this change currently in effect, I thought now would be a good time to concisely explain the potential exposures that small associations face and why this coverage is critical now more than ever to all associations, including yours!

2 cases in which coverage is now more important than ever!

1. The new financial disclosure laws require an association to disclose whether or not the association has sufficient reserves to cover the repair or replacement of major components over a 30 year period.  The first question you might be asking yourself is, “Do we have a reserve study to refer to?”  This is important because, say for example, you have disclosed to all members in the association that dues are going to be $200 per month and claim that the $200 per month is sufficient to cover major improvements for a new owner.  Then, two years down the road, it turns out that the roof fails and it wasn’t figured into your disclosure.  The new owner may refuse to pay his or her portion of the assessment and turn around and sue the board for misrepresentation.  This would be a huge problem not only for the association, but for each of the other owners as well.  If the association does not have proper D&O coverage, the association will be exposed and not covered for the suit.  In addition, the new owner will be able to sue each of the other owners separately because without proper coverage, the association will not be in compliance with the Davis Sterling Act, and thus, each individual owner would be liable for damages.
2. Another example would be if you have a four unit association in which all of the members in the association are on the board. If it happens that one of the owners becomes very delinquent on his or her dues and the majority of the owners decide to begin foreclosure proceedings in order to collect payment, the delinquent owner may counter sue the other owners for defamation of character. If the association does not have proper D&O coverage, the association will not be  protected from this suit

Is it really a good idea to overlook this aspect of your protection and potentially leave you exposed to losing the most valuable asset you own—your home, just to save $140?

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