As in other situations involving nonprofit organizations, we find time and again that volunteers — even those highly educated or sophisticated in other walks of life — do not understand the risk of liability and litigation they are taking on. As volunteers, they may not act quite as wisely or carefully as they do when they are in their professional environments.

The community agent has a vital role to fulfill as risk manager and preventive insurance counselor with respect to nonprofit homeowners' and condo association boards. In studying this coverage, agents should note the common exposures as well as guidelines for writing this book of business, which can be profitable for both underwriters and themselves.

A Growing Market

The housing boom, one of the drivers of our economy in recent years, has brought about an accompanying boom in homeowners' and condominium associations. Furthermore, these associations have more complex tasks and responsibilities than ever before.

As suburbia marches outward, shared property and amenities in subdivisions grow apace. The “good life” can include swimming pools, tennis courts, fancy club houses, walking trails, and landscaped paths — even internal roads and secured entry points. Because of these features, a great percentage of all new homes being built today will require a homeowners' association and board of directors.

In other older areas, urban revitalization has upgraded the residential stock of many cities and downtowns in the form of lofts, condominiums, and other shared structure owner-occupied housing. Condominiums have become an important component of master-planned town centers, whether all new or rehabilitated construction.

Range of Exposures

What is the greatest source of potential litigation against homeowners' and condo association directors and officers? Undoubtedly, it is the people they represent and their likes and dislikes, personality conflicts, differing opinions about how to run the association, how maintenance and management monies are spent, as well as divergent views on rules and regulations. This is where we live. This is home turf. And people running for and being elected to such boards are not always well versed in managing associations, leading to frequent disputes regarding bylaws and covenants.

Condo association boards, in particular, are responsible for the common structures of a condominium and, for the most part, will be more involved in issues akin to property management and asset preservation. Therefore, charges against directors and officers can involve such issues as responsibility for repair and maintenance of structures, failure to properly assess members and maintain adequate funds, negligence in hiring contractors, or failure to maintain property value.

For example, suppose a board hires a contractor to replace or repair balconies on the property, and the work is later found to be defective. The board could be charged with negligence in the hiring. Disputes, including charges of kickbacks, also commonly arise when relatives or business relations of a board member are hired by the association. A board also could be charged with not properly insuring the condominium property, including exceeding deductible limits in an attempt to save on property insurance.

Also, in the modern, upscale subdivision, more activities mean more things to supervise and more potential for claims against an association. While general liability would be the primary line of insurance defense in most instances (e.g., slip and fall), a board always is liable against a claim of not having acted prudently. This situation points to the value of writing general liability and nonprofit directors & officers as a package, which should provide seamless coverage for any homeowners' or condo association.

The scale and character of new residential communities should encourage caution for boards and their insurers. The presence of larger and more highly valued homes within standard and gated communities, not to mention extensive internal roadways and the like, increases exposure in areas such as security, emergency response, and privacy rights. In fact, municipalities and state legislatures have recognized these dynamics with increasing regulatory vigor.

A Better Class of Risks?

Still, homeowners' and condominium associations present fewer aggravations than many other categories of nonprofit D&O policy writing. Among the reasons:

Fewer employment issues. These boards generally employ few staff, meaning less potential for sexual harassment or employment discrimination claims, including those that often arise from intermediary management in an organization.

Fewer service/funding issues. There generally are few, if any, issues of providing services to the public as, for example, there are with many health-related nonprofit organizations or scholarship funds. Also, for the most part, federal, grant, or donated monies are not being spent, although a residential community could conceivably qualify for modest municipal beautification and fix-up grants.

Behavior surprises minimized. The board members and their subdivision or condominium residents generally are known to each other, which should mean fewer surprises in behavior, not to mention the conforming power of neighbors. This has been somewhat contradicted in recent years by the scale of many residential communities.

Predictable claims. This is a well-established class of D&O business, with many predictable aspects in terms of frequency and nature of claims.

Writing the Policy

Regardless, agents writing D&O coverage for homeowners' and condo associations do need to watch several key points, such as making sure bylaws comply with relevant state laws and investigating the presence of prior and pending claims.

Overall, it has been estimated that as many as half of condo or homeowners' associations may be involved in a lawsuit of some kind at any given moment. Accordingly, agents have an important role in helping these associations meet their nonprofit D&O coverage needs. As noted before, we strongly recommend writing condominium and homeowners' association insurance as a package that includes general liability coverage. This protects against someone crafting a lawsuit that slips between the general liability and nonprofit D&O coverage cracks.

Water-tight nonprofit D&O coverage for board directors and members serves a valuable purpose. With an agent's guidance, the coverage helps encourage quality people to serve on these boards, rather than shying away from fear of litigation. The education process also may deter invitations to litigation by board members or by residents familiar with board politics and thinking. In this way, homeowners' and condo associations can have a positive impact on the daily lives and property values of homeowners.

David J. Price serves as executive vice president, chief underwriting officer and Kenneth A. Schneider as vice president, director of product development with Burns & Wilcox, an independently owned managing general insurance agent. They can be reached at [email protected] and [email protected].