by Joel W. Meskin, Esq., CIRMS w Featured in QuoiUlll, May 2006

It is a groundless complaint; it will go away soon

according to our property manager or attorneywhy

should it impact our insurance :

As an underwriter of Director and Officer Liability Insurance

for some 35,000 non-profit community associations,

this is a question I hear on a daily basis. To get a quote

on liability insurance, visit The

non profit board of directors and officers in our experience

do a fabulous job at the task at hand, however, no

matter how well nm and govemed an association is,

there will always be complaints. As a practical matter,

if the insurance canier is involved, expenses will

be inctmed. Once expenses are incuned, there is an

impact on the insurer ‘s costs for providing the insmance,

regardless if the complaint is frivolous, false, or

fr·audulent. A natural consequence is that the cost of

the insurance itself in general, will rise and in specific

for the individual association.

The challenge is: how can the community association

or condominium minimize the claims and resolve

them as expeditiously as possible without the necessary

involvement of the Directors ‘ & Officers’ Liability

Insurance, (D&O) thereby keeping insurance

costs down? By not involving the D&O Insurance,

the association keeps its insmance down. By keeping

the insmance down and by keeping it fr·ee of minor

claims, the premium will be more stable and predictable

allowing the board to properly budget and to

avoid smprises.

D&O Insmance, like general liability insurance should

be viewed as insurance for substantial matters and

claims and not as a means for handling the day to day

affairs oftheAssociation. Unf01tunately, many community

associations have looked to their Non Profit

D&O insurance far too often and too prematurely.

The mandate of the board of directors is to work with

the associations at large to ensure that the association

complies with the goals of the association. One reason

associations ru·e too quick to tum to their insurance

for these issues, we believe, is the custom and practice

of insurance professionals and agents to recommend

these associations to cany unnecessarily low deductibles.

In the end, we believe that this is in fact a dissetvice

for the association. In fact, when we take an

anonymous poll of our over 4,000 subagents, the vast

majority agree with our analysis, but indicate that their

inureds are just too used to the low deductibles.

As a side note we must adtnit that fi:om a premitm1

generation standpoint, we do not necessrui ly mind the

lower deductibles, because we can justify higher premiums.

The premises of this rui icle, however, is what

can be done to minimize the cost of insurance for the

associations and what can be done to create stability

and predictability for the associations in budgeting for


To better tmderstand this issue, let’s take a look at an

issue I believe each one of us can relate to as individuals.

How many of us cru1y $500 or $1,000 deductibles

for the collision portion of our auto insurance? Why

do we do this? We do this because although it is not

easy, we can personally handle and absorb these losses

without having to involve our insmance, thereby keeping

our premiums down. In personal auto context, we

as consumers cleru·ly understand the cause and effect

of this issue. Why then would a community association

cany a $1,000 deductible for its D&O insurance

where there are many association members to help

absorb the higher deductible?

Doesn’t the same type of analysis apply to our community

association? It is hard to in1agine that a community

association can not absorb a larger deductible

to accomplish the same thing we do on a personal

level. In fact, the logic should apply more readily in

the larger context. For example, if you have a 100

unit Condominium and there is a $1′ 000 deductible )

this would be $10 per unit. We spend this much for a

couple of coffees or a fast food hmch. If the association

canied a $10.000 deductible, each unit, in worst

case scenario would be assessed with a $100 chaJge in

the event of a substantial claim, and that would only

occur if the association failed to maintain a reserve for

such contingencies.

To further understand this concept, we should identify

what appear to be the most common claims that are

made against the Directors and Officers of a typical

non profit community association boa1·d. Based on our

20 plus years of experience in this niche, the following

are the most common types of claims:

The Board’s failure to adhere to by-laws

The Board’s failure to properly notice elections

The Board’s failure to properly count votes/proxies

Challenges by members regarding power granted the Board by by-laws

Improper removal of Board Members

Decisions by the Board resulting in physical damage to the association property

Challenges to assessments

Approval of variances, generally by an architecture committee

Breach of fiduciary duty

Challenges to decisions of the Architectrual Review Board

Questions or challenges regarding easements

The Board’s failure to maintain common areas

The Board’s failure to properly disburse funds (i.e. insurance proceeds)

Defamation by the Board of a member

When we stand back and look at these types of claims

in an objective manner, it is tmly hard to believe that

the types of disputes giving rise to these claims can

not be resolved short of insurer involvement or the

need for litigation. The fact is that many of these can

be resolved. The reality is, however, that the associations

are not motivated to resolve these issues on their

own, due in large part to the low deductibles. Specifically,

the association realizes why they have insurance.

That is the inherent flaw. This should not be the

reason for the D&O insurance. The D&O insurance

should apply where the association tmly can not itself

resolve the matter. Moreover, very often, the property

manager or managing agent is too quick to submit

this to the insurer to stay out of the mix. This is a key

job of the property manager, to manage and to be the

professional staff for the board.

The nature of the D&O policy is that the insmers

spend money in defense and claims expenses, not


The Directors and Officers in most cases

act in the utmost good faith and within their fiducia1y

capacity. However, there will always be someone who

does not agree with the decisions being made, there

will always be someone who believes they are being

treated differently than others, and there is always

someone who believes that their board is acting in its

own best interest. Rarely is that the case. We believe

that if those who make these frivolous complaints

understand that they will be absorbing some of the

expense for their complaints may be less motivated

to be quick to pull the trigger and will be more likely

willing to tty and resolve the issue.

In addition to the increase of deductible, which we believe

will help develop problem solving mechanisms

for the association, we believe that the instigation of

an altemate dispute resolution provision is another

method of minimizing the unnecessruy use of insmance

and the minimizing of costs.

What I propose is that the association asks itself: Why

do we have a minimal deductible? The association

should also ask the property manager and insurance

professional why they have the low deductible. After

asking these questions, the association should

detetmine whether it would be in its best interest to

increase the deductible both for problem solving and

cost saving measmes. We believe that the need for the

low deductible is a bad habit whose time has come and


Joel W. Mes/, Esq

. is Vice Presidem- Community

Association Products, McGowan

& CompanJ: Inc.,

a leading provider of Conmumily Association and


Jvfanager Insurance Products natiomvide.

Reprimed with permission of Co11do Jvledia maga



e, tile official publication of Tile CAl New England


The McGowan Companies • 800.545

.1538 •

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