A Florida homeowner is blaming their homeowners association (HOA) for hurricane damage, claiming that a dry retention pond located behind the home worsened flooding during the storm, creating a “lake” in the homeowner’s backyard. The owner claims the pond was overgrown and poorly maintained and inquired about whether the HOA could be held liable for the storm damage, The Cool Down reported in December.
Retention ponds, designed to manage stormwater runoff and prevent flooding, are one of many common areas an HOA may be responsible for within a residential community. When an association faces an allegation of mismanagement or other breach of duties, its Directors & Officers (D&O) Insurance policy could protect the entity and personal liability of its board members, said Spencer Gura, Broker, Professional Liability, Burns & Wilcox, Farmington Hills, Michigan.
“Whether or not the HOA would actually be found liable for the property damage from the hurricane, the lawsuit against the HOA is a real-world example that highlights the need for D&O Insurance coverage,” he said. “Given the relationship between homeowners and HOA board members over their decisions, it is imperative that the HOA board has the D&O policy in place in the event of a lawsuit.”
The intent of the D&O Insurance policy is not to cover property damage, but to cover the directors and officers for allegations of mismanagement in the running of the association.
Even legal “gray areas” like the storm damage claim can put volunteer board members at risk of financial repercussions, said Chris Valenzuela, Broker, Professional Liability, Burns & Wilcox, Los Angeles, California. “The intent of the D&O Insurance policy is not to cover property damage, but to cover the directors and officers for allegations of mismanagement in the running of the association,” she said. “Just as with any policy, a claim may or may not be covered, depending on how the allegations are brought.”
Why HOAs may be sued
Lawsuits against homeowners associations are not uncommon and may even be on the rise in some areas. In Colorado, where approximately 40% of residents live in an HOA community, a recent article from the Denver Post reported on associations facing “skyrocketing fees, lawsuits and death threats” as residents seek to change how the communities are managed.
In Charlotte, North Carolina, a woman recently ended a five-year legal dispute with her homeowners association after she was ordered to replace her newly-purchased windows to make them match other townhouses in the community; when she refused, she was assessed daily fines totaling $12,000 and the HOA placed a lien on her home, the U.S. Sun reported in November. She reportedly refinanced her house for the funds needed to sue the association, and the HOA eventually offered her a $75,000 settlement and allowed her to keep her windows.
Given the relationship between homeowners and HOA board members over their decisions, it is imperative that the HOA board has the D&O policy in place in the event of a lawsuit.
“Most often with homeowners associations, the claims usually allege that they did not properly charge someone’s dues, that they mismanaged funds, or they unfairly enforced the rules,” Valenzuela said, noting that property damage claims are much less common and could be excluded on most D&O Insurance policies. “Mismanagement is a much more common scenario versus a retention pond causing someone’s yard to flood. A lot of times when HOAs are sued, it is for administrative issues or because somebody feels harassed or discriminated against and is claiming the rules were being applied to them unfairly.”
Between legal defense and indemnity payments, these lawsuits can be extremely costly to associations and individual board members if the HOA is not properly insured. In 2021, a couple in Central Florida was awarded $33,000 in damages after their HOA took foreclosure action on their home despite them paying the fees that were owed; the couple had sued the HOA and its law firm, alleging violations of the Fair Debt Collection Practices Act, WFTV reported in 2021.
“The D&O Insurance provides the defense coverage and could cover the settlement amount in the event of a judgement,” Gura explained. “If a board member was named in a lawsuit and they did not have the insurance coverage in place, they could be on the hook for these costs personally. This coverage allows individuals to participate in their HOAs without fear financial liability.”
Many associations not protected by insurance
According to HOA management firm Condominium Associates, other common reasons for lawsuits against homeowners associations include misuse of funds, architectural request denials and pet disputes. They may also be sued over injuries that occur in common areas maintained by the association, such as playgrounds, pools, or clubhouses. Despite the variety of potential reasons why these boards could face legal action, many associations do not carry D&O Insurance and may not realize their risk, Gura said.
Many potential clients understand there is a need for D&O coverage but may be unaware of the personal risk or differences in conditions between policies, Gura said. “Some individuals are unaware that volunteer board members could be held liable and individually named in a lawsuit.”
D&O policies exist to protect those members of the boards because they are making decisions as a group, and they are putting themselves on the line. The policy helps protect them from the personal liability that could come from their decisions.
A homeowners association in Greenville, South Carolina, was on the brink of bankruptcy in 2021 after a resident in the community filed multiple lawsuits against the association, seeking total damages of $1 million, the Greenville News reported. The lawsuits named the board members individually and led to more than $53,600 in legal fees; according to the report, the HOA’s annual dues generated about $13,000 per year.
“If you do not have D&O Insurance in place and you serve on a board of directors, you could be personally liable. The attorneys and the courts can come after your personal assets in order to make their claimants whole,” Valenzuela explained. “D&O policies exist to protect those members of the boards because they are making decisions as a group, and they are putting themselves on the line. The policy helps protect them from the personal liability that could come from their decisions.”
While she expects that “a good majority” of HOAs do carry D&O Insurance, “for those associations that do not, it can be a huge risk for their board members,” Valenzuela said.
Protecting volunteers, mitigating risks
According to Gura, D&O coverage can be applied to both nonprofit organizations and private companies alike. “It is definitely something that we are seeing as a need in today’s increasingly litigious environment more than ever,” he said.
D&O Insurance is often packaged with Employment Practices Liability (EPL) Insurance, which can respond to lawsuits from employees over alleged discrimination, harassment, and other issues. These coverages “tend to go hand in hand,” Gura said. Homeowners association leaders should also know that all policy forms are unique, with their own limits and exclusions.
Understand how your policy responds to defense costs, whether or not there is an additional defense limit, and how it will address retiring board members and their decisions. Wording can vary between carriers.
“The board should review the wording and actual endorsements and exclusions on their D&O Insurance policy,” he said. “Understand how your policy responds to defense costs, whether or not there is an additional defense limit, and how it will address retiring board members and their decisions. Wording can vary between carriers.”
In addition to obtaining D&O Insurance and asking about specific policy provisions, homeowners associations should have a comprehensive risk strategy to address the unique needs of each HOA.
