D&O insurance and personal liability

I live in California. I am the president on a three person board of an 18 unit complex. My wife and I are near retirement and have a net worth that should fund us to live into our nineties and still leave a little to our heirs according to our financial planner. Our condo is paid off. The other two board members are younger in their thirties and probably don't have anywhere near the net worth - although they are probably higher earners.

We on the board have D&O insurance of $3M. I don't really understand how this works. Let's say that there is a lawsuit or multiple lawsuits against the board..... I want to say that we are all honest and of good will and feel we are doing the best we can. None of us are doing anything illegal or unethical .... Is a $3M policy enough to cover all three of us if the total net value of our assets is over $3M?

Our property manager says that someone suing the HOA's board for not maintaining something that could cause an injury or property loss, or whatever, could not successfully sue the individual parties personally. <-- If I understand her correctly.

I've talked to my personal insurance agent about this and he says that my personal umbrella policy does not cover a suit against me as a board member. <-- If I understand him correctly.

Here is an example of one of my worries. Our CC&Rs state that dues must cover earthquake insurance. We have earthquake insurance. It is expensive and probably covers enough to rebuild half the 18 units. But it's probably not enough if the whole 18 units fell to the ground. If that happens and owners come after the board because there was not enough earthquake coverage, the losses would be more than $3M. Would I be personally liable for other owner’s losses if they exceed the D&Os $3M policy?

BTW, the board has decided to get the membership more informed of the coverage we currently have to poll the membership to get input about the level of earthquake insurance they want to have. So that might be the solution to any liability in that case.

But the question still stands: Are members of the board at risk of losing a lawsuit and losing their savings when they serve on an HOA board and how can that be dealt with?

Tino,

I'm going to defer to Richard on this one, as he has most likely has more training on that issue.

However, it is very typical that applicable statutes and the governing documents specify that the Directors are indemnified by the Association. This is the main reason for D&O insurance. If the insurance isn't enough to cover any award/settlement, then the Association should be picking up the tab directly.

Any legal action against an individual Director would first need to pierce the corporate shield. This is difficult to do and is (I believe) what Melissa was thinking when she said it's typical for courts to remove the individual directors from the legal action.

The quake insurance question is best asked of your HOA attorney, Tino. What level of coverage is acceptable or "reasonable" given our CC&Rs? would be the question, I think. I suspect that if all your buildings were totally destroyed, you all would have far bigger things to worry about.

Our property mgr. polled about 25 high rise condos in our urban area and only one had quake insurance as required by their CC&Rs too. One had plate glass insurance.

See your governing documents about indemnification--might be in your bylaws.

There is a CA Corporations Code that's similar all over the country that states directors on boards are protected so long as they practice "due diligence," is carefully examining the topic before they make their decision. This is their "duty of care." That would include consulting with experts. Another aspect is that directors should "act in good faith" and do what they think is best for their corporation (HOA). This is their "duty of loyalty."

Check out davis-stirling.com's Main Index for the above. Tim'd approach is useful too.

So we might make mistakes, but if we practice both aspects of the Business Judgement Rule (or BJR), we should not be in danger of losing any suit.If we directors purposely act against our governing documents or CA's many statutes about HOAs, we sure could be liable.

TinoS CAL As others put it above so well, a Corporation's directors are typically not personally, directly liable for civil awards against the Corporation they serve if they fully & lawfully & timely discharge their Directoral duties.

This usually at least means Three Stooges honesty at the very base. Not pursuing an identifiable divurgence in personal interest at odds with / to the detriment of, what the jurisdiction creates in favour of the general owners/shareholders/ of the general law.

However if the jurisdiction or governance documents add a higher standard of performance again eg competence and/or acting according to qualified professional advice, then meeting such is a defence for personal liability. Sharing in depressed property values along with ever other shakeholders or getting turfed electorally may be the only punishment if the standard is met.

My own jurisdiction is starting to see rogue condo Board members PERSONALLY hit for pursuing divurgent private interests eg contempt of court orders, bizarre misuse of grand-fathering to effectively shield their Declaration defying shenanigans. One was a $27 K per Director punishment ordered NOT paid by general members nor corporate insurers ( for daring to get caught in disregard of a civil judge who knows when & why to pull the trigger ).

Tino, please read the replies again and also read there references provided to you.

Well just using the earthquake insurance as an example, one way to lessen your (in my opinion already low) liability is to get several prices for various levels of insurance and put the choice up for vote by the general body.