In our specialized yet pluralistic world, where the interestsand needs of people from many walks of life overlap in surprisingways, the number and range of activities of nonprofit organizationscontinues to grow. In addition to charities such as the United Wayor Red Cross, health delivery groups run as nonprofits, disease ordisorder dedicated information and advocacy groups, religiousorganizations, educational and charitable foundations. There alsoare homeowners' and condominium association boards, charity sportsleagues, and community action groups.

On the one hand, organizations are filling in the gaps to meetneeds neighborhoods or extended families once did, while a moresophisticated American populace seems to have more interests orcauses to embrace than ever before. On the other hand, there is asincere desire for people, professionals, and business executivesto give back to society in the form of volunteer activities inorder to have a say in areas that impact their lives.

My Home and My Hearth

Perhaps nowhere else is the motivation for getting involved sostrong as with boards of directors of nonprofit homeowners' andcondominium associations, an important and growing segment of thefor-profit and nonprofit D&O marketplaces. We place greatemotional and financial stakes in our residences. So who wouldn'twant to get involved in order to build a better community, helpmaintain and enhance property values, have a say in how things aremanaged, or just meet the neighbors? But the directors and officersof these nonprofit association boards could pay a steep price forgood citizenship if a lawsuit comes calling and the board does nothave the proper insurance coverage in place.

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

The community agent has a vital role to fulfill as risk managerand preventive insurance counselor with respect to nonprofithomeowners' and condo association boards. In studying thiscoverage, agents should note the common exposures as well asguidelines for writing this book of business, which can beprofitable for both underwriters and themselves.

A Growing Market

The housing boom, one of the drivers of our economy in recentyears, has brought about an accompanying boom in homeowners' andcondominium associations. Furthermore, these associations have morecomplex tasks and responsibilities than ever before.

As suburbia marches outward, shared property and amenities insubdivisions grow apace. The “good life” can include swimmingpools, tennis courts, fancy club houses, walking trails, andlandscaped paths — even internal roads and secured entry points.Because of these features, a great percentage of all new homesbeing built today will require a homeowners' association and boardof directors.

In other older areas, urban revitalization has upgraded theresidential stock of many cities and downtowns in the form oflofts, condominiums, and other shared structure owner-occupiedhousing. Condominiums have become an important component ofmaster-planned town centers, whether all new or rehabilitatedconstruction.

Range of Exposures

What is the greatest source of potential litigation againsthomeowners' and condo association directors and officers?Undoubtedly, it is the people they represent and their likes anddislikes, personality conflicts, differing opinions about how torun the association, how maintenance and management monies arespent, as well as divergent views on rules and regulations. This iswhere we live. This is home turf. And people running for and beingelected to such boards are not always well versed in managingassociations, leading to frequent disputes regarding bylaws andcovenants.

Condo association boards, in particular, are responsible for thecommon structures of a condominium and, for the most part, will bemore involved in issues akin to property management and assetpreservation. Therefore, charges against directors and officers caninvolve such issues as responsibility for repair and maintenance ofstructures, failure to properly assess members and maintainadequate funds, negligence in hiring contractors, or failure tomaintain property value.

For example, suppose a board hires a contractor to replace orrepair balconies on the property, and the work is later found to bedefective. The board could be charged with negligence in thehiring. Disputes, including charges of kickbacks, also commonlyarise when relatives or business relations of a board member arehired by the association. A board also could be charged with notproperly insuring the condominium property, including exceedingdeductible limits in an attempt to save on property insurance.

Also, in the modern, upscale subdivision, more activities meanmore things to supervise and more potential for claims against anassociation. While general liability would be the primary line ofinsurance defense in most instances (e.g., slip and fall), a boardalways is liable against a claim of not having acted prudently.This situation points to the value of writing general liability andnonprofit directors & officers as a package, which shouldprovide seamless coverage for any homeowners' or condoassociation.

The scale and character of new residential communities shouldencourage caution for boards and their insurers. The presence oflarger and more highly valued homes within standard and gatedcommunities, not to mention extensive internal roadways and thelike, increases exposure in areas such as security, emergencyresponse, and privacy rights. In fact, municipalities and statelegislatures have recognized these dynamics with increasingregulatory vigor.

A Better Class of Risks?

Still, homeowners' and condominium associations present feweraggravations than many other categories of nonprofit D&O policywriting. Among the reasons:

Fewer employment issues. These boards generally employ fewstaff, meaning less potential for sexual harassment or employmentdiscrimination claims, including those that often arise fromintermediary management in an organization.

Fewer service/funding issues. There generally are few, if any,issues of providing services to the public as, for example, thereare with many health-related nonprofit organizations or scholarshipfunds. Also, for the most part, federal, grant, or donated moniesare not being spent, although a residential community couldconceivably qualify for modest municipal beautification and fix-upgrants.

Behavior surprises minimized. The board members and theirsubdivision or condominium residents generally are known to eachother, which should mean fewer surprises in behavior, not tomention the conforming power of neighbors. This has been somewhatcontradicted in recent years by the scale of many residentialcommunities.

Predictable claims. This is a well-established class of D&Obusiness, with many predictable aspects in terms of frequency andnature of claims.

Writing the Policy

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

Overall, it has been estimated that as many as half of condo orhomeowners' associations may be involved in a lawsuit of some kindat any given moment. Accordingly, agents have an important role inhelping these associations meet their nonprofit D&O coverageneeds. As noted before, we strongly recommend writing condominiumand homeowners' association insurance as a package that includesgeneral liability coverage. This protects against someone craftinga lawsuit that slips between the general liability and nonprofitD&O coverage cracks.

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

David J. Price serves as executive vice president, chiefunderwriting officer and Kenneth A. Schneider as vice president,director of product development with Burns & Wilcox, anindependently owned managing general insurance agent. They can bereached at [email protected] [email protected].