Risk Management Considerations for Condo
Association Boards |
Article Courtesy of The Insurance Journal
By Patrick Wraight
Published
April 5, 2023
The condo association takes on a special level of responsibility because
of the unique form of ownership that is the condominium. To make sure we
are all on the same footing — a condominium is a form of ownership where
a person (in the broadest possible sense) purchases a unit within a
building. By purchasing the unit, they also buy their spot as co-owner
of the entity that owns the entire property, whether it is a single
building or a group of buildings, including their appurtenant structures
(the clubhouse, pool houses, pools, etc.), the condo association.
The association elects a board of directors. The board acts on behalf of
the unit owners to conduct the business of the association. This allows
business to be done without the need to bring the body of owners
together to make decisions. That exposure creates the need for the board
to have directors and officers liability (D&O) insurance in place.
D&O insurance provides coverage for the decisions of the board and the
individual members of the board.
Consider the Surfside Condominium collapse in June 2021. The evidence to
date suggests the collapse was due at least in part because of deferred
maintenance to the building. Deferred maintenance is a fancy term that
means that they haven’t taken care of the building as they should have.
The association board was made aware of repairs that the buildings
needed, and they chose not to start on those repairs because of the cost
associated with them.
There are other decisions that boards have to make, from hiring lawn
maintenance contractors to handling the association’s funds to
purchasing insurance for the association’ various exposures. All of
these decisions can lead to a D&O exposure.
While it seems like it would be impossible to reduce the chance of a D&O
claim to zero, it is possible to reduce the chances, and to mitigate the
impact of the claim, if filed.
Validate Board Members
In order to best manage the risks of a D&O claim, the association should
start at the source of potential D&O issues and that is with the board
members.
Each member, and potential member, of the board should be required to
submit to some degree of scrutiny. Their personal business is not
personal if they want to take on the responsibility of leading the
association for the good of the members. Board members should be
required to, at a minimum, submit an application that details the board
position they are seeking and why they think they would make a good
board member.
The application process should include divulging any businesses that the
potential board member has an ownership stake in, especially any
businesses that could end up bidding as a vendor for the association.
Additionally, the application should include an anti-conflict of
interest provision that requires board members and potential board
members to report any potential conflicts of interest before any
business is considered.
It may seem intrusive, but especially if the board members have access
to association funds, a review of potential board members’ financial
situation may be in order. Financially insecure board members may be
swayed in their decision-making process to vote in such a way that helps
their finances rather than protecting the financial investments of the
association.
Document Board Proceedings
If there is an item that can prevent a problem as quickly as it can
create a problem, it’s documentation. Properly documenting meetings
allows for the transparency that people expect and can provide answers
for most questions that come up. A decision may have turned out to be
the wrong one and created a problem, but if the decision-making process
is documented and the conversation captured, it tells why the decision
was made in the way it was.
The documentation of meetings creates the historical records that
describe the chain of events that ocurred before each decision. It helps
to answer questions such as why to choose vendor A over vendor B, or why
to choose solution one over solution two.
This takes away the potential for accusations of misconduct in fielding
business proposals, or other business where the board could be
questioned.
In the past, a secretary might record the meeting minutes, which may
still be the preferred method for many boards, but it would be easy
enough to create a video (or audio) record of board meetings so that
there are no questions as to how the board came to a decision.
Communicate Board Decisions
After documentation, communication is another simple way to avoid D&O
trouble and the lack of communication is a way to invite trouble.
Communication should be simple, direct and complete. All board
communications should be sent in the same way every time, and in a way
that is clear to the members of the association.
Any time the board meets, they should communicate the results of that
meeting, even if it seems as though there was nothing to report. The
more information that is available to the association, the easier it
will be to defend issues that might come up.
If every board meeting is communicated to the association, including
those meetings where major decisions are made, it reduces the likelihood
of someone accusing the board of making decisions without informing the
association about what’s happening.
Continual open communication with the association also allows the board
to seek the input of the association members. If the members choose not
to make their voices heard, either by attending meetings, or by
responding to the reports of the board, then they help make the case
that the board is acting according to the wishes of the members.
There are other ways in which a condo association board might mitigate
their D&O exposures, but what’s most important to note is, whether the
board actively works to mitigate their risks or not, those risks are
still there. It’s just a matter of time before the claim comes that the
board made the wrong decision or failed to make a decision and something
happened.
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