D&O Coverage Exclusions Revisited / Eastpointe Case Upheld
I talked about the distinction between a carrier's duty to defend and the duty to indemnify early in the year in connection with the U.S. District Court's ruling that a D&O policy did not provide coverage for claims of breach of fiduciary duty, breach of contract and negligence. In Eastpointe Condominium I Asn. Inc. v. Travelers Casualty & Surety Company an owner sued the association claiming the board of directors failed to adequately maintain the roof and other portions of the property. The carrier took the position that the "property damage" exclusion in the policy controlled. The Court agreed.
The 11th Circuit Court of Appeal recently affirmed that decision in an unpublished opinion issued on May 20, 2010.
These types of claims are pretty typical. A unit owner (or several unit owners) feels that the board is not "doing its job" and files suit seeking various remedies often including:
- injunctive relief (demanding that work, repairs, maintenance or improvements, be performed);
- reimbursement for costs sustained as a result of damages to property that would not otherwise exist if the board appropriately attended to the needs of the property;
- damages for the loss in property value, loss of enjoyment of the property, loss of use and the like; and
- reimbursement of attorney's fees and costs for bringing the claim.
Many of these cases involve differences in opinion as to whether maintenance/repairs were or are necessary, what products and methods to use for the repairs or maintenance, which contractor is better, etc. In many cases the amount of money sought by the unit owner or owners is less than what it costs to defend the claims. Defense costs can easily eat into the association's cash flow.
Isn't the association's board of directors protected against claims of negligence or breach of fiduciary duty? If the D&O policy has a similar property damage exclusion, maybe not.
The Traveler's D&O policy excluded coverage for loss in connection with any claim "for or arising out of any damage, destruction, loss of use or deterioration of any tangible property including ... mold, toxic mold, mildew, fungus, or wet or dry rot."
The Eleventh Circuit departs from an earlier ruling that required a carrier to cover claims brought by homeowners against the association. In Lumbermens Mutual Casualty Co. v. Dadeland Cove Section One Homeowners Asn. Inc., the District Court found that the D&O policy covered property damage losses based upon claims of breach of fiduciary duty, regardless of the tangible property exclusion.
What does your policy cover? What does it exclude? If you're not sure, please speak to your agent and/or have your attorney review and compare the policies before you renew because it seems coverage denials (and disputes) are becoming more prevalent.
As one of the largest writers of Community Association D&O coverage and someone who spends a great deal of time on this and other issues within the community association insurance industry, I would like to comment. This issue of whether "consequential" property damage as a result of a board of directors alleged "wrongful act" (whether it be "breach of fiduciary duty, breach of contract and negligence") has been a topic of discussion amongst many of us specializing in the field, including the CIRMS (Community Insurance Risk Management Specialists) group of the Community Association Institute. This issue was discussed at the recent National conference for CAI.
There is no D&O policy that I am familiar with that does not include an express exclusion for Bodily Injury or Property Damage. If you can point one out, please let me know. Second, there is no D&O policy that I am familiar with that intends to provide coverage for "consequential" damage arising from an alleged "wrongful act" of a board member or other insured under the terms of the D&O policy. Again, if you have information to the contrary, please let me know.
In the normal course, most property damage claims appropriately fall under the general liability policy. We are aware, however, that in some instances there may be a gap due to possible "intentional" conduct that may be excluded under the GL policy.
As I have discussed with many in the industry, there is one significant reason why the D&O policy excludes the Bodily Injury and Property Damage claims. If this coverage were not excluded, the cost of the D&O policies would be "SIGNIFICANTLY" higher. The average D&O policy is $1,000. By adding coverage for bodily injury and property damage, would make this policy for all intents and purposes a general liability policy. As anyone who produces this type of policy to community associations will tell you, the cost of the policies is already claimed to be too high.
When you look at most General Liability policies, the premium dwarfs that of the D&O policy premiums. If you make the D&O policy into a GL policy as well, you are not only increasing the premium, but also creating signficant issues of duplicative coverage situations.
As a producer of insurance, I am all for increased premiums. The problem is, if we provide the bodily injury and property damage coverage that you are referencing in your blog, it would not be actuarially sound unless we increased the premiums significantly.
The concern I have with the concluding comment of your blog posting is the inference that they should check to make sure their D&O policy provides the coverage that the policy in the opinion excludes. The fact is, EVERY policy on the market that I am aware of has this exclusion and I am not aware of any policy that will allow you to purchase the excluded coverage back. If you are aware of such a policy, please let me know. I have an article I published that goes into this issue in more depth entitled "What is Not covered By Your D&O Policy." Anyone who is interested in a copy can send me an e-mail at jmeskin@mcgowanins.com.
I agree with points posted by Mr. Meskin. Excellent post. We insure a number of South Carolina Community Associations and utilize the majority of carriers writing D&O for Associations. The leading insurers of Community Association D&O all have similar policy language on these points.
Mr. Meskin is absolutely right! Good post!
I work in the UK. I agree that on grounds of premium for 'liability for bodily and property damage' should be excluded at least underUK directors and officers policies. Adequate protection is available under first party property insurance, employers liability and public liability policies. However, the Travelers' wording (see Lisa Magill's post, 24 May 2010) indicates a D & O exclusion not only 'for bodily injury or property damage' but also for claims 'arising out of bodiy injury or property damage'. This would enable a D & O insurer to deny cover for the indirect consequences of 'property damage', e.g. breach of their duty by failing to take care to select a competent contractor, whose carelessness damaged the association's building in some way. This surely should be a legitimate D & O claim as the policy's purpose is to cover the liability of directors' and officer's for, inter alia, the economic loss 'caused by or arising from their breach of duty'. They not be liable for the damage itself although the resultant costs will form a part of the assessment of damages. Insureds should take care to allow only those exclusions that strike out cover only for property damage claims and not claims of a derivative nature which are not likely to be covered under anything but a directors' and officers' liability. A policy that strikes out claims for claims indirectly related to property damage, e.g repair covenants,leaves a serious gap in cover. An associatin whose almost sole responsibility is for the care and protection of an aparment block is close to being sold a worthless policy.