Beware the D&O Policy Exclusion!

Well folks, it's been awhile since I last posted and I wish I could say that it was owing to a fabulous winter vacation or some other recreational hiatus; the truth of the matter is that business has never been busier, which means that now I have an abundance of new issues and tips to bring to you, the interested public, regarding community and homeowner associations.

My latest article is inspired from a tale of one of my own clients, who suffered from a setback in Directors and Officers insurance coverage (the "D&O policy") based on some of the policy exclusions included in the insurance contract. Those exclusions, plus an excellent presentation at the CAI national legal seminar recently held in New Orleans, Louisiana got me to thinking that I need to draft an all-points-bulletin warning for those associations that might be struggling with their D&O policy coverage (or lack thereof).

In addition to the numerous policy provisions that potentially can defeat coverage, the D&O policy includes its own set of policy exclusions. Each insurance contract must be reviewed for its own specific policy exclusions, but the list below identifies the most common exclusions that the Association board needs to be leery of:

(1) Dishonest or Criminal Acts
(2) Bodily Injury and Property Damage*
(3) Pollution Claims
(4) Breach of Contract claims
(5) Personal Profit Claims

However, there are some less-restrictive D&O policies that include defenses for:

(1) Discrimination claims
(2) Suits involving insured vs. insured
(3) Removal or failure to procure and maintain adequate insurance (except for flood and earthquake and non-monetary damage claims)
(4) Defense for Employment Practices
(5) Personal Injury claims including claims for mental anguish

When examining the above-cited exclusions individually, the Property Damage exclusion presents the biggest headache for Associations because it creates a "gap" in coverage for boards of directors in their insurance protection umbrella. The Property Damage exclusion typically includes: (1) bodily injury, (2) sickness, (3) disease or death of any person, or (4) damage to or destruction of any tangible property including loss of use thereof.

When claims include the allegation of property damage, the D&O carrier denies coverage per its express exclusion. The trouble arises when, however, the Commercial General Liability carrier (the "CGL") also denies coverage because an "occurrence" has not been met, as defined by the policy. This is a tricky "dual-burden" to meet because not all acts of the directors and/or officers will meet the CGL's policy requirement for occurrences, even though by their conduct the property damage was a likely consequence.

A possible solution to this "gap" in coverage: draft the property damage exclusion to extend coverage for claims of property damage when "loss of use of tangible property that is not physically injured" is alleged. This coverage would fall outside of the reach of either D&O and CGL insurance contracts maintained by the association.

+a special thanks goes out to John Manougian, John Manougian Insurance Agency, Inc., Silver Spring, MD 20910, who authored "Directors and Officers Liability Insurance: A Minefield of Coverage Exclusions and Uncertainty" at the 2007 Community Association Law Seminar, New Orleans, LA, February 23-24, 2007 from which portions of this article were excerpted from.