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How Much D&O Insurance Is Needed for Condo Association?

Q: I currently serve on the board of my condominium association and am running to serve for another year. With the new statutes passed last year, for the first time I have been asked to sign a certification form stating that I have read and understand the statutes and declaration of condominium for my community. Also, our condo association attorney informs us that there are new provisions in the Condominium Act that appear to require new duties for association directors. The condo board president tells me that I should not be worried because the condo association carries directors and officers liability insurance. My question is, how much directors and officers liability insurance is enough, and what happens if somebody makes a claim against the directors in excess of the directors and officers liability policy limit? I enjoy serving on the condominium board, but I certainly do not want to put any of my personal assets at risk. N.N. (via e-mail)

A: You are correct that many new provisions were added to the Florida Condominium Act in 2008. It is not clear yet what the legal effect of the changes regarding a director's liability will be. As you probably know since you have served on the condo board previously, directors have always had a fiduciary duty to be reasonably well informed and to investigate and make a good faith evaluation of issues before voting. Directors have also always been required to keep reasonably apprised of association activities. Therefore, from one point of view, nothing has changed with the new statutes except that previously existing fiduciary duties have been expressly codified in the Condominium Act.

The new provisions in the Condominium Act concerning a director's duty of care are basically the same duties that have been found in the Florida corporate statutes for many years. Only time and perhaps some appellate court decisions will tell whether the new certification requirement for condo board directors, or the inclusion of director and officer liability standards in the Condominium Act, change existing condo law.

The answer to your first question is that the condo board should consult with the condo association insurance broker/agent as to the appropriate amount of directors and officers insurance coverage (usually referred to as theD&O policy). A million dollars coverage is probably the bare bones minimum. It is my understanding that coverage of three million, or even five million, can be obtained for a modestly higher premium. Obviously, the size of your association and the nature of your operation has some bearing on risk and the best balance between coverage and cost control.

In answer to your second question, the Florida statutes permit the bylaws of the association to contain comprehensive indemnification provisions which could become extremely important should insurance coverage not be adequate to cover a claim against you arising from board service. You may want to ask the board to check with the association's counsel to ensure that your bylaws contain thorough indemnification provisions. If a claim against a director exceeds the amount of insurance coverage, indemnification means that the entire community essentially acts as your insurer. However, there will likely be no insurance coverage and no right to indemnification in the event criminal action, fraudulent acts, or if willful or reckless misconduct or self-dealing is established.


Condo Associations and Windstorm Insurance

Even if association storm-proofs units, Florida requires purchasing policies

The standoff over whether to purchase windstorm insurance brewed for several years at Greenbriar Condominiums in Boca Raton.  Board member Walker Crewson argued that Florida law required the association to have it. But his fellow directors declined to purchase it because the association had invested heavily in storm-proofing the property and had windstorm coverage for the clubhouse.

They said Greenbriar's governing documents did not require windstorm insurance unless three-quarters of the 24 units voted in favor of it, and if Crewson was right, each owner would pay a lot more.

"It was hard. I didn't want to make enemies of my neighbors," said Crewson. On the other hand, if the condo did not have windstorm insurance, it could face up to $5,000 per violation. If the Florida Department of Business and Professional Regulation needed to enforce the order in court, there also could be court costs. Plus, in the end, the agency would require the association to obtain condo association insurance.

After years of debate, Crewson and another unit owner contacted the state. Here is what they learned:

1. Florida law requires all condo associations to buy windstorm insurance. And state law supersedes conflicting condo law. Crewson's fellow board members believed the association had met the law's intent by having other forms of insurance - flood, liability, etc. - and by having spent more than $200,000 on storm-proofing the building and units, including installing impact glass, wind-proof garage doors and strapping down rooftop air-conditioner equipment. But the DBPR, which oversees condo associations, let Greenbriar know it was indeed in violation.

Greenbriar, which lies on the west side of State Road A1A, now is in compliance, say directors.

2. There are no exceptions to the windstorm insurance requirement.

But associations may obtain condo association insurance through a self-insurance fund or through a group policy as approved by the Office of Insurance Regulation, said a DBPR spokesperson.

"But the law is not fair," said Greenbriar vice president Arnold Cohen. "If a condo can prove it has storm-proofed its property, it should be able to decide for itself whether windstorm is needed."

Cohen says each unit owner was assessed approximately $8,300 to storm-proof the buildings and now must pay an additional $1,600 to cover higher insurance bills.

"This law is putting a lot of pressure on people who don't have that kind of money to shell out," said Dick Verro, president of Greenbriar.

Cohen and Verro want lawmakers to consider an opt-out provision for condos built or retrofitted to withstand a major hurricane.

It may be a tough sell.

"I don't think there is much appetite to change the law. Mitigation is no guarantee that you won't be damaged. And let's face it, if we get a Category 4 or 5 hurricane, there will be some damage," said State Rep. Ellyn Bogdanoff, R-Fort Lauderdale, whose office was called by Cohen for possible help.

Bogdanoff says the purpose of the law is to make sure unit owners are able to move back home as soon as possible after a destructive storm. "We also enacted legislation in 2007 to reduce windstorm insurance costs," she said.

3. Florida law requires all condo unit owners to insure their interiors.

Bogdanoff said that is likely to change in the 2009 legislative session because lawmakers' intent simply was to delineate what the association was responsible for. And that includes the exterior, up to the drywall.

"I have submitted the language to reverse the requirement for unit owners to purchase individual policies," she said.

However, Rep. Julio Robaina, R-Miami, who pushed for the mandate to be removed, warned "If you go bare like that, you should know that you will be responsible for everything inside your unit."


HOA Should Buy Flood Insurance

Question: I have recently been elected to the board at our condo association, The previous board was informed that because of a revision by FEMA in May of 2007, we now have 5-6 Buildings located in an AE flood zone. Some of our residents found out about this when we were notified by lenders (banks) that, because we had a mortgage, we were required to have flood insurance. Our board refuses to help by saying that we should pay off our mortgage, and it was not a concern for them and they didn't have to provide insurance. I informed the board that I wanted it on record that they were liable if in fact any buildings in this zone were damaged. Because I needed insurance for the bank, I was required to pay for a Flood Elevation Certificate for my building, which is 12 units, and then purchase an insurance policy. My question is, should the association pay for flood elevation certificates? What is the liability of the board and the association on providing insurance for the buildings in the flood zone? Please note an AE flood zone is based on the fact there could be a flood one time in 100 years. I believe that the association is at risk.

Answer: The Condominium Act requires a unit owner-controlled association to use its best efforts to obtain and maintain adequate insurance to protect the association, the association property, the common elements and the condominium property required to be insured by the act. An argument could have been made that this includes the obligation to obtain flood insurance for condominiums in a flood zone. Under the FEMA guidelines, the association is the correct party for acquiring flood insurance, not the individual unit owners. I have personal knowledge of a condominium in the Florida Panhandle which was washed away by an hurricane; there was no flood insurance. The board didn't want to spend the money. While there is case law holding that the board is not liable for the exercise of its business judgment, so long as the individual board members are not guilty of self-dealing, the absence of flood insurance will impact the ability of individual unit owners to obtain financing on their units. Personally, I feel the board is not acting in the best interests of the unit owners.

Q: We enjoy your weekly column and hope you can give us an opinion on the duties of our board of directors. First, some background: We are a small (37 lots) association with a three-member board. The president has been in place for the last four years. She has determined that she is the treasurer as well as the president. Several of the homeowners feel that this is not the best business decision and does not provide the necessary checks and balances for sound business practices. We would like to bring this up at our annual meeting, but before we can bring it up, we would like to present some reasoning for a change. What is your opinion of this practice?

A: While not favored, without a provision in the articles of incorporation or the bylaws prohibiting same, the president can serve as a dual office holder (e.g., president and secretary, president and treasurer). This is expressly provided for in the Not-for-profit Corporate Act (Chapter 617, Florida Statutes).

Q: Where would it say what the exemptions are, since our declaration that refers to mortgagees being involved in any declaration changes only says "No amendment shall be passed which shall materially affect the rights or interests of any mortgagee without the written prior consent of such mortgagee."

A: The Condominium Act provides that, as to any mortgage recorded AFTER Oct. 1, 2007, the requirement of mortgagee consent only applies to amendments which change the proportionate share of ownership and sharing of the common expenses, and amendments which permit time sharing in a condominium which previously did not, and amendments which adversely affect the rights and interests of unit mortgagees.



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