CONDOCENTRIC: DIRECTORS AND OFFICERS LIABILITY INSURANCE - Claims Made Form

With the increasing responsibility being placed on directors and officers of residential condominium corporations, there appears to be an increasing number of questions surrounding the Directors and Officers’ Liability (“D&O Liability”) coverage provided under a condominium corporation’s policy of insurance.

The Condominium Act, 1998 (the “Act”) provides that a condominium corporation shall maintain D&O Liability insurance “if reasonably available”. While extreme circumstances could exist to hinder the availability of such coverage, coverage is generally available by almost all writers of residential condominium insurance.

Who is covered under a directors and officers’ liability form?

It is not unusual for directors to feel that once they have left the Board, they are no longer protected under the D&O Liability coverage. Most standard D&O Liability wordings protect, past and present directors and officers, individually and collectively for wrongful acts, subject to any exclusions or limitations. Condominium corporations should ensure that coverage extends to cover members of any committee created and acting under the authority of the Board, as well as any employees of the condominium corporation while performing duties in accordance with the directions of the Board.

“Claims Made Basis” vs. “Occurrence Basis”

Property and General Liability coverage is written on an “Occurrence Basis”, meaning that the policy, which is in force at the time of the occurrence giving rise to the loss, is the policy of insurance that responds (i.e. if a fire “occurs” on July 10, 2002, the policy that is in effect on that date will pay for any resultant damage).

D&O Liability, by contrast, is written on a “Claims Made Basis”, meaning that if a Board is drawn into a lawsuit as a result of an incident which occurred 2 years ago, the policy that is in force at the time the “claim is made” against the Board is the policy that responds (not the policy that was in place 2 years ago).

Note: This coverage is subject to the fact that the Board had no knowledge of any incident, which would give rise to a claim, prior to placing the coverage with the existing insurer. Past Board members should take comfort in the knowledge that they can be assured of coverage despite any coverage, or lack thereof, in effect when the incident occurred, and for which the Board is now being sued.

Limitation of Coverage

All coverage provided under any policy of insurance contains exclusions and limitations. Dishonest, fraudulent, criminal, and deliberate acts of directors and officers are all specifically excluded from coverage under the D&O Liability coverage. In addition to numerous other exclusions, there would be no coverage available to any director and/or officer gaining any personal profit, remuneration or advantage to which he/she was not legally entitled.

Depending on the insurance company and the wordings provided, coverage can vary from one company to the next. Special attention should always be paid to the specific limitations and exclusions contained in the Policy.

From “Common Elements” Spring 2002

All of the information contained in this article is of a general nature for informational purposes only, and is not intended to represent the definitive opinion of the firm of Elia Associates on any particular matter. Although every effort is made to ensure that the information contained in this newsletter is accurate and up-to-date, the reader should not act upon it without obtaining appropriate professional advice and assistance.

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