Condo Media - February 2014 - 39

That was the key issue in a Wisconsin case (Hunt v. Beach Club Condominium Association Inc.) triggered
when an insurer refused to defend a
condominium association against a suit
the condominium developers had filed
against the community. The developers were challenging an amendment
to the condominium declaration that
had eliminated their right to continue
using the beachfront area. The insurer
argued that because the developers
were demanding only a restoration of
their usage rights and were not seeking
financial compensation, the defense was
not required. An appeals court agreed,
finding that the "damages" requiring
coverage should be defined narrowly as
"compensation for past wrongs or injuries, consisting of money or something
that has monetary value."
Meskin shakes his head at the
thought that any condominium board
would purchase a policy that excludes
non-monetary claims, which represent
approximately 85 percent of the D&O
claims he sees. He finds even more
disturbing the idea that an insurance
agent would sell such a policy to a condominium client.

Assumption 4: The D&O
policy covers the defense
costs in any suit filed against
the board.

That's not how it works. D&O policies
will defend boards against allegations
that they acted improperly, failed to
act, or failed to exercise due care, but
the policies specifically exclude coverage for claims resulting from property
damage or bodily injury. Meskin provides three examples of the limitations:
Example 1. Looking to cut costs, a
board hires the unemployed and

"not very skillful" brother-in-law of
one of the board members to repair
a step. An owner slips on the poorly
constructed step and breaks her hip.
The D&O policy wouldn't apply
to this personal injury claim; the
association's general liability policy,
which covers damages resulting
from negligence or from results that
were "unintended and unexpected,"
might provide coverage, Meskin says.
But he worries the liability insurer
might argue that the board should
have expected poor results from hiring an unqualified contractor, recognized those risks, and incurred them
intentionally - excluding coverage
from the liability policy as well.
Example 2. An arborist tells the board
that a 700-year-old oak tree is diseased,
likely to fall, and needs to be removed.
The board decides the tree is too
important to the community and the
cost of removing it is too high. Predictably, the tree falls, killing two people
and injuring three others. Everyone
sues the association. The D&O carrier
refuses to cover the defense, citing the
bodily injury exclusion in its policy; the
general liability carrier also balks, saying the board recognized the risks and
incurred them willingly. Because the
board's actions were "intentional" and
the results "expected," liability coverage might be denied as well, leaving
this community essentially uninsured
for hundreds of thousands of dollars
in legal costs and what will almost
certainly be multimillion-dollar damage
claims.
Example 3. Revisiting that
700-year-old tree, the city's arborist
says the tree is diseased and orders it
removed, citing the risk that

it might fall on cars passing on an
abutting street. An arborist hired by
the association disagrees, proclaiming the tree perfectly healthy and
likely to stand for another 100 years.
The board refuses to remove the tree
and the city files suit. Because this
claim doesn't involve property damage or bodily injury, Meskin says,
his D&O policy would cover the
defense, but the policy would not
cover the cost of removing the tree if
the city prevails.
Rosen has discovered another twist
in D&O coverage limits: Some carriers are denying coverage for liability
disputes arising from property damage
claims.
In one case, an owner challenged
the way the board had allocated the
insurance proceeds from a fire loss. The
carrier refused to cover the board's defense costs, citing the policy exclusion
for property damage. Rosen says he's
argued in that case and similar ones
that the defense is for breach of duty,
which the D&O policy clearly covers, not for property damages. Some
insurers have backed down in the face
of that argument, he says, but others
have not.

Assumption 5. The
settlement for a liability
claim will also cover the
defense costs related to it.

That depends, Rosen says, on
whether the policy treats defense
costs as inside or outside the limits
of liability. Outside provides coverage for legal costs exceeding the
liability limits; inside means once the
liability limit on a claim is reached,
the association has no insurance for
the legal costs above that amount.

Condo Media * February 2014

Condo Media - February 2014

Table of Contents for the Digital Edition of Condo Media - February 2014