Defending Unit Owner Lawsuits in Community Associations: A Step by Step Process

 
 

While being named as a defendant in a lawsuit is never ideal, community associations have a number of defense tactics available to prepare for the possibility of litigation.  These defense measures may enable an association to avoid costly litigation and defer additional liability when faced with an action filed by an owner or resident in the association.  The following is a general overview of the actions that should be taken when a lawsuit is filed, or when an association, through its board members or management, receives a threat or notice of a claim that may result in litigation.

Ensure Proper Insurance Coverage

One of the best ways that an association can prepare itself to defend against litigation and future claims is to obtain, and continue to carry, proper insurance coverage.  Community associations should consult with an insurance agent who specializes in coverage for community associations when determining which policies to select.  The policy should be reviewed annually to confirm that the association has adequate amounts of coverage.

Notification of Claim: Insurance Carrier(s) and Attorney

Depending on the nature of the claim that is asserted, the association may have an insurance policy available to fund a defense of the litigation and to cover a potential judgment.  While it may be difficult to determine whether insurance coverage will be available when a claim is first threatened or filed, an association should always err on the side of caution, and timely communicate the threat of litigation to its insurance carrier(s).  Many associations often contact their insurance providers simply to put the provider on notice that they have received a communication which contains a threat of a claim, prior to the filing of actual litigation.  It is important to note that many insurance companies have very strict terms as to when the insurance company must be notified about a claim or even a potential claim.  Under many policies, associations are required to provide “reasonable” notice to their insurance provider to obtain coverage under the policy.  As a result, notifying the insurance company at the outset will aid in ensuring that the association is complying with the insurer’s reporting requirements, even if a claim is not immediately opened.

Contemporaneous with notifying the insurance company, management and/or the board of directors should also contact the association’s legal counsel upon receipt of the threat of a claim or notice of a lawsuit.  Counsel may provide specific direction to the association regarding certain steps that may be taken to preserve evidence or to minimize potential liability.

Determining if Insurance Coverage Exists

Many claims that are filed against associations and board members may be covered by one or more of the association’s insurance policies.  For example, a number of claims filed against a board of directors may be covered under the Directors and Officers Liability (“D&O”) policy.  This policy covers claims filed against board members who are sued for acts or omissions that have occurred in the course of their service as board members.  The D&O policy may provide coverage for the defense of the litigation and/or indemnification for board members and management.  A common claim that typically triggers coverage under the D&O policy is a claim for breach of fiduciary duty filed against the association’s board of directors.  Generally, a claim of breach of fiduciary duty includes allegations against board members for wrongdoing or failing to properly address issues within the association.  Some common breach of fiduciary allegations include failure to maintain the common elements, failure to maintain sufficient association reserves, mishandling of association funds, self-dealing, and failure to adhere to or enforce the association’s governing documents.

In addition to claims covered under an association’s D&O policy, certain claims may trigger insurance coverage under an association’s General Commercial Liability policy.  Claims that may trigger coverage under such a policy typically include allegations involving property damage, such as water leaks, damaged patio decks, and damage to personal property.

In sum, whether insurance coverage exists for a particular claim will depend on the facts of the case, the cause of the alleged damage (whether monetary or property damage), and also whether the alleged acts fall within the insurance policy period.  As a result, it is crucial that an association be mindful of the terms of its insurance policies and comply with all notice requirements set forth in the policy.

Confirm Legal Representation

When a lawsuit is filed, an association’s insurance carrier may assign legal counsel from a panel of “pre-approved” attorneys often used by the insurance company.  Generally speaking, the insurance-appointed counsel works for insurance companies on all types of non-community association matters, and generally has pre-existing fee arrangements with the insurance provider.  In many cases, the legal counsel assigned by the insurance company will begin work on a case before the Board has agreed to accept the representation.  However, in many cases, the association may actually have the right to select its own attorney to defend the litigation.  For instance, when there are multiple counts in a lawsuit filed against the Board and/or the association, and the insurance company agrees to cover some but not all of the counts, the association may be entitled to select its own counsel at the insurer’s expense.  Thus, prior to agreeing to work with the insurance-appointed legal counsel, management and the Board should consult with the association’s own legal counsel to determine if the insurer has the absolute right to choose counsel for the association.  Similarly, the association’s counsel often has knowledge of a history with the unit owner or resident who has filed the claim, or history with the particular building issue that is involved in the litigation.  In this regard, the association may prefer to utilize its own legal counsel who is experienced and knowledgeable in the association’s history rather than proceeding with an attorney who is unfamiliar with the facts, and who may not specialize in the representation of community associations.  It is important for management and/or the Board to immediately address the issue of representation and confirm the arrangement in writing, whether it be the use of insurance-appointed counsel or the association’s own counsel.

Vote to Defend Against Litigation

Note that one of the most important – and most overlooked – steps in the process of defending litigation is the formal vote to defend the lawsuit.  As the court in the Palm case expressly held, a board of directors must also vote to defend the association (whether the claim was filed against the Board members, management or the association) in a lawsuit.  Accordingly, any time an action is filed against individual board members, the “board” as a whole, the property manager or management company, or the association, the board must take the formal action of voting in an open meeting to defend the litigation.

Conclusion

In summary, in order to ensure your association is well prepared to properly defend against litigation or threats of litigation, it is important that management and/or the board obtains appropriate insurance coverage long before a claim or potential claim arises.  Management and the board should work swiftly to notify the insurance carrier and report the claim, and contact legal counsel to discuss steps to minimize liability and coordinate the effort to determine whether insurance coverage exists.  Lastly, if the option exists, the association should select legal representation based upon the case and opt for an experienced and trusted legal counsel to resolve the litigation.

 

by Kelly C. Elmore, Principal
Kovitz Shifrin Nesbit

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