Most community association Board of Directors understand the importance of maintaining Directors and Officers insurance (“D&O insurance”) to protect the Association, Board members, and those who assist the Board, such as property managers and committee members. D&O insurance provides coverage for claims for “wrongful acts” committed or alleged to be committed by a Board member or someone else insured under the policy. Unfortunately, what many Directors do not understand is that to preserve coverage under a D&O policy, the policy requires that an insured under the policy provide the D&O insurer with timely notice of any threats of lawsuit that it receives that may be covered under the policy. Otherwise, the D&O insurer may deny coverage of the claim.
The Case of Taylor v. State Farm: Lessons for Community Associations and Boards
In the case of Taylor v. State Farm Fire & Casualty Company, decided by the Georgia Court of Appeals in September 2018, a former Association committee member of the Regency Oaks Neighborhood Association, Inc. (the “Association”), Regina Taylor, learned the importance of timely reporting claims the hard way. In this case, Taylor sued the Association after leaving her committee member position with the Association, and the Association brought counter-claims against her. In January 2015, after filing her lawsuit against the Association, Taylor sent a copy of her lawsuit to the Association’s D&O insurance carrier, State Farm, to notify it of her claims against the Association. State Farm appointed defense counsel to defend the Association against Taylor’s claims.
However, Taylor did not notify State Farm of the Association’s counter-suit against her and ask that it cover the Association’s claims against her under the policy until over a year later, in July 2016. Even though Taylor was potentially insured under the D&O policy since she was a former Association committee member, State Farm denied coverage of her claim.
When Taylor sued State Farm for its denial of coverage, the court found State Farm justified in denying coverage to the Taylors based upon the Taylors’ failure to comply with the policy’s requirement to provide timely notice of the claims against her. In its holding, the court noted that Taylor’s first letter to State Farm made no mention of the counterclaims nor did it demand coverage under the policy for her. Rather, Taylor did not demand coverage from State Farm until July 2016, over 18 months later.
The lesson that Taylor v. State Farm teaches us is that to preserve coverage under a D&O policy, an association should timely notify its D&O carrier of any written or specific verbal threats of suit and/or lawsuit filed against it that may be covered under the policy. Given that the consequences for failure to report such threats can be denial of coverage for a lawsuit related to the threat, Boards should err on the side of caution to report such threats even if a Board believes a person is unlikely to follow through with his/her threat of lawsuit.