Board Member Liability: How to Protect Your Building and Yourself
On August 3, Herrick partners Deborah Koplovitz, Alan R. Lyons and Andrew B. Freedland and led a webinar titled "Board Member Liability for Cooperatives & Condominiums," which focused on the necessary actions required to be a knowledgeable board member and ensure building safety. At the beginning of the webinar, Deborah emphasized that a board’s foremost interest is making sure the building is in excellent physical shape. She also added that while there are many New York state and city laws pertaining to building requirements, they tend to be reactive to issues that have historically occurred, and it is important for board members to be proactive in dealing with any potential building issues.
For those looking to join a board or those currently a member of one, the Herrick team highlighted the following factors to keep in mind:
Know what’s in your operational documents
There are two types of operational documents: Condos abide by bylaws and the declaration, and co-ops abide by the proprietary lease. In these documents, board members will find their repair obligations. In addition to the obligations outlined in these operational documents, there are also a number of New York state and city laws to which board members are required to adhere in order to ensure building safety. Some of the local legal requirements for inspections and repairs include façade inspections every five years, for buildings six stories and higher; boiler inspections; elevator inspections; retaining wall inspections; and energy audits. Currently, there are no local legal rules requiring adjacent construction surveys, structural evaluation, and garage evaluations, but owners and operators should strongly consider inspections on a consistent basis.
Know what protects you as a board member
If there is an incident, it is important to know which protections you have as a board member. One such protection is the Business Judgement Rule, which is a common law rule that applies to condos and co-ops as well as corporations. The Business Judgement Rule states that, as long as a board member and board exercise their duty in good faith and in the best interest of the condo, the court will not go beyond that, Deborah said. That is why it is important to rely on experts, including lawyers, architects and engineers, electricians and plumbers.
Know the different types of insurance and what they cover
Alan Lyons, chair of Herrick’s Insurance practice, mentioned that along with the Business Judgement Rule, there are different types of insurance that offer protection to board members. Directors and Officers (D&O) Insurance covers the decisions that board members make and claims against board members can potentially be brought by unit owners, renters and vendors. D&O policies usually exclude claims arising out of dishonest or fraudulent acts, as well as breach of contract claims. If a claim is covered, the policies cover the cost to defend the claim and resultant monetary damages awarded. A $1 million policy is generally the minimum limit, but it is important to note that defense costs reduce the limit and can erode the limit pretty quickly, and therefore higher limits should be considered, Alan said. There is also Commercial General Liability (CGL) insurance, which covers the board against claims of bodily injury and property damage. Board members are also insured under this policy, but only for liability arising out of their duties as board members. These policies cover incidents such as a slip and fall, and property damage to unit owners’ property (e.g. water or smoke damage) allegedly caused by negligent building maintenance.
Lastly, there are two types of property insurance: a master policy and an individual unit owner policy. Master insurance policies are purchased by the board and can be "all-in," where the policy covers the original structure as the building was delivered, including walls, ceilings and fixtures, while the unit owners cover the additions made after the original structure was built under their individual policies. Master policies can also be "bare walls" policies, which cover the bare walls and floors in unit owners' apartments, but exclude all fixtures, which are then the unit owners' responsibility to insure under their individual policies. The individual policy may also include loss assessment coverage, which protects unit owners if they are required to pay a share of a special assessment caused by a covered loss.
To avoid safety issues in a condominium or co-op building, there must be consistent evaluation, and it is crucial to get up to speed on your building’s condition. The Herrick team suggests maintaining open lines of communication with residents and bringing in an engineer to do a structural evaluation approximately every five years to walk the building and ensure it’s in good condition. By being proactive and understanding their responsibilities, condo and co-op board members can best protect their residents and themselves.
Click here to listen to a podcast version of the original webinar and watch a recording of the entire webinar here.
For more information on condominium and cooperative law matters or insurance matters, please contact:
Deborah Koplovitz at +1 212 592 1620 or [email protected]
Alan R. Lyons at +1 212 592 1539 or [email protected]
Andrew B. Freedland at +1 212 592 1623 or [email protected]
© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.