DIRECTORS' & OFFICERS'
Every autumn, the Council of New York Cooperatives and Condominiums holds its day-long information-packed Housing Conference, with dozens of workshops offering unparalleled opportunities for board members of cooperatives and condominiums to learn and to share information on virtually every aspect of operating their buildings. This year's Housing Conference will take place on Sunday, November 14th. The article that follows is based on a workshop on Directors and Officers Insurance, presented by attorneys David L. Berkey of Gallet Dreyer & Berkey, LLP and Robert I. Cantor of Cantor Epstein and Degenshein, LLP and Program Manager Betsy Certa of The Distinguished Programs Group.
You've been elected to your co-op board and you're confident you can do a good job: your fellow cooperators picked you because you're fair and reasonable. However, while you might believe that "good faith" efforts on your part would suffice, you very well could find yourself the defendant in a litigious claim against your building. To protect yourself, you need to be knowledgeable about the Directors and Officers (D&O) Liability Insurance in your cooperative. You should acquaint yourself with what is covered and what's not, and become aware of the how to work with your building's legal counsel to defend such a lawsuit.
WHEN THE BOARD FACES A LAWSUIT
Imagine this scenario: The terrace garden of penthouse owner John Smith is surrounded by your building's community terrace. You've just amended your bylaws to allow the community terrace to remain open an extra two hours and Mr. Smith is irate: He and his wife do not want neighbors looking into their kitchen window every evening. The issue is brought to trial and the board prevails, but it is not awarded legal fees. Why is this? Has the board and its attorney failed to master the intricacies and implications involved in building a proper legal defense?
Attorney Robert Cantor, who represents boards insured under D&O policies, general liability insurance and errors and omissions policies, notes that directors need to understand the difference between an insurance carrier's duty to defend and its duty to indemnify. "Insurance companies have a very broad duty to provide a defense, so that if any reasonable reading of the charges in the complaint produces even one claim which is covered, they have to defend the entire suit." But, according to Cantor, depending upon how the case comes out-- which charges are ultimately proven and which are not--your insurance may or may not cover all costs. "You go to trial, they pay for the lawyer, everything's great," Cantor says. "But if the verdict comes in one way, they'll cover it. If it comes in another way, they won't." This is such a difficult issue," he says, "that many buildings choose instead to bring in private counsel."
YOUR TEAM OF LAWYERS
As Cantor explains, firms such as his are assigned by the insurance carrier to defend the lawsuit. Quite often in such litigation, assigned counsel works in tandem with the building's general counsel. "Our relationship with private counsel will be as much or as little as the board wants it to be," he says. "Generally we'll work with them to strategize the case." According to attorney David Berkey, who specializes in issues affecting co-ops and condos, general counsel assists assigned counsel in analyzing the claim. His job is to determine whether the building has a counter claim that can be alleged. As your private counsel, he may initiate a case, such as a landlord/tenant suit involving non-payment of maintenance. If the defendant tenant counterclaims, "I haven't been paying my maintenance because the building is horrendous and my warranty of habitability has been breached," assigned counsel comes in to defend the counter claim. Cantor says, "As the carrier-appointed firm to come in, I work closely with private counsel; they would handle the part of the case where you're the plaintiff, pushing your allegations in terms of non-payment. We'd handle the part defending the counter claims, and we'd work together."
Cantor makes it clear, however, that while he is assigned by the carrier, the board is his client. "I am an independent lawyer. I don't work for the insurance company." The co-op's insurance carrier will have suggested his firm, but once he's hired, you're his client. "So when I talk to you," he explains, "we have client confidentiality. When it comes time to decide whether or not to settle, its totally your decision." There's a caveat, though: Oftentimes when the issue of settlement is raised, there has to be a negotiation with the carrier. "The carrier might say, "yes, we've provided you with a defense, that's a much broader duty. But based on what you're settling for, we think it might not be covered. We want you to pay 50% of that. I come in; I'm told to represent the co-op. We win the case. Now when it comes down to coverage issues, the carrier doesn't want to hear from me. They don't want me giving you advice; that's for your private counsel."
Cantor says his responsibilities to the carrier are to keep them apprised of the situation. Usually within two months, his firm writes up the case and sends it to the board as well as to the carrier. He explains, "We say, ‘We've gathered most of the facts. Here are the legal points involved. Here's our best estimate on possible exposure.'" He says that firms such as his generally need to receive permission from the carrier before embarking upon a significant piece of litigation, such as filing a motion. However, he adds, "I can honestly say that in the 12 years of doing this I've never been told no, when I personally thought the motion was legitimate. I can always work it out with the client as to what makes sense and what doesn't make sense to do."
FIRST THINGS FIRST
When you are initially notified of a pending lawsuit, Berkey says, the first thing to do is notify your insurance carrier. "Generally, as soon as a claim comes in, we like to make sure proper notice is given by the cooperative or condominium to the carrier. Unfortunately, there have been times when a co-op or condo has given the papers to the managing agent and they just don't work their way to the carrier. The right way to give notice is to send a copy of the letter or the pleading to the carrier, as well as to the broker, both by certified mail, return-receipt requested, so you know that the notice has gone out and that they've received it." Counsel's next step is to make sure documents don't disappear and to interview staff members or board members who may have been involved. Berkey says board members must understand the investigation that's made by counsel is privileged, so "what the board members tell counsel is not subject to discovery in the lawsuit." While your assigned attorney works at defending you, general counsel helps prepare the case: working with the assigned firm to make sure all directors and officers, building employees and management staff are available for pre-deposition review of the facts; that they show up when they're supposed to for their depositions; and that they come to the trial when they're supposed to appear as witnesses. General Counsel helps with the analysis and the settlement discussions.
In addition to dealing with the issue of punitive damages, Berkey says, general counsel keeps an eye out for additional issues of co-op or condo policies that might be brought to bear in connection with the case. A simple example is that a building might have adopted a new rule, such as, "You cannot put a tree on a terrace." An individual shareholder might bring a lawsuit against the board to try to overturn that rule. According to Berkey, "You don't want a settlement to be negotiated that says, Oh yes, you, Individual Shareholder, can plant a tree." This would render the building's policy unenforceable against all the other shareholders. General Counsel's duty is to review such policies to make sure there's no adverse impact with a settlement.
Your managing agent is also crucial in litigation, because your attorneys will require records, such as minutes, to submit to the court. This is especially important in cases where a prospective buyer has been turned down. When the plaintiff utters the word "discrimination," the board will need to prove otherwise. In building a defense, it may need to gather a list of all prospective buyers over the previous few years to demonstrate a non-discriminatory approval history. Your attorneys need to work very closely with the managing agent to obtain all necessary documents.
HOW MUCH COVERAGE IS ENOUGH?
According to Betsy Certa, who is responsible for managing the sale, underwriting and servicing of community association insurance coverage, as Community Association Program Manager for The Distinguished Programs Group, "The bigger the co-op, the more claims activity there is." So it's not unreasonable to insure for a minimum of $1 million. Buildings seeking more coverage will purchase an additional umbrella policy. She suggests that $10 million umbrella coverage is not out of line when you think of the numerous claims that could come your way: "The board turned down my buyer for no reason at all. The board's not fixing my leaks fast enough. The board won't let me do this alteration and they let nine other people do the same thing."
Berkey explains that most proprietary leases do not require residents who initiate legal proceedings, and then lose the suit, to cover the co-op's legal expenses. His advice is to make sure that yours does. However, Cantor cautions that such terms apply reciprocally. "There's a statute that says if there's any provision in the lease which charges attorneys fees against a tenant under certain circumstances, then if the tenant gets into litigation with the co-op and is the prevailing party, the tenant can get its attorneys fees paid for by the co-op." According to Cantor, such provisions become tactical concerns for the board. Questions you'll ask yourself include: "Do I really want to go all the way on this thing and go to trial? If it doesn't work out, could we be looking at a problem?" A review of your proprietary lease and your D&O insurance coverage is most definitely in order. Come time to defend a lawsuit, you want to make sure you're relatively secure in your documents. Remember that anyone can allege malice. Any shareholder can claim "bad faith" on the board's part. Make sure you're covered and that you know how to deal with litigation. Best intentions alone are not adequate insurance.