Be Aware of Nontraditional Liability Exposures

SEPTEMBER 3, 2024

When we think of liability, activities such as driving a car, hosting a party, purchasing a home or signing a lease may come to mind. However, there are other everyday actions that can leave your assets at risk. Read on for some of these often-overlooked activities, as well as low-cost solutions to maximize asset protection.

Serving on a Homeowners Association Board

Sitting on the board of a homeowners association (HOA) is voluntary, but if things go awry, your individual assets could be at risk. Allegations that may be brought against a board include:

• Breached governing documents
• Improperly enforced rules
• Misused association funds
• Improperly imposed assessments
• Conflicts of interest
• Failure to maintain the common areas
• Failure to maintain proper insurance
• Breached contracts and privacy violations
• Discrimination, harassment, libel or slander

If you become a board member, take steps to protect your personal assets. First, examine the indemnification provided by the HOA’s charter, articles of association or other organizational documents, bylaws or resolutions. Review directors and officers (D&O) insurance procured for the condo/HOA. A D&O policy protects the directors and officers and the association itself against D&O claims. Defense costs, settlements and judgments are typically included with the policy.   

Lastly, speak with an insurance professional regarding your activity. You may be able to obtain individual coverage through an inexpensive endorsement on your excess liability policy. For more information, see our HOA and Condo Checklist.

Living in an HOA Community

Living in a community with an HOA is a liability exposure. Associations collect fees from homeowners for services and amenities. These fees are also applied to a “master policy.”  If a claim is not fully covered by the master policy, the governing documents may permit the association to pass debts owed (including judgment creditors) to homeowners via assessments.

Offset these assessments by adding an inexpensive loss assessment endorsement onto your homeowners or condominium policy. Basic loss assessment coverage is typically $1,000, but it can be increased to $100,000 for a nominal cost.

Wills and Trusts

Incorporating ownership of homes, automobiles, boats and other assets into trusts and LLCs provides tax, privacy and wealth protection. Creation of these entities also provides a layer of liability protection. In the event of a loss, personal assets may be protected if the entity is sued.

However, steps must be taken to keep that liability protection in place. Since both trusts and LLCs are legal entities, it’s important for personal assets to remain separate from an entity’s assets. If the two entities co-mingle funds, the corporate veil may be pierced, and the liability protection is gone.

Trustee Liability Insurance

If you appoint an individual as a trustee, they now have an additional liability exposure. Lawsuits against a trustee can be filed for almost anything. These suits bring legal fees, reputation damage and additional stress.  

A trustee errors and omissions (E&O) insurance policy helps protect a trustee from a lawsuit. Without this coverage, a trustee may have to pay out of pocket legal costs — and potential damages — in the event of a lawsuit.

Employing Domestic Staff

Homes placed in an entity may employ domestic staff to maintain the residence. If an entity employs domestic staff, employment practices liability insurance (EPLI) should be considered. This type of policy provides families and entities coverage from lawsuits filed by employees and helps protect against:

• Discrimination (based on sex, race, age or disability, for example)
• Wrongful termination
• Harassment
• Other employment-related issues, such as failure to promote

EPLI may be endorsed onto an excess liability policy. Speak to your insurance professional to see if this option is available to you.

Additional Liability Coverage

Many families erroneously believe liability coverage is expensive. Typically, additional liability coverage may be purchased as a separate policy. Different types of liability policies are available depending on your need and circumstance. You may wish to consider:

• Umbrella — An umbrella policy may pick up when the underlying policy liability limit has been exhausted or the claim was excluded. An umbrella policy may not have the same exclusions as the underlying policy and the claim may be paid.
• Excess Liability — This is similar to an umbrella policy; however, it is designed to pay claims in the same way that the underlying policies pay claims. Claims excluded in the underlying policy will be excluded in an excess policy.
• Group Excess Liability — Provides additional protection when the underlying policy (e.g., home, auto) limits are reached. Higher limits of liability coverage are provided at a discounted rate. These policies are usually available for companies with more than 25 employees and groups of professionals.