Understanding Indemnification: Protecting Board Members in Co-ops and Condos

Serving on your board can be a very rewarding experience, but personal liability is a real concern, and you should not assume that you will be automatically protected. Co-ops and condos offer different protections, and it’s wise to understand what they are.  

The Indemnification Clause Whether you’re serving on a co-op or condo board, the legal language you’ll want to understand is indemnification. This term means that if you or your board is sued, you will be protected. These clauses work hand in hand with directors and officers insurance, and to give you peace of mind you’ll need both. Co-ops have the added protection of New York’s Business Corporation Law (BCL), which condominiums don’t, but in both cases you’ll want a broad indemnification clause in your governing documents. Indemnification clauses that only cover contract-related issues, for instance, won’t protect you from lawsuits over tort claims like trip-and-fall accidents or damage from water leaks. 

In older condominiums, it’s not uncommon for indemnification clauses to be outdated or flawed. To modernize it, the condo bylaws need to be amended which in most cases requires 66 ⅔ of the unit owners to approve. 

Co-op Issues If your co-op’s indemnification clause merely states “Go to the Business Corporation Law” it has a problem. It leaves boards with a big question mark, because the way the statute is drafted, indemnification only becomes mandatory in certain circumstances. One of these is that a board member will be indemnified only if he or she is cleared of wrongdoing in court, which means this will be uncertain until litigation, which probably takes years, is decided. Because of this co-op boards should reinforce its indemnification clause with specific language to ensure consistent coverage for its members.

Added Protection While indemnification clauses provide a degree of protection, it’s important to have Directors and Officers (D&O) insurance. It will typically cover most claims, as long as they’re not related to willful misconduct. Board members need to verify that their D&O insurance policies include individual coverage, not just coverage for the board as a whole. You’ll also want to check your policy cap, which is often at a limit of $1 million, and may not be sufficient for high-stakes lawsuits in New York City. An umbrella policy on top of the D&O insurance can provide additional coverage, and you’ll want to make sure the D&O policy aligns with the indemnification clause to offer backup protection if the insurance policy doesn’t cover the full cost of a claim.

Risk Should Be Covered Board members take on personal risk as volunteers, so it’s essential to be proactive about protection. Potential liability can be based on signed contracts, property damage or injuries. To serve with peace of mind, make sure indemnification clauses are modernized and you have adequate Directors & Officers insurance.