Directors' Liability Insurance - Do You Really Need It?

Buildings insurance is a major expense, yet it is the marginal addition of a small premium to cover the liabilities of volunteer management company directors that seem to concern lessees more!
Natalie Hughes argues that the protection this cover affords is something that all directors should insist upon.

Insurance is typically the largest single item of recurring expenditure in a service charge budget and it could be expected that lessees take a keen interest in the policies that directors of their management company and managing agents select. Indeed, any lessee has the right to request a summary of the current insurance cover, and the right to inspect the policy document or evidence of receipt of premium, or alternatively to ask for copies of the policy document and payment of premium to be sent to them.

However, our own surveys of directors of resident management companies show that in practice, so long as the block is well kept and managed, then most lessees are happy to leave the management company and managing agents to get on with the job – until someone suggests adding something entirely new. Something like directors’ and officers’ liability cover. The unwillingness of co-lessees to pay the modest premiums is the main reason cited for some blocks not taking out this cover.

Why you need it

The law makes no differentiation between a volunteer director or officer of a residents management company and someone running a large commercial business. This means that volunteer directors can be sued personally and can face potentially unlimited personal liability. Their personal wealth is at stake and even where a major award is not made, legal defence costs can be significant.

Remember that an aggrieved party will sue where he expects to get the best result. So make sure the policy covers both the management company and the individual directors. Some directors and officers’ policies will not do so.

It may be the management company has very few assets and so the best result will come from taking legal action against individual directors. As a director of a management company, an individual can be found lacking and held accountable for failures in:

Can you afford it?
Specialist policies are available to match the real nature of the risk of being a director of a resident management company, as opposed to a large commercial concern. And these are affordable.

Expect to pay around £150 for £100,000 indemnity for a block of up to 20 flats, rising to around £400 for £500,000 indemnity for a larger block.

It is probable this figure will fade into insignificance compared to the costs of hiring professionals because of the reluctance of lessees exposing themselves to the risks of being a director of the management company. Our customer surveys show that most blocks are in fact run by a small number of management company directors, who liaise with the managing agents or, in very small blocks, handle all of the management themselves. Other lessees take little practical interest other than when service charge demands are issued. This small pool of willing volunteer directors is too valuable to lose for the sake of a few pounds per apartment to provide them with the cover they deserve.

Famous last words

As a director you may live in a friendly, well-managed building. You may have known most of your neighbours for years but if an action you take, or fail to take as a director of a management company causes significant financial loss to another party then they may have no choice but to seek redress. Years of neighbourliness and friendship will soon be forgotten.

Your action, or inaction, may have resulted in a significant loss of value of a lessee’s flat for example if the management company had failed to deal with unsocial behaviour of other lessees. A poor choice of buildings insurance may have left all of the lessees liable to major expenditure if cover was found to be inadequate and a claim declined. Failure to vet a contractor may result in significant expenditure on poor workmanship that co-lessees are unwilling to pay.

Remember you cannot rely on the buildings insurance policy, which may provide only basic legal expenses cover for specific situations such as dealing with squatters. Disputes with lessees will not be covered.

Nor can you rely on the professional indemnity cover of your managing agents (and you will, of course, have checked that they have such cover). Their PI insurance policy covers claims arising from their own professional duties, and has no relation to the responsibilities and liabilities of the resident management company which employs them.

What next?

If you are a director of a resident management company, obtain quotations and present them at the next residents’ meeting. If you are a lessee but not a director, suggest the directors obtain this cover – and hope they will continue to run the building on your behalf.

Natalie Hughes is sales assistant at Deacon – the property insurance professionals
www.deacon.co.uk