We believe that anyone who is willing to take on the workload of managing a Residents Management Company (RMC) or Right to Manage Company (RTM) should be protected from personal financial loss.
Directors of a company, even a relatively small company running a block of flats, face potentially unlimited personal liability if anything goes wrong with financial, legal or practical maintenance matters.
The good news is that you could have Directors’ and Officers’ Liability insurance that, while broadly based on the sort of cover that directors of big businesses take out, may be tailored and priced for companies like yours.
They can cost from as little as a few pounds per flat, and providing your lease allows for it or your co-lessees agree, you could add the cost to the service charge budget.
You might think that you are all friends and that nothing could go wrong, but your neighbours may have no choice but to sue if they suffer a loss. Look at a few scenarios below and you can see how you could be affected:
- Building Insurance blunder: An association secretary chooses the building insurance for a block of flats but fails to note that some flats are unoccupied for long periods. A pipe bursts in an empty flat, damaging the flat below. The loss is not covered by the insurance policy. The secretary is held personally responsible for failing to obtain adequate cover.
- Filing accounts fiasco: Companies House fines the directors of a Residents’ Management Association because they didn’t file the accounts on time.
- Pest damage: A squirrel climbs into a loft via an overhanging tree and chews up all the wiring. The damage is not insured and residents object to adding repair costs to their service charges and the directors are sued for the costs because they failed to maintain the tree properly!
- Price drop penalty: Members of a Residents’ Association committee are sued because a flat dropped in value. The leaseholder alleges that the directors of the Residents Management Company (RMC) failed to manage a disruptive tenant in a neighbouring flat, or failed to maintain the building adequately. This caused the value of the flat to fall, a loss he cannot afford. He sought recompense through the directors of the RMCS.
- Libel: Directors write a heated letter in response to some allegations against them. They are sued for libel. Conversely, directors are libelled by a leaseholder who suggests they are taking ‘backhanders’ for repair work.
What is Directors’ and Officers’ Liability Insurance?*
Directors of RMC or RTM companies owe their fellow residents a duty of care because anything they do or fail to do, can impact on individual flats and their owners. Directors’ and Officers’ policies indemnify them for action taken against them to recover monetary loss and legal fees as a result of something they have done, or failed to do. What should be covered?
- Legal defence costs including representation.
- Damages awarded or any out of court settlements agreed.
- Claimants’ costs and expenses.
- Entity insurance – this is often not included. Do check.
Entity insurance provides protection if the company itself, rather than an individual, is sued. Should an individual think they have cause for litigation, their lawyers will consider whose decision resulted in the loss and act accordingly. If a decision to delay repair works was taken collectively by all directors, for instance, the logical choice may be to pursue the company through the courts. It is often included in Directors’ and Officers’ cover, but be sure to check. It is included as standard in Deacon policies.
Legal expenses cover*
This is different to Directors’ and Officers’ cover. Legal expenses insurance can help fund unexpected legal disputes with contractors, neighbours and employees. Deacon’s legal expenses cover*, designed for Residential Management Companies (RMC), also provides 24/7 access to a legal advice line putting you in touch with professionals who can help with matters relating to your block or association. Failure to act quickly might prejudice your position and result in you losing a dispute by default, which can also be the case if you can’t afford to pay for legal costs yourself. To find out more click here.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.