Source: https://www.alblawfirm.com/articles/board-tort-liability/
Timestamp: 2019-04-22 03:06:04+00:00

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Interestingly, in Stalker v. Stewart Tenants Corp.,6 a decision rendered just three months before Fletcher, a separate First Department panel held that the plaintiffs’ complaint stated causes of action for housing discrimination against the corporate defendant, but that the individual board members who had approved the discriminatory acts of the corporation were not themselves subject to personal liability. The Stalker court stated: “Although allegations of unequal treatment of shareholders may be sufficient to overcome the protection afforded directors under the business judgment rule [for purposes of “board” liability], individual directors may not be subject to liability absent allegations that they committed separate tortious acts.” Interestingly, since this decision was from a completely different group of Appellate Division judges, this decision could have an affect on how much credence the Fletcher decision receives.
If Fletcher fails to be spurned by the Court of Appeals and its progeny of cases protecting board members by applying the business judgment rule, the decision will necessarily impact condo and co-op board membership in three ways: first, it will have a chilling effect on the willingness of qualified persons to volunteer to sit on these boards without compensation; second, it will permit individual board members to be personally liable for torts committed in their official capacity even though they believe they acted in good faith within the limits of their board authority; and, as discussed below, board members will have to serve at risk of incurring the costs to defend themselves, from charges of unlawful discriminatory acts or other bad faith conduct, without the protection of insurance.
Although the Fletcher court intended to address the confusion it perceived in condo/co-op law, the decision raises new questions concerning the scope of board insurance coverage. Will carriers provide insurance protection to individual board members accused of wrongdoing when acting as “the board,” and will condo and co-op apartment owners readily volunteer to sit on boards whereby they will not only have increased exposure to potential personal tort liability, but whereby they may also incur personal responsibility for the legal costs of defending “board” action they honestly believed was rendered honestly and in good faith?
In bringing an action against the individual members of a cooperative or condominium board based on allegations of discrimination or similar wrongdoing, plaintiffs were required to plead with specificity independent tortious acts by each individual defendant in order to overcome the public policy that supports the business judgment rule. (Emphasis added).
Thus, D&O policies may not provide coverage for intentional torts, such as defamation (although negligent misrepresentation may be covered), or violations of statutory anti-discrimination laws in which intent is an element. “One who intentionally injures another may not be indemnified for any civil liability thus incurred. However, one whose intentional act causes an unintended injury may be so indemnified.”12 It is clear, therefore, that if the intent of the wrongful act is to cause the resultant injury (such as the harm caused by the invidious discrimination alleged in Fletcher), it cannot be indemnified as a matter of public policy.
Although the individual board member defendant is now at risk for his or her “board” actions, the insurance issues are similar to those which prevailed before Fletcher respecting the decisions made by insurers to defend allegedly tortious “board” activity. Therefore, while board members cannot avoid the prospect of having to personally defend baseless law suits brought for actions they do in their official “board” capacity, they may still obtain the benefit of an insured defense with a reservation of rights by the carrier, so long as the complaint in the suit (and/or the insurer’s actual knowledge of the facts underlying the suit) provides a reasonable possibility of coverage under the terms of the policy. However, although a board member may thus receive the benefit of a paid defense by an insurer, a board member found liable for the tort committed in his or her official board capacity will nevertheless be responsible for any monetary judgment rendered in the case.
Only time will tell the magnitude and long-ranging effect of the Fletcher decision, but every practitioner and board member must be aware of its existence.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. John M. Desiderio is chair of the firm’s Real Estate Litigation Group. Colin E. Kaufman, a partner at the firm, contributed to the preparation of this article.
1. __ AD3d__, 948 NYS2d 263 (1st Dept. 2012).
3. Citing Peguero v. 601 Realty Corp., 58 AD3d 556, __ NYS2d ___ (1st Dept. 2009).
4. Citing Savannah T&T Co. v. Force One Express, Inc., 58 AD3d 409, __ NYS2d __ (1st Dept. 2009).
5. Citing Marine Midland Bank v. Russo Produce Co., 50 NY2d 31 (1980); see also Kleinerman v. 245 East 87 Tenants Corp., 74 AD3d 448, 903 NYSd 356 (1st Dept. 2010); Ackerman v. 305 East 40th Owners Corp., 1889 AD2d 665, 592 NYS2d 365 (1st Dept. 1993).
7. 75 NY2d 530 (1990).
8. 100 NY2d 147 (2003).
9. See, e.g., Peacock v. Herald Square Loft Corp., 67 AD3d 442, 889 NYS2d 22 (1st Dept. 2009); Meadow Lane Equities Corp. v. Hill, 63 AD3d 699, 880 NYS2d 338 (2d Dept. 2009); Hill v. Murphy, 63 AD3d 680, 881 NYs2d 133 (2d Dept. 2009); Konrad v. 136 East 64th Street Corporation, 246 AD2d 324, 667 NYS2d 354 (1st Dept. 1998); DeCastro v. Bhokari, 201 AD2d 382, 607 NYS2d 348 (1st Dept. 1994).
10. See Murtha v. Yonkers Child Care Association, Inc., 45 NY2d 913 (1978).
11. SeeTown of Massena v. Healthcare Underwriters Mutual Insurance Co., 98 NY2d 435 (2002).
12. Public Service. Mutual. Insurance. Co. v. Goldfarb, 53 N.Y.2d 392, 399 (1981).
13. 78 NY2d 61, 65-66 (1991); see also BP AC Corp. v. One Beacon Insurance Group, 8 NY3d 708 (2007); Fieldston Property Owners Assn. v. Hermitage Insurance Co., 16 NY3d 257 (2011).
14. General Motors Acceptance Corp. v. Nationwide Insurance Co., 4 NY3d 451, 456 (2005); see also Automobile Insurance Co. of Hartford v. Cook, 7 NY3d 131, 137 (2006).
15. Fitzpatrick v. American Honda Motor Co., supra, n. 13; see also Technicon Electronics Co. v. American Home Assurance Co. 74 NY2d 66, rearg. denied, 74 NY2d 893 (1989); Meyers & Sons Corp. v. Zurich American Insurance Group, 74 NY2d 298 (1989).

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