A condo board will vote on a three-year landscaping contract at tonight’s meeting. To save time, the community manager pastes the 30-page agreement into a free AI chatbot and emails the board a one-paragraph summary. The summary reads well, but it leaves out an automatic renewal clause. Once the board approves the contract, the directors are responsible for all of its terms, including the clause nobody read. If that clause costs the association money, owners can sue the directors for breach of fiduciary duty.
Condo directors and officers insurance may respond to that claim. Agents can also help board clients avoid it by explaining why AI-generated answers need human oversight and what that entails.
Why AI Gets It Wrong With Confidence
The National Institute of Standards and Technology (NIST) uses the term “confabulation,” also known as hallucination, to describe AI output that presents false or erroneous content with confidence. According to NIST, the risk arises when users believe the content because the answer sounds certain, and then act on it. NIST adds that confabulation is a particular concern in subjects that require specialized expertise. Contract terms and governing documents require that kind of expertise, so a board that relies on an AI summary of a contract faces this risk.
AI tools can also produce made-up reasoning or citations that make a wrong answer look well-supported. The problem has already caught the attention of trained professionals. In 2023, a federal judge in New York sanctioned two lawyers and their law firm after the lawyers filed a legal brief containing six fictitious case citations generated by ChatGPT. The lawyers also kept standing by the fake opinions after the court and the opposing party questioned whether the cases existed.
The judge wrote that nothing is inherently improper about lawyers using AI for assistance, but ethical rules require attorneys to ensure their filings are accurate. A board’s vote follows the same logic. AI can help prepare a summary, but the directors answer for what they approve. If lawyers can be fooled by fabricated content, a volunteer board can be fooled, too.
A Landscaping Contract the Board Didn’t Read
Back at the board meeting, the risk plays out in four steps:
- The summary covers the price, the scope of work, and the term. But it skips the renewal clause, which requires 90 days’ written notice to cancel and allows a price increase on renewal.
- The board approves the contract, and no director reads the full agreement.
- No one sends the notice, so when the deadline passes three years later, the contract automatically renews at the higher price.
- The association pays the increase, and owners fund it through their assessments. Owners then allege the directors breached their fiduciary duty by approving terms they never reviewed.
The directors’ usual answer to a claim like that is reliance on professional advice. California law protects directors who rely on qualified experts under certain conditions, and the statute lists people such as counsel and accountants. In the landscaping vote, no attorney or other expert reviewed the contract, and a chatbot generated the summary. The directors therefore have no expert advice to cite in their defense.
Where Condo Directors and Officers Insurance Comes In
Owners sue the people who made the decision, not the software that produced the summary. As a result, the coverage question turns to who the policy insures. In the landscaping vote, owners could name the directors, the association, and the manager who prepared the summary.
KDIS’s D&O program includes support for claims involving breach of fiduciary duty. The program also covers community managers and the management company. Under a program like the one KDIS offers, coverage may respond to claims against both the board and the manager. Before a claim arrives, agents should confirm that a board client’s condo directors and officers insurance extends to the manager as well as the directors.
How Boards Can Check AI Before They Act
Each of the following habits would have caught the renewal clause before the vote, and agents can pass them along to board and manager clients:
- Check the summary against the document. Ask the AI to quote the exact language behind each point, find that language in the original, and read the sections a summary might skip, such as renewal, termination, and price changes. A chatbot can invent support for a wrong answer, so asking it to confirm its own work doesn’t verify anything.
- Send legal questions to the attorney before the vote. The association’s attorney can review contract terms and governing documents before the board signs. An attorney’s review also provides the directors with the kind of professional advice described in California’s reliance protection.
- Adopt a board rule. No AI summary replaces reading the source document for anything the board approves. A written rule applies the same standard to every director and to the manager.
Unchecked AI information is one of the risks KDIS will cover in its webinar, “Before You Trust AI: Understand Your D&O Exposure as a Community Association Board Member or Manager,” on Nov. 19 at 11 a.m. PT. Register for the webinar to hear how boards and managers can reduce that exposure.
About the Author
Kevin Davis is President of Kevin Davis Insurance Services, Inc. (KDIS) and managing general agent for Travelers Insurance — one of the largest specialty insurance writers for community associations in the United States, currently insuring more than 40,000 associations nationwide. With three decades in the insurance industry — 25 of them devoted exclusively to community associations — Davis brings rare depth of expertise to a highly specialized field. He founded KDIS in 2000 with a two-person team and has since built it into a firm of more than 65 employees, establishing the company as a trusted leader in its market. A nationally recognized authority on loss prevention, Davis writes and speaks regularly on the subject. He also serves as a faculty member for Community Associations Institute (CAI) training programs throughout the country.
About Kevin Davis Insurance Services
For over 35 years, Kevin Davis Insurance Services has built an impressive reputation as a strong wholesale broker offering insurance products for the community association industry. Our president, Kevin Davis, and his team take pride in offering committed services to the community association market and providing them with unparalleled access to high-quality coverage, competitive premiums, superior markets, and detailed customer service. To learn more about the coverage we offer, contact us toll-free at (855) 790 -7393 to speak with one of our representatives.