We write regularly about the role of community associations’ boards of directors, as well as the role of each of the directors on the board. Today I saw an interesting article about potential liability of directors.
We routinely advise boards that it is important for boards to obtain proper information, thoroughly debate issues at a board meeting and make a decision. In fact, Colorado law provides that a Board, acting within its power, in good faith and in the exercise of its business judgment, will not be liable for its decisions, even if the decision is ultimately determined to be the wrong one. This is known as the business judgment rule.
The article I read today was written by an attorney named Joel Meskin, who is very active in the community association world, primarily as an insurance expert who also actively issues directors’ and officers’ insurance to community associations. Joel bills himself as a “Community Association, Condominium & HOA Directors & Officers Insurance & Risk Management Expert.” Joel writes:
Board members generally join the board because they want to help maintain their community and its property values. We find that board members have the best of intentions when they join the board, but they may not fully understand the scope of their authority and position as a board member.
A board is not a group of individuals managing an association as individuals. The board acts “solely” as a board entity. Their work as a board is conducted fully and completely in a board meeting, end of story. The board makes decisions as a group and may debate in the meeting, and when they leave the board room, the decision made by the board majority is the decision that all board members must support whether it was their position or not.
A board may direct someone on the board to do a task as a result of a board decision, or they may direct the management company to do something, but the execution of the task is not in the individual’s capacity as a board member, it is as an association volunteer carrying out a board directive.
If a board member does something that he or she thinks is for the benefit of the association, but it is not the result of a board policy or decision, he is neither doing it in his or her capacity as a board member nor in his or her capacity as a volunteer acting at the direction of the board. The biggest result of this is that he or she would not be covered under the directors and officers liability policy if someone complains about this. He or she would have to defend him or herself. (Emphasis added)
While we have discussed each director’s legal duty to carry out the decision of the Board, and not act contrary to that decision or to undermine that decision, here is one additional great reason to not do those things – as a director who does those things, you will likely not be covered by the Association’s directors’ and officers’ insurance coverage. Without coverage, the director then is personally liable for any adverse court ruling or judgment. If that doesn’t make you think twice about your service on the Board, and to the association, I don’t know what will.
As always, if you have questions about your role as a director, or the Board’s role, please give us a call.