Understanding the legal liabilities of HOA board members is critical to smooth leadership and operations. Board members volunteer their time and services to help the association. However, the role also comes with its fair share of legal hazards. Board members often expose themselves to possible liability simply by representing the HOA.
What are the Legal Liabilities of HOA Board Members?
Board members should be aware of the possible legal risks associated with their jobs. While it is uncommon for homeowners to sue board members individually, that doesn’t mean they should not familiarize themselves with the issues typically associated with lawsuits.
Here are the usual legal liabilities of HOA board members.
- Negligence. When the HOA board fails to uphold its duty of care, homeowners can sue for negligence.
Lack of Common Area Maintenance. The HOA board is in charge of overseeing and ensuring common area maintenance. Homeowners can sue for failing to fulfill obligations if this falls by the wayside.- Fund Mismanagement. Board members can find themselves in legal trouble for theft, fraud, and embezzlement.
- Selective Enforcement. Board members have a responsibility to enforce the rules fairly and consistently. Homeowners can sue if they exhibit selective enforcement, bias, and personal vendettas.
- Discrimination. Discriminating against homeowners is a violation of the federal Fair Housing Act and state-level fair housing laws.
- Harassment. When board members abuse their power and harass homeowners, they might face a lawsuit.
- Disputes Over Rules. Homeowners might not always agree with an HOA’s rules or how they are enforced. They might sue the HOA board for disputes over pet rules, architectural rules, decoration rules, election rules, and more.
Fiduciary Duties of the HOA Board
Board members are bound by three fiduciary duties to the association: the duty of care, loyalty, and the duty to act within the scope of authority.
Duty of Care
Board members need to make thoughtful decisions by gathering the necessary information first. For instance, before penalizing a homeowner for breaking a rule, reviewing the HOA’s governing documents and understanding the situation fully is important. This includes speaking with the homeowner if needed. Board members should act responsibly and reasonably, using good judgment and avoiding unfair actions.
Duty of Loyalty
This duty means acting in good faith and prioritizing the HOA’s interests over personal ones. Decisions must benefit the community as a whole, not individual board members.
Avoiding conflicts of interest is essential. Similarly, if a board member has violated a rule, they should not participate in decisions about changing that rule.
Confidentiality is another key aspect of loyalty. Information shared in confidence, like a homeowner discussing financial difficulties, must not be shared with others in the community.
Duty to Act Within Authority
The board must adhere to its responsibilities outlined in the governing documents and state laws. Board members can’t act on matters they don’t have the authority to handle. For example, they should follow proper decision-making procedures and avoid overstepping boundaries set by the HOA’s rules.
Can HOA Board Members be Sued?
Board members can be sued, and homeowners can sue board members for almost anything. However, whether or not the lawsuit is successful is another matter.
Board members have certain liability protections in place. Such protections usually appear within the association’s governing documents, such as the articles of incorporation or the bylaws. State laws can also protect board members from liability.
Can HOA Board Members be Held Liable?
In certain situations, yes, a court may find HOA board members personally liable. This usually happens when the board member commits fraudulent acts or exhibits malicious behavior. Just because a board member has protections doesn’t mean they are free to do anything, with no accountability for their actions.
Below are some examples of when a court may hold a board member personally liable:
When a board member uses the association’s money for personal purposes;- When a board member displays negligence in fulfilling their duties; and,
- If a board member prioritizes their personal interests before the community’s.
It can be frightening when a homeowner personally names a board member in a lawsuit. Most board members don’t know how to react. However, the first action should be to inform the HOA’s insurance provider. It is essential to forward a copy of the lawsuit to the insurance company and tell the insurance agent the details.
It is also critical to contact an attorney. An HOA attorney can help the board members determine the next steps and represent the association if the case goes to trial.
How to Limit HOA Board Member Liabilities
The legal risks associated with board membership are one of the major deterrents to homeowners from volunteering. However, certain protections also keep these liabilities at bay.
Here are some things that can limit the liabilities of HOA board members.
State Laws
Many states have laws that protect board members from personal liability. This protection may cover issues like property damage, emotional distress, bodily injury, and even wrongful death. However, board members must meet certain conditions to be eligible. It’s important to review state laws to understand which protections apply.
HOA Bylaws
The HOA’s governing documents, including the bylaws, may include provisions stating that the HOA will cover board members’ legal expenses in cases of personal liability. However, these provisions typically exclude specific actions, such as willful, intentional, or reckless behavior, from qualifying for protection.
The Business Judgment Rule
Homeowners suing board members may encounter the protection of the Business Judgment Rule. This rule shields board members from personal liability if their actions or decisions were reasonable and made in good faith.
In most cases, the Business Judgment Rule favors the board. If board members acted within their authority, a judge may dismiss the lawsuit, even if the decision proved incorrect. The critical factor is whether the board member upheld their fiduciary duties and acted in the association’s best interests. Failing to do so could lead to a claim of breach of fiduciary duty.
The Business Judgment Rule favors board members because these roles are unpaid volunteer positions. Without legal protections, finding individuals willing to serve would be difficult.
Courts recognize that board members are not perfect and may occasionally make mistakes. However, if the board member did not act fraudulently or egregiously, the court will unlikely allow the case to proceed.
D&O Insurance and General Liability Insurance
The HOA’s Directors and Officers (D&O) insurance can also provide protection when a board member is personally named in a lawsuit. A strong D&O policy can cover litigation costs and other expenses related to their role on the board.
Additionally, the HOA’s general liability insurance may offer some protection. While it primarily covers the HOA itself, it often includes limited coverage for board members.
HOA Lawyer vs Personal Lawyer for Board Members
An HOA attorney may represent both the HOA and individual board members. However, if interests conflict, the board member must seek separate representation.
Insurance companies typically decide if personal representation is needed. They evaluate the claim and potential conflicts of interest. If conflicts exist, the insurer may recommend separate legal counsel.
Keep in mind that the D&O insurance policy may not cover separate representation. Board members should clarify this with the insurance agent and the association’s governing documents.
Staying the Course
The legal liabilities of HOA board members can sometimes keep homeowners from serving the community. However, it is worth remembering that state laws, the HOA’s governing documents, and insurance provide protection. As long as board members uphold their fiduciary duties and do what’s best for the HOA, they should be clear.
Clark Simson Miller provides expert HOA management services to community associations, including legal and risk consultations. Call us today at 865.315.7505 or email us at help@csmhoa.com to get started!
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