Serving on your association’s board of directors can be a gratifying experience. As a board member, you make decisions that help keep the association’s space beautiful and functional for the benefit of the entire community. On the other hand, the possibility of legal action being taken against the board is always present. Understanding the most common types of allegations against boards, as well as how to safeguard against them, can minimize the risk of such lawsuits.
If a board is named in a suit, Directors & Officers Liability Insurance protects past, present, and future board members from financial consequences due to alleged wrongful acts, decisions, or omissions. In the event of a covered claim, the policy pays for the loss if the board loses the lawsuit. It also covers the association’s legal defense costs. These costs to defend will fall to the board, regardless of whether an allegation against an association’s board is determined to be true. Below are the most common incidents that give rise to Directors & Officers Liability Insurance claims.
- Breach of fiduciary duty – An association’s board of directors has a legal obligation to act in the best interests of the association. Boards may be sued for breach of fiduciary duty if someone alleges that this obligation was not upheld. Some common examples include failure to enforce the governing documents, enforcing governing documents inconsistently, or failure of due diligence prior to a financial decision.
- Discrimination – Community associations may be sued under the Fair Housing Act or the Americans with Disabilities Act if a decision made by the board is construed as a wrongful act or discrimination. Examples include failure to make reasonable accommodations for a disabled homeowner, as well as discriminatory acts based on age, race, or religion.
- Violation of Covenants, Conditions, and Restrictions (CC&Rs) – An association’s CC&Rs detail rules that must be followed by unit owners, board members, and the association. If someone feels the board has violated part of the CC&Rs, they may sue. These violations may include misuse of funds, failure to maintain common elements, denial of unit owner architectural modification requests, or suits challenging an HOA fine assessed against a unit owner.
To help prevent lawsuits and claims against the board of directors, take preventative measures to avoid issues from arising in the first place.
- Educate and train board members – Board members should understand and regularly review the governing documents and reserve study. They should understand what their fiduciary responsibilities entail.
- Leverage professional guidance – Speak with the board’s legal counsel, insurance agent, and other advisors and follow their advice.
- Obtain comprehensive Directors & Officers Liability Insurance coverage – Ensure the association always carries a D&O policy that includes appropriate coverage provisions.
The first step board members can take to avoid lawsuits and claims is to understand the common issues that give rise to disputes within community associations. With forethought and prevention, your association’s board will be prepared for the challenge of serving your association.
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