When a candidate accepts their election to the board of directors, they take on a number of duties it comes with a set of risks. We always recommend that each association provide great insurance coverage for their board members and access to the education they need to help prepare them to successfully carry out their duties. That is why it’s important to check this Guide to Fiduciary Duty.
If your association is lacking in either area, please consider insurance and education, such as Boardline Academy, as an investment in protecting your association’s members and your board members personally. Board member responsibilities are real, but our goal is to help you navigate risk and understand your duties, so you can be the best board member you can be.
Today, we’re going to discuss these board responsibilities, how board members can follow them, and the legal protections for conscientious board members.
What Is Fiduciary Duty?
Fiduciary duty consists of the responsibilities held by certain persons in positions of trust. Depending on a state’s specific laws, community association board members may legally be considered fiduciaries. Board members may be considered fiduciaries because they are elected to a position of trust to protect the value of homes belonging to all the members of the community.
Even if an association’s state law does not hold its board to the heightened standard of a fiduciary, the board still has an obligation to act within the scope of its authority and discharge its duties with proper care and loyalty. Doing so will help protect the board if legal action is taken against the association and ensure that the association is run efficiently and with care.
A board member’s fiduciary duties can be broken into three different responsibilities, which we will review below.
Duty of Care
First, the duty of care requires fiduciaries to research thoroughly and think carefully before making decisions on behalf of the association. This involves becoming familiar with the association’s governing documents and getting expert advice when necessary, among other actions the board can take to help them make wise decisions.
Duty of Loyalty
To follow the duty of loyalty, board members must act in the best interests of the association as a whole, as opposed to acting in their own self-interests or in the interests of a friend or family member. This means that a board member would vote to raise assessments to cover necessary HOA costs even if it hurt their personal finances or vote to send a parking violation notice to their best friend just as they would respond to any other homeowner’s parking violation.
The duty of loyalty also requires a fiduciary to avoid conflicts of interest, which exist if a board member would receive money personally because of a decision they made in their position on the board. For instance, a board member should not vote to hire their own plumbing company (or a family member’s plumbing company) to complete work for the community association and should disclose any such conflict, in advance, to the board.
Scope of Authority
Board members should also act within the scope of their authority, as detailed in the association’s governing documents and state law. An association’s bylaws should explain the roles and responsibilities of board members, as well as the limits to their authority.
For instance, if a membership vote is required to impose a special assessment, the board cannot vote to approve the assessment instead. Additionally, if the board must vote at a properly noticed, open board meeting to hire a new contractor for the HOA, a single board member cannot select and hire a contractor on their own.
The Business Judgment Rule
Board members that strive to uphold these fiduciary duties are better protected under the business judgment rule than less fastidious boards. The business judgment rule is the legal presumption that board members act in the best interests of their corporation. Unless someone can prove that the board did not act with reasonable care, in the association’s best interests, and within their scope of authority as a board member, the board members are generally protected from personal liability for negligence or mistakes made in their association role.
Directors’ and officers’ insurance policies also typically cover negligent acts and omissions by board members protected by the business judgment rule. Negligent acts or omissions occur when a board member does not use the prudence and care a reasonable person would in similar circumstances. For instance, if a board member forgets to lock a clubhouse door, and as a result, the association’s television and computer are stolen, this would generally be considered a negligent omission.
Gross Negligence & Intentional Acts
However, there are still some types of actions and inactions that an association board can be held legally liable for. These include grossly negligent acts and intentional wrongful actions.
Grossly negligent actions and omissions occur when the board member should have recognized that their action or inaction was dangerous or harmful. For instance, if the clubhouse porch caves in so that there is a large hole near the front door, but the board does not act to close off the area and hire a contractor to repair it, the board has committed a grossly negligent act.
Intentional wrongful actions occur when a board member acts with the intent to do harm. For instance, embezzling association funds or stealing association property would be an intentional act.
Lastly, it is important to note that every association’s governing documents should include an indemnification provision that protects its directors, officers, employees, and others who work for the association from liability for actions taken in the discharge of their duties. For example, this provision would state that the association is responsible for paying legal fees and damages that board members, officers, committee members, and other association volunteers incur in a lawsuit because of their service to the association.
If this provision is not included in the association’s governing documents, the board can contact the association’s legal counsel to see if the governing documents could be amended.
For more information on the topics covered in this article, you can review our Business Ethics & Professionalism course.