The day-to-day business of most planned developments, such as managing finances and maintenance, is typically run by its homeowner association (HOA) board of directors (the "board"). If you live in a planned unit or common interest development, serving on the board can be an important way to impact, and help maintain, the well-being of your community. However, to serve responsibly, and avoid potential legal liability, you'll need to know what your fiduciary obligations are as an HOA board member. Breach these, and you could face personal liability for your actions or errors.
The fiduciary duties of HOA board members mainly arise from state corporate law. Most HOAs are nonprofit corporations, typically formed by filing articles of incorporation in the state where the development is located. Recognizing that a corporation's board members serve in a position of trust, every state's corporation law imposes a fiduciary duty on the corporation's board of directors, requiring them to act in the best interest of the corporation.
Subject to some limitations, this fiduciary duty applies to HOAs even though they are typically nonprofit corporations, and even though HOA board members are usually volunteers.
A board member's fiduciary duties involve three basic components:
To meet the duty of care, an HOA board member must make informed decisions, which might require a bit of research before you act or vote on an HOA matter. For example, before fining a homeowner for a rule violation, you must familiarize yourself with the association's CC&Rs, and the details of the situation, such as by talking with the homeowner.
HOA board members must also act in a prudent and reasonable manner, basically using sound business judgment and avoiding arbitrary or capricious actions. For example, you can't issue a fine against a homeowner for painting a home red just because you don't like that color, if this is not a violation of association rules about house paint color.
The duty of loyalty requires that HOA board members act fairly, in good faith, in the interest of, and for the benefit of, the HOA as a whole, rather than making decisions based on any personal interest or gain.
HOA board members should also avoid acting where there is a conflict of interest. For example, a board member who is helping select landscapers for the property should not steer contracts for landscaping to family members. A board member who owns a purple house should not participate in a board vote on whether or not to allow pink and purple homes in the development.
Additionally, an HOA board member must protect members' confidentiality, and not divulge information provided in confidence. For example, if a home owner confides in a board member about his impending home foreclosure in order to arrange a payment plan for HOA dues, the board member should not disclose the information to a friend or neighbor
This duty requires the HOA board to perform the duties it's obligated to carry out, but prohibits the board from making decisions or acting on matters without the authority to do so. The authority of an HOA comes from its obligations under state laws, as well as the authority granted to it in the development's governing documents. (Find out What's in the Basic Governing Documents of a HOA.)
To ensure you meet your obligations as a board member, you must know what duties are required. Review your state law and HOA's governing documents, specifically the articles of incorporation and bylaws, and your development's CC&Rs to determine the HOA's obligations, and the extent of its authority.
For example, if the laws or governing documents do not grant your HOA board the authority to adopt new rules and regulations, any restrictions it adopts about house colors might be invalid.
Many HOA board members are understandably concerned about their personal liability for lawsuits. Unhappy homeowners can sue the HOA and the board members individually for any number of reasons; for example, if the HOA fails to properly maintain a common area, or discriminates when enforcing a rule.
The best protection against liability as an HOA Board member is to take what you do seriously. You can avoid a breach of fiduciary duty by fully informing yourself before making decisions, ensuring you have the authority to act, and always acting in the best interests of the HOA.
In addition, some forms of protection from personal liability are available from your state law, your development's governing documents, and/or your HOA's D&O insurance.
Many states have laws that reduce the standard of care required, or limit the personal liability of a nonprofit corporation's board members.
For example, in Colorado, the articles of incorporation or bylaws of a nonprofit can contain limitations on the personal liability of its board members. (See C.R.S. §7-128-402 for details.) And in California, the board members of an HOA (if it's a nonprofit or a mutual benefit corporation) are not personally liable for any damage exceeding what's covered by the HOA's insurance. (See Cal. Corp. Code § 5047.5 for details.)
Your development's governing documents might also offer some protection. Typically an HOA's bylaws or the development's CC&Rs contain indemnification provisions, which require the HOA to reimburse its Board members for any expenses incurred in connection with their work on the Board (including expenses incurred defending any lawsuit).
These provisions, however, usually contain exclusions for a Board member's gross negligence or willful misconduct—for example, a Board member might be held liable for gross negligence if he or she blocks a vote to fix or remove a common area swing that's about to break, even when repeatedly warned by an expert of the likelihood that a child will get hurt on it.
Your HOA's insurance can also provide important liability protection for board members. General liability insurance is not enough, however. Liability insurance only protects the HOA itself from personal injury or property damage claims. Your HOA should have adequate Director's and Officer's (D&O) insurance, to protect board members in claims for the breach of a fiduciary duty.