For homeowner's association volunteers, a very real concern is the possibility of legal threats that may be levelled against the board. In a recent “Ask the Experts” webinar, Attorney Chris Gelwicks provided information on what community association board members should do when faced with threats of litigation from homeowners. Though these threats may be considered empty, they should always be taken seriously and promptly addressed. In this article, we’ll discuss how to determine the legitimacy of the threat, protections for board members, common real threats, and some best practices to avoid being threatened with legal action.
Evaluating the Legitimacy of the Threat
When board members are told “You’ll be hearing from my lawyer!”, the nature and legitimacy of the threat must be evaluated. The first question that comes to mind is “Can I be sued for that?”, and unfortunately, the answer is probably yes as we live in a litigious society where anyone can be sued for anything. But the real question board members should ask themselves is “If I’m sued, can I really be held liable?”. The answer to that question is often no, as many of these threats derive from association members simply trying to rattle the board.
Hearing “I’ve contacted my lawyer” from a homeowner is more often than not a scare tactic as hiring an attorney is costly and most people will not go to that length unless the issue at hand is extremely serious. If a member says, “My lawyer looked at this and says I’m right”, the best response board members can give is “If you’ve gotten an attorney involved, I can no longer speak on this matter”. If the threat is flimsy, that is typically the end of the conversation. However, anytime this happens, board members should immediately contact their community manager and the association’s attorney must be made aware. Should the threat lead to further action, the association must inform the insurance company because the association’s Directors and Officers Liability Insurance Policy may need to respond.
There are some instances when the legal threat being posed to board members is real and should be taken seriously. Most often, these serious threats center around a breach of fiduciary duty. A breach of fiduciary duty essentially exists if board members aren’t acting in the best interest of the association. Directors are required to act in good faith, exercise business judgement and prudent care, and always act in the best interest of the association. Some common examples of fiduciary duty breaches are:
- Failure to maintain the common areas
- Not properly funding the association
- Taking actions outside the board’s scope of duty
- Taking actions that show a personal grudge is held against a member
Protections for Board Members
Board members and the decisions they make are provided some protections from a few different sources. One of the main protections for board members is simply adhering to their fiduciary duties and using the “business judgement rule". A director isn’t liable for an action or decision as long as they’ve performed their duties in compliance with state statutes and the association’s governing documents. The decision may be good, bad, or even outright stupid, but if it was made in compliance with all state and association requirements, and the board members acted in good faith and in the best interest of the association, then board members are generally relieved of liability.
Indemnity clauses are not a “get out of jail free” card; however, directors (both personally and the board as a whole) may be indemnified – meaning protected from liability – if they’ve exercised good judgement and reasonably believed the action was in the best interest of the association. Though both North Carolina & South Carolina Nonprofit Acts, as well as the majority of association bylaws include indemnity clauses, not all do. If your community’s bylaws make no mention of this, changes should be considered and can be discussed with your attorney.
There are also protections in place for board members that are provided by insurance policies. This comes in the form of Directors & Operators (D&O) insurance. These policies cover legal costs associated with being sued for an action taken as a board or committee member. Keep in mind, however, that insurance companies will only cover these costs if the director has acted in good faith and is not found guilty of the infraction. Neither North nor South Carolina require nonprofit corporations to carry D&O insurance, but it is highly recommended that all boards of directors maintain these policies. D&O policies can vary significantly in the protections that they offer; therefore, it is important for the board to verify the policy information with the association’s insurance agent and to ensure that such policies remain in force at all times.
As we all know, there are some people who will never be happy regardless of any decision that is made. When dealing with disgruntled community members, it is key not only to continue to exercise the business judgement rule, but also to document everything that went into making decisions and to ensure consistency when enforcing association policies.
A good example is a community member having an issue with a neighbor’s architectural change even though the change was properly requested and approved and is in compliance with governing documents. Say a homeowner installed approved solar panels on their home but their neighbor is upset about the glare they create during the day. The unhappy neighbor may demand that the board rectify the situation in their favor, but since the panels went through all proper channels prior to installation, the board is limited as to what can be done about it. These types of conflicts are neighbor-to-neighbor conflicts and are something the board should steer clear of. Getting involved in homeowner disputes could lead to allegations of breach of duty as it would require using money and other resources on problems that aren’t those of the association.
Putting Forth a United Front
Community association board members must always remember to put on a united front regardless of the opinions of individual board members. If a decision wasn’t passed unanimously, for example, and 2 out of 5 members dissented, the dissenting members should not publicly express their opinions on the matter. Publicly expressed dissent can lead to dissension in the membership which can open the door to allegations of breach of duty. Furthermore, while board members cannot exercise authority outside the context of official board actions, homeowners often confuse the individual with the role, therefore board volunteers should always be careful to avoid making statements that could be misconstrued.
Communication and Best Practices
Most of the world relies on digital communications these days and, while convenient, these communications, such as emails or social media posts, can lead to trouble if not carefully worded. When drafting emails related to association business, board members should write under the assumption that the correspondence could be read by anyone. When communicating with the membership, stick to the facts and always remain professional – failing to do this could lead to liability issues, especially if it seems the board is acting vengefully or has a grudge against a particular homeowner. Board members should also be very careful about what is said at meetings – an utterance under the breath could be heard by anyone and lead to a host of issues.
One of your primary concerns as a board member should be fulfilling your fiduciary duties. By using all available resources (contractors, attorneys, community managers, e.g.), speaking with a united front, knowing indemnity provisions, and staying out of homeowner-to-homeowner disputes, board members have a good chance of avoiding legal threats.
If your community association’s board of directors needs trusted guidance on avoiding legal issues or handling them when they arise, please reach out to the experts at CAMS today via our website or at 877.672.2267. Our community managers have experience dealing with all types of association issues and can skillfully guide your board to ensure the best possible outcome.