I want to serve on my community’s board of directors for the lucrative salary . . . said no board member ever! Nevertheless, serving on the board of directors for your community can be a satisfying and rewarding experience. But sometimes boards hit rough patches and fall under the scrutiny of their owners, who can be less than nice or understanding. Oftentimes, board members are criticized and threatened with legal action if owners do not perceive them to be acting “appropriately”, leaving directors and officers nervous and wondering whether they have personal liability exposure.
Below are five steps you can take to protect yourself and your fellow board members from liability exposure when you hit those rough patches—because the pay just isn’t enough.
- Limitation of Liability Clause. Ensure your articles of incorporation contain a “limitation of liability” clause, which provides that directors will not be personally liable for any action they take in the course of managing the association as long as such actions do not involve intentional misconduct, knowing violations of the law, or any transactions from which directors derive an improper personal benefit. If your articles do not contain such a provision, you should consider proposing an amendment to your membership for this reason alone.
- Make Informed Decisions. Colorado law requires board members to make decisions in a “prudent” manner. This means directors must become informed on the issues at hand before making decisions. For example, if the board needs to decide on the scope of structural repairs to the building, the board must obtain an expert opinion as to the recommended scope of work before making a decision on how to proceed. The best part about relying on an expert opinion is if the board makes a decision in reliance on an expert, it will be protected from personal liability even if the decision ends up being wrong.
- Indemnification Provisions. Indemnification provisions protect individual board members by requiring associations to pay for their legal defense in the event directors are individually sued based on action they took in the scope of their duties as a board member. Therefore, it is important to make sure the bylaws and/or articles of incorporation contain indemnification provisions protecting directors to the fullest extent permitted by law. Indemnification provisions:
- Should require indemnification, rather than permit it;
- Should require advancement of defense expenses; and
- Should NOT link indemnification to availability of insurance proceeds
- D&O Liability Insurance. Directors’ and officers’ liability insurance (“D&O”) is the policy allowing associations to indemnify directors and officers if they get personally named in lawsuits. The D&O policy steps in and pays legal defense costs (and damages, if awarded) to defend the named director/officer in a lawsuit. The D&O policy, at a minimum, must contain the following:
- Coverage for legal defense for both monetary and non-monetary claims;
- Coverage for all current and past directors, officers, committee members, volunteers, and managers;
- Coverage that includes defense of discrimination claims; and
- Attorney fees must be outside the policy limit;
- Comply with Governing Documents. No matter how much a board does not like covenants and requirements of the association’s governing documents, it is required to comply with, and enforce, these requirements and restrictions. For example, if the declaration contains a prohibition on parking RVs, but everyone in the community has an RV and the board wants to allow owners to park RVs in the community, it must first present an amendment to the declaration to its members removing such restriction (and have the amendment approved) before the board can cease enforcement of same.
Unless the declaration is amended (with the appropriate owner approval), the board is required to enforce the RV restriction or it (and individual directors) will be exposed to liability for failing to comply with the association’s governing documents. Therefore, if your documents contain outdated restrictions that no longer serve the community, consult with the association’s attorney immediately to determine the process for amending such provision out of the document. Until then, however, keep enforcing it as written.
Please do not hesitate to contact an Altitude Community Law attorney at 303.432.9999 if you have any additional questions concerning limiting liability exposure for directors.