Board Members May Be Sued Individually

Published on: May 23, 2001

Sometimes, we get so wrapped up in new and emerging trends in Community Association law that we forget to look at the basics. It is sometimes easy to forget that although many professionals have been involved with Community Association law for years, that new Board Members are getting elected daily throughout the country. Recently, I have heard several instances where Board Members have stated that they could not be sued individually. More importantly, we have witnessed a recent upturn in cases where Board Members are being sued in their role as Board Members, as well as in their individual capacities. The answer to whether a Board Member can be sued individually is obviously “Of course they can be”. As one of my partners is fond of saying, “You can be sued for breathing”. The next issue is whether these can be valid claims and whether a defense will be provided. Unfortunately, in some cases the answers are that one may have a valid claim against a Board Member individually and certain claims and the defense of the claims are not covered by insurance. Very recently, a Massachusetts Trial Court on a Motion to Dismiss individual claims against Board Members denied the Motion to Dismiss stating that there could be a set of circumstances whereby the individual Board Members could be held personally liable. Since Motions to Dismiss are filed at the early stages of the Complaint, the issue is to whether the ultimate finding of the Court would be that the Board Members are personally liable, and more likely than not the Board Members will not be held personally liable. Because the Complaint is for a fairly routine set of circumstances relating to water infiltration into a unit, there is some cause to be concerned. The Association Boards in most states do not have immunity from suits against themselves. At a time when more and more Boards are finding that it is difficult to get volunteer Board Members, it is critical to the viability of Associations to protect the Board Members from individual liability. Although this article is not intended to be an extensive examination of those protections which a Board Member may take, the following are a few steps that a Board Member may consider examining.

1. Personal Liability – A Board Member individually will not be personally liable for a mistake of judgment, negligence, or otherwise, except for his or her own willful misconduct and bad faith. Unfortunately, the language differs from document to document, and Board Members would be wise to review the language, and if necessary, to attempt to have the language amended. For example, language which states that a Board Member should not be personally liable unless he or she acts in a grossly negligent manner and in bad faith and only if a court adjudicates them to have so acted gives more protection than a typical personal liability clause. Anyone can have their own opinion as to whether someone acted in bad faith and the claims may be denied as it is determined whether the Board Member did act in good faith. A clause which indicates that the liability arises only at such time as there is adjudication that one has acted in bad faith, at the very least, provides a defense of the individual claims by the Association until such time as a court determines whether there was bad faith.

Many Board Members have a false sense of security in believing that because they are indemnified by the other owners that they will never be responsible for any amounts. However, it should be kept in mind that indemnification is simply the obligation of the other owners to pay back to the individual Board Members that which the individual Board Members had to expend. Although most claims against Boards are covered by insurance and are covered with adequate funds in the Association’s accounts in any event, there may be cases where a judgment could enter for an amount far in excess of the amount of insurance. For example, there is little satisfaction in having $1,000,000.00 of insurance coverage if a court or jury awards someone $10,000,000.00 against you. In addition, if the owners can’t afford to indemnify you, then in essence the indemnification against you is worthless. It would seem that Board members or potential Board Members should review the personal liability and indemnification sections of the governing documents and decide whether an amendment thereto might be desired.

2. Insurance – As stated earlier, insurance often will kick in to defend and pay claims made against Board Members either in their individual capacities or as Board Members. However, simply having general liability insurance and director’s and officer’s liability insurance does not mean that all insurance coverage is alike. An experienced insurance advisor, who for purposes of the insurance review is not attempting to sell the Association insurance, could be quite helpful in reviewing insurance policies to determine which policies afford the greatest amount of coverage. In addition, an experienced insurance advisor can check the rating of the insurance carrier since it is possible that some insurance carriers are in weaker financial positions than others. The insurance advisor should also be requested to provide information as to how good the insurance carrier is at defending and paying claims. It is little consolation to find out after a claim has been filed against you individually that the insurance company prefers to deny claims unless pushed or likes to reserves its rights under its coverage so that it may defend its claim, but at the end of the case determine that there is no coverage. Some states, including Massachusetts and California, have court decisions which indicate that if an insurer defends under a reservation of rights that the insured has the right to have counsel of its own choosing to defend the claim at the expense of the insurance carrier. Other states do not offer this type of protection. Board Members should also be careful about having a false sense of security in cases whereby the insurer states that they will defend the claim as to certain causes of action, but will not defend it against others. For example, it is common that punitive damages would not be paid for by the insurance carrier since many states indicate that this would be against public policy. However, it is very common for a Board to have a claim defended by the insurer’s choice of counsel without really understanding that defending and paying for certain causes of action does not give the Board total protection and that their own counsel may need to get involved in the matter.

Since I tend to believe that everyone in the world should have an umbrella insurance policy, that they pay for on their own, for their own protection, I certainly would suggest that Board Members consider this coverage even more strongly since they are exposed to other homeowners and the more involved one gets, unfortunately, the more likely that one might get sued.

In states like Massachusetts, where Boards are typically Trusts or in other states where Boards are unincorporated Associations, Boards may want to discuss with their legal counsel whether they should have corporate Trustees or whether an Amendment to the documents changing from a non-incorporated Association to an incorporated Association would make any sense. Although this might be difficult to sell to the unit owners, if an Association gets to the point where no one will serve on the Board, the unit owners may change their opinion as to the benefit of considering these Amendments.

Boards should check with CAI and other organizations dealing with Community Associations to see if there is any active or pending legislation to provide volunteer Board Members with certain types of immunity from suit. Finally, I suppose every Board Member should find out whether they are insured if they resign from the Board tomorrow and get sued a year from now for something they allegedly did as Board Members three months ago. In other words, Board Members should check with their insurance advisors to determine whether they are protected under the Director’s and Officer’s Liability insurance once they resign from the Board or are removed from office. One would hate to discover that they must remain on the Board for life in order to have the benefit of the insurance protection and, therefore, it is always better to ask this question before getting on the Board versus after this is done.