Navigating the Liabilities of the Board
In our previous issue we discussed the primary principle and role of a Board member is to fulfill their "fiduciary duty" to the association. In this issue we want to follow that up by talking about the liability that comes along with it. Below are three scenarios that a collective Board, or an individual Board member, may face; an explanation of the protections that may be in place; and suggestions for ways to avoid being put in such a dilemma in the first place.
Issue 1: Resident Disputes with the Board
This is perhaps the most common issue a Board may face at one point or another. For some, it might be a chronic problem homeowner that just refuses to follow the rules. For others, it might be a single "hot button" or sensitive issue for a particular homeowner. In either case, if not resolved between the Board and homeowner, tensions may rise and the common threat "I will sue the Board/Association" will start flying around.
Protection: Directors & Officers Insurance - and Statutory Securities
As part of the master insurance package, most associations carry a "Directors and Officers" policy. Typically, this policy carries $1,000,000-$2,000,000 in coverage and it protects the association from lawsuits against the Board for "wrongful acts." In the case of a homeowner feeling like they are being singled out or discriminated against, a claim would be filed and the insurance company would help navigate the lawsuit by assigning legal representation for the Board.
Additionally, so long as no member is receiving any compensation, Boards are afforded statutory protections under the Minnesota Nonprofit Corporations Act (Statute 317A.251). It provides that "a director shall discharge the duties of the position...in good faith, in a manner the director reasonably believes to be in the best interest of the corporation, and with the care of ordinarily prudent person in a like position would exercise under similar circumstances."
Suggestions: Fairness & Consistency
Put simply, be consistent in how homeowners and homeowner issues are handled. A good example is with a chronic problem homeowner - if you are enforcing a particular rule against him or her, you must enforce it for everybody. Additionally, if your governing documents provide a framework for enforcement of rules, or if you are subject to the Minnesota Common Interest Ownership Act (MCIOA or Statue 515B), homeowners need to be given the opportunity to appeal or have a hearing before any financial consequences (such as fines) are brought upon them. It may seem like a headache to go through such steps when there is a clear violation of a rule or policy; however, if proper procedure is not followed larger headaches may loom.
Issue 2: Misuse or Theft of Association Funds
While it is fairly rare, from time to time an association may find themselves in a situation where a Board member is caught stealing association money, embezzling funds, or taking some form of "kickbacks." It goes without saying that this is a serious matter with significant implications for the association and the financial well-being of the organization; and significant, and possible criminal, implication for the Board member breaching, quite literally, their fiduciary duty.
Protection: Crime & Fidelity Insurance
As part of the master insurance package, most associations carry a policy called "Crime and Fidelity." This policy protects the financial assets of the association. At a minimum, it should always be equal to the amount of money on the books for the association (the typical balance of the Operating checking account and the average balance of the Reserve Fund).
Suggestion: Transparency & Authorization Steps
One of the more common ways that association funds seem to disappear is in small, recurring increments. Maybe it's a percentage of the washing machine money that doesn't seem to make its way to the weekly deposit; petty cash transactions of equipment or supplies that never seem to find their way into the association's inventory; or mishandling of association fees for amenity rentals. There are many scenarios. It is best to have all handling of money facilitated through employees, the managing agent or the management company. It provides for better protection (through additional insurances) for the association, reduces exposure, and mitigates liability on association volunteers. It is also wise to specifically name the management company and/or any individuals that might be directly or indirectly handling funds on the policy.
Another possible scenario is the mishandling of the association's accounts - particularly the Reserve Fund. Often times it is a particular Board member that is the listed "authorized signer" on the Reserve account. While uncommon with associations that are under professional management because there is an ever watchful eye kept on the account activity, it is not out of the realm of possibility for said signer to erroneously request funds to be withdrawn. A great way to safeguard against this is to simply have a written policy for the Board to specifically approve the transfer or removal of funds - and to require that the financial institution receive authorization from multiple account signers.
Issue 3: Abuse of Power
When you really boil down the responsibilities entrusted to, and the authorities granted by, the Board of Directors of a community association, it is quite profound the impact that a group of volunteers can have on the operations of a property and the governance of a community. It's a role that should not be taken lightly. Unfortunately, there are times when that influence is unintentionally misapplied - or outright misused.
An example of the former might be a Board member, or the Board as a whole, making impactful decisions outside of a Board meeting. Renewals or cancelations of contracts is a specific example. An example of the latter might be a Board creating and/or enforcing rules or policies that go against the legal governing documents of the association - and therefore infringing on the ownership rights of the members. A specific and common example of this is an association that wishes to restrict the rental of homes by creating a cap limit policy in the Rules & Regulations. If the Declarations state the owners have the right to rent their home, you cannot create a rule(s) that infringes that right. There is a hierarchy of governing documents.
Protection: Directors & Officers Insurance
As previously mentioned, a Directors & Officers insurance policy covers "wrongful acts" of the Board. The scenarios listed above would likely fit such a definition. The Board was acting outside of its scope of power and should a homeowner sue, this policy would likely cover legal expenses and settlements.
That said, Board members are still subject to personal lawsuits which would not be covered under any association insurance policy.
Suggestions: Following Governing Documents Procedures
Volunteer Boards and Board members are asked to do a lot. And they must work within appropriate ethics, and under the umbrella of their fiduciary duty. Unfortunately, that means taking on liability. Ways to avoid the abuse or misuse of power scenarios listed above can be overcome by complete transparency, careful utilization of resources such as legal advice from attorneys or guidance from management. Any decision that has financial or policy impact should be made during an official Board meeting where it can be documented in the minutes. Governing documents may sometimes specify how and when decisions can be made outside of a meeting. A common doctrine is to only carry out an action or decision via email when said decision is unanimous. Be very cautious and consistent on how and where decisions are made.
, there are many exposures for the Board of Directors. These scenarios listed above may be rare; nevertheless, they can happen if the Board as a whole, and each individual making up the Board, does not take their roles and duties seriously.
Remember the following key principles;
- Transparency for all actions, decisions and records.
- Fairness and consistency in the handling of all issues involving homeowners.
- Understanding of the governing document's framework and requirements on all matters.
- Professionalism at all times when representing the association. As an elected director of your association, you are ALWAYS representing the association!