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Feldsott Lee Pagano & Canfield
Orange County Homeowners Association Law Firm

Director duties and potential liability: is your board protected?

By Jacqueline Pagano, Esq.

Volunteer directors serve an important, often underappreciated role in community associations. Having been vested with considerable power, board members also have specific legal duties, and with these duties come potential personal liability. The following shall summarize what you need to know in order to protect your board and shield your directors from potential liability.

Directors of community association are fiduciaries who owe a duty of due care and a duty of loyalty to the association and its members. To fulfill this duty, directors must be diligent and careful in performing the duties they have undertaken, and directors must act in the best interest of the association, even if at the expense of their own interest. If a court finds that the directors breached their fiduciary duty, it may rule the board's action invalid and hold the directors individually and personally liable.

In addition to being fiduciaries, directors are also held to a statutory duty to exercise ordinary care in their actions as directors. Thus, a director must perform his or her duties in good faith, in a manner the director believes to be in the best interest of the association, and with such care, including reasonable inquiry, as an ordinarily prudent person would use. In exercising such care, a director is entitled to rely on information, opinions or reports presented by competent professionals.

A director who acts in accordance with the above requirements is shielded from personal liability based upon any alleged failure to discharge the person's obligations as a director. Breaches of the above duties, however, may subject a director to personal liability. Breaches might include mismanagement of association funds, failure to enforce governing documents, and failure to maintain the premises so that property values depreciate. Directors further have a duty to exercise sound fiscal management in managing the association's funds. Failing to adequately fund reserves and/or failing to adhere to operating budgets may constitute breaches of the directors' fiduciary duty and duty of ordinary care for which directors can be held personally and individually liable.

While vested with a duty of ordinary care, directors of community associations are not guarantors of the success of the association and are not liable for mere mistakes in judgment. Courts recognize that directors must sometimes make difficult cost-benefit decisions and will not second- guess those decisions as long as the directors acted in good faith, in a manner they believed to be in the best interest of the association, and as reasonably prudent people. Thus, directors are protected against personal liability by the "business judgment rule" only to the extent that they have acted reasonably and made decisions based on reasonable inquiry, investigations and reliance on experts' opinions. While the "business judgment rule" may protect the directors from individual liability, it does not shield the association from potential liability for acts or omissions sanctioned by the board.

Finally, individual directors who satisfy both their fiduciary duty and their duty of ordinary care toward the association and its members can still incur liability for both negligence and intentional torts. For instance, directors may be held personally liable for negligently failing to maintain the common areas where such failure results in personal injury, emotional distress, property damage or loss. Personal liability for tortious conduct (including negligence), however, is limited by Civil Code ยง5800. Under this section a volunteer director acting in good faith and within the scope of his or her duties will not be personally liable in excess of insurance coverage, so long as the act was not wilful, wanton, or grossly negligent and the association maintains both general liability coverage and director and officer liability coverage in the minimum amounts of $500,000.00 for developments of 100 or fewer separate interests, and $1,000,000.00 for developments with more than 100 separate interests. By failing to maintain insurance in the statutorily-required amounts, an association is exposing its volunteer directors to potentially having to pay out of their own pockets should they be found liable for failing to maintain the common area resulting in injury, property damage or loss. Accordingly, associations should always maintain adequate director and officer liability coverage.

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