Fiduciary Responsibility of HOA Board Members

The fiduciary duties of HOA Board members mainly arise from state corporate law. Most HOAs  are nonprofit corporations, typically formed by filing articles of incorporation in the state where  the development is located. Recognizing that a corporation’s board members serve in a position  of trust, every state’s corporation law imposes a fiduciary duty on the corporation’s board of  directors, requiring them to act in the best interest of the corporation.  

Subject to some limitations, this fiduciary duty applies to HOAs even though they are typically  nonprofit corporations, and even though HOA board members are usually volunteers.  

A Board member’s fiduciary duties involve three basic components: the duty of care, the duty  of loyalty and the duty to act within the scope of its authority.  

The Duty of Care  

To meet the duty of care, an HOA Board member must make informed decisions, which might  require a bit of research before you act or vote on an HOA matter. For example, before fining a  homeowner for a rule violation, you must familiarize yourself with the association's CC&Rs, and  the details of the situation, such as by talking with the homeowner. HOA Board members must  also act in a prudent and reasonable manner, basically using sound business judgment, and  avoiding arbitrary or capricious actions. For example, you can’t fine a homeowner for painting  his or her home red just because you don’t like that color, if this is not a violation of association  rules.  

The Duty of Loyalty  

The duty of loyalty requires that HOA Board members act fairly, in good faith, in the interest of,  and for the benefit of, the HOA as a whole, rather than make decisions based on any personal  interest or gain. HOA Board members should also avoid acting where there is a conflict of  interest. For example, a Board member who is helping select landscapers for the property  should not steer contracts for landscaping to family members. Or a Board member who owns a  purple house should not participate in a Board vote on whether or not to allow pink and purple  homes in the development.  

Additionally, an HOA Board member must protect members’ confidentiality, and not divulge  information provided in confidence. For example, if a home owner confides in a Board member  about his impending home foreclosure in order to arrange a payment plan for HOA dues, the  Board member should not disclose the information to a friend or neighbor 

The Duty to Act Within the Scope of Authority  

This duty requires the HOA Board to perform the duties it’s obligated to carry out, but prohibits  the Board from making decisions or acting on matters without the authority to do so. The  authority of an HOA comes from its obligations under state laws, as well as the authority  granted to it in the development’s governing documents. (See What’s in the Basic Governing  Documents of a HOA for details.)  

To ensure you meet your obligations as a Board member, you must know what duties are  required. Review your state law and HOA’s governing documents, specifically the articles of  incorporation and bylaws, and your development’s CC&Rs to determine the HOA’s obligations,  and the extent of its authority. For example, if the laws or governing documents do not grant  your HOA Board the authority to adopt new rules and regulations, any restrictions the HOA  adopts about home colors might be invalid.  

See the section “Learn More,” below for advice on finding relevant state laws and governing  documents.  

HOA Board Member Protection from Personal Liability  

Many HOA board members are understandably concerned about their personal liability for  lawsuits. Unhappy homeowners can sue the HOA and the Board members individually for any  number of reasons--for example, if the HOA fails to properly maintain a common area, or  discriminates when enforcing a rule. The best protection against liability as an HOA Board  member is to take what you do seriously. You can avoid a breach of fiduciary duty by fully  informing yourself before making decisions, ensuring you have the authority to act, and always  acting in the best interests of the HOA.  

In addition, some forms of protection from personal liability are available from your state law,  your development’s governing documents, and/or your HOA’s insurance.  

State Laws Limiting HOA Board Member Liability  

Many states have laws that reduce the standard of care required, or limit the personal liability  of a nonprofit corporation’s Board members. For example, in Colorado, the articles of  incorporation or the bylaws of a nonprofit corporation can contain limitations on the personal  liability of its board members. (See CRS §7-128-402 for details.) And in California, the board 

members of an HOA (if it’s a nonprofit or a mutual benefit corporation) are not personally liable  for any damage exceeding what’s covered by the HOA’s insurance. (See Cal Corp Code Section §  5047.5 for details.)  

How HOA Governing Documents May Limit Board Liability  

Your development’s governing documents might also offer some protection. Typically an HOA’s  bylaws or the development’s CC&Rs contain indemnification provisions, which require the HOA  to reimburse its Board members for any expenses incurred in connection with their work on the  Board (including expenses incurred defending any lawsuit).  

These provisions, however, usually contain exclusions for a Board member’s gross negligence or  willful misconduct—for example, a Board member might be held liable for gross negligence if  he or she blocks a vote to fix or remove a common area swing that’s about to break, even when  repeatedly warned by an expert of the likelihood that a child will get hurt on it.  

HOA Insurance That Protects Board Members  

Your HOA’s insurance can also provide important liability protection for Board members.  General liability insurance is not enough, however. Liability insurance only protects the HOA  itself from personal injury or property damage claims. Your HOA should have adequate  Director’s and Officer’s (D&O) insurance, which is meant to protect board members in claims  for the breach of a fiduciary duty