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.