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What Happens When You Damage HOA Financial Management?

Posted by IKO Community Management on December 28, 2017 at 9:00 AM

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When you choose to handle the financial management for a homeowners association as a volunteer or elected official, you’re automatically subject to fiduciary duties. As defined by Nolo, this term comes from state corporate law and requires you to act in the best interest of the community.

The duties include the following three components, as defined by Nolo:

  • The duty of care. You must make informed decisions and research before acting or voting on a community matter.
  • The duty of loyalty. You must “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” or conflict of interest.
  • The duty to act within the scope of authority. You must perform obligated duties but not without the authorization to do so.

What happens if you breach any of these fiduciary duties?

  • You’re responsible for your personal actions. As an HOA board member, you’re a big part of the homeowners association. However, that doesn’t mean the association can protect you in all cases, especially if you abuse your power for individual gain.

    Personal liability is the biggest risk when taking on financial management for your homeowners association, and it goes beyond personal ethics. Liability is a factor in legal battles, too.

    "It's a common misconception that board members automatically have coverage for anything and everything under their directors' and officers' [insurance] policy," Dennis Eisinger, a partner at Eisinger, Brown, Lewis, Frankel & Chaiet, P.A. in Hollywood, Florida, said to HOA Leader.

    "If [a board member purposefully] did something wrong, there's a decent shot there wouldn't be coverage to protect them because it's an intentional act," Eisinger said.

    For example, if you’re allegedly caught embezzling money, you’ll likely get defense under the obligation of directors’ and officers’ insurance policy (also known as the D&O carrier). However, if someone gets a judgment against you, according to Eisinger, the insurance policy isn’t likely to cover it.

  • You’re not always covered by an indemnification clause. Many board members will also cite an indemnification clause in the CC&Rs, “a promise by the other party to cover your losses if they do something that causes you harm or causes a third party to sue you,” according to Startup Law Talk.

    This might work -- if your community offers one. However, this clause isn’t a saving grace.

    "If you're acting in self dealing or usurping corporate control or opportunities, you could be held personally liable," Lisa Magill, a shareholder and association attorney at Becker & Poliakoff in Fort Lauderdale, Florida, said to HOA Leader.

    "That's the whole point of indemnification. Directors are protected from personal liability, if they act within their fiduciary duties. If you go outside of those, you can be held personally liable."

    An example of this would be hiring a contractor out of nepotism. If the contractor performs their contracted duties at fair market value, you’d be within your fiduciary duties.

    However, if the contractor was hired because they gave you $1,000, you’re outside your fiduciary duties and subject to a lawsuit without the help of a D&O carrier or an indemnification clause.  

  • You’re subject to a lawsuit. Like we mentioned, a breach of fiduciary duty is a viable reason for your residents’ to take you to court. Generally, an element of criminal activity, unjust enrichment, or fraud is necessary to file a lawsuit, as simple negligence isn’t enough in many cases.

    If an HOA board member is caught breaching fiduciary duty, your whole community suffers. The reputation of your neighborhood is at stake for potential buyers and renters, and the HOA board has to take an in-depth look at financial management in the interim.  

While IKO Community Management doesn’t aim to frighten you away from handling financial management for your homeowners association, it’s best to hire an association management company to perform these duties. The consequences of breaching said duties are damaging, so contact IKO for financial help.

You can also download our guide to financial management for more information before committing to this board position:

Download The HOA Guide To Financial Management

Topics: HOA Board