In HOA financial management, a volunteer or elected official is legally subject to fiduciary duties. As defined by Nolo, "fiduciary duties" come from state corporate law and require HOA board members to act in the best interest of the community.
Fiduciary duties include the following three components, according to 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 HOA fiduciary duties?
You’re responsible for your personal actions. As an HOA board member, you’re a big part of the homeowners association. That doesn’t mean the association can protect you in all cases. This is especially true if you abuse power for individual gain. Personal liability is the biggest risk when taking on HOA financial management, and it scopes 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 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, 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). Yet, 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 also cite an indemnification clause in the CC&Rs. It's “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 HOA community offers one. This clause isn’t a saving grace, though.
"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 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 is hiring a contractor out of nepotism. If the contractor performs their contracted duties at fair market value, you’re within HOA fiduciary duties.
Yet, if the contractor was hired because they gave you $1,000, you’re outside HOA fiduciary duties. You're also subject to a lawsuit without the help of a D&O carrier or an indemnification clause.
You’re subject to a lawsuit. A breach of HOA fiduciary duty is a viable reason for residents’ to take you to court. An element of criminal activity, unjust enrichment, or fraud is necessary to file a lawsuit. Simple negligence isn’t enough in many legal cases.
If an HOA board member breaches fiduciary duty, the whole community suffers. The reputation of the community is at stake for potential buyers and renters. The HOA board also has to take an in-depth look at financial management in the interim.
Handling financial management for a homeowners association is a risky responsibility. 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 HOA Financial Management for more information before committing to the board. Click on the button below to get started: