California Condo & HOA Law

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September 27, 2005

Tight With Information About Association Professionals? - Why?

A frustrated website visitor recently asked me:

"I was told by the Property Manager of my HOA that we have an Association Attorney. I asked him who the Association Attorney was and I was informed in was none of my business and I had no legal right to know. I’m having a hard time accepting that due to the fact that I am paying for this attorney via my HOA fees. As a homeowner am I not entitled to know who our Board of Directors has contracted with including attorneys. Without this knowledge how can the homeowners be sure that there is not a conflict of interest between the Board and who the Board contracts with if they are not entitled to this information. Also is not the Board responsible for providing explanation of expenditures and where our money went. I was under the impression that as a member of an HOA I had certain rights. Please let me know. Thank you."

I know of no law or case that definitively says whether an Association must disclose the name of the Association's attorney (in California). Owners have rights to review certain financial records and documents and after January 1, 2006, the rights are expanded, except that documents subject to confidentiality are not among those to be provided. Attorney statements and communications are subject to confidentiality under cases and statutes and so they need not be provided for inspection or copying, even under the new statutes. So the question remains, is there any requirement to disclose the name? Probably not, but why withhold it? Perhaps if there is a possibility of harrassment, a history of problems with an Owner interfering with Association contractors, or some extenuating circumstances, it might be acceptable. But under the new statutes requiring disclosure of records that would require redaction to prevent exposure for identity theft, the legislature probably did not contemplate the withholding of names of vendors and professionals serving Associations. I would assume that if there is a fear an Owner might contact the Association's attorney without authority, that protecting the attorney is not necessary - most attorneys would know how to handle a call or contact from an owner.

This brings me to address the comment about the owner's rights of access and information given that the assessments paid by the owner help pay for legal services. Many times owners assume that since the assessments they pay are used for legal services, the owner should have access to the attorney and be able to ask for legal advice. The truth is that when a corporation (which most HOAs are in California) hires an attorney, the attorney has an ethical obligation to and takes its guidance and direction from the Board, not individual owners, and not any individual member of the Board. The corporation is the client.

As for the question of conflict of interest, if an owner suspected that the Association attorney was married to a board member, or had some similar close relationship, and that fact was not disclosed to the members, there would be a conflict of interest. However, this is because the association must disclose any contracts or vendor relationships that provide a board member direct or indirect financial benefit. But the fact that the association attorney advises the Board based on information received from the Board does not create a conflict of interest as to the members, who might wish for equal time or free legal advice from the association attorney.

Posted by Beth Grimm at 10:05 PM

September 16, 2005

What To Put Up On the Web - Associations, Be Careful!

Recently, a manager I work with on many associations asked me: "Do you suggest password protecting the proprietary info: i.e. governing documents, minutes newsletter,etc. Some of my boards have it all open and others restrict the newsletters, minutes, etc. Thoughts?"

This is my answer to that question (remember, talking as a California lawyer but I believe this could apply to any state): Things like governing documents that are recorded with the state (CC&Rs and Articles of Incorporation in California) are already in the public domain and so I do not have a problem with not protecting them. Even publishing the Bylaws is probably not a problem because they tend to be pretty standard, except in cases where they were drafted by a board member or someone who did not know what they were doing, because in that case, publishing them for the world to see might create quite a sorry impression of the Association's professionalism (or lack thereof).

But as to other documents of the Association, it is my view that minutes, newsletters and financial papers, etc. that are not already in the public domain should be protected, and use of a password is helpful. The public is not entitled to know the private business of an association.

Posted by Beth Grimm at 1:06 PM

September 14, 2005

OK - WHAT ABOUT THE OWNERS WHO LIVE WITH UNRESOLVED LEAKS?

I have done a number on Associations that get battered by owner non-responsibility and apathy. So its time I stick up for some of the owners who get the shaft. (It's really not a perfect world, is it?)

Believe it or not, some boards go "into hibernation" when a leak is reported and mold is discovered. The problem is of course that when they bury their heads in the sand, their derriers are still exposed.

And there are the situations where a leak is reported, and the Association just cannot seem to get the roof fixed right (in a situation where the Association is responsible for leaks). Maybe its the contractor hired that cannot diagnose the leak (maybe its a handyman who caulks around the area where the leak is reported but cannot imagine it might be coming under the rafters or be diverted by the very construction of the walls). Sometimes a board waits too long to do a roof replacement and tells the members they "just have to live" with the leaks. Now we are getting into an arena where there may be Association liability for interior damage to floors, fixtures, furniture and other stuff. Negligence may be a dirty word. It has to do with duty, breach, causation and damages. If an Owner reports a leak from the roof right away and the Association fixes it, there is usually not a lot of damage. Areas can be dried out and the roof can be repaired. But if the leaks are ALLOWED to continue for a long period of time, the party originally responsible to diagnose the leak or repair the area where the leak occurs will probably be held responsible for all damages that "flow" from the leak (its a big legal term - one that actually makes sense here!). If the Associaton has a problem and hires a contractor to remedy the problem and that contractor fails - the Association could be found to have a duty to look at another contractor or hire a diagnostician of appropriate qualifications, or to pursue the contractor for poorly constructed repairs.

Thus, in any situation where an Association has responsibility for the component (hence - a duty) through which the leak is occurring (yes, like the roof, siding, windows, doors, etc.) and the leak is reported, and the Association fails (in the duty it has) to get the leak to stop, then there is a problem (breach) and the Association may be responsible for any of the damages caused by that failure.

I hope this balances out things to a degree. Neither "side" is right all of the time, if you want to chose sides. However, if in doubt, try serving on the Board for awhile and you will probably see that some problems (like roof leaks) can seem unresolvable at times. Many problems challenge the Board to find the right kinds of experts. In order to find them, all I can say is attend seminars, join ECHO (directors and everyone else), CAI (everyone), and CACM (managers) and get educated, come to exhibits, pick the brains of your neighbor and the professionals and vendors who attend, and don't sit on your thumbs!

Posted by Beth Grimm at 12:54 PM

September 13, 2005

Shifting Responsibility - When Is it Responsible?

Updating Governing Documents - it can be fun, can't it? One reason so many California HOAs are moving to update and improve the governing documents (besides the fact that the laws change everytime we turn around and even 5 year old documents are sorely outdated today) is to shift some responsibility and accountability to Owners. Let's face it - those "in-the-know" know that Owners tend to rely on the Board and management too heavily. They expect to be "taken care of" in all instances. One area where this had lead to major problems for HOAs is water intrusion management and insurance protection. Owners line walls with bookshelves or put a tenant in a unit for years and essentially breed a "cover up" of signs of water intrusion. They may notice a book binding is a little damp, and set the book out to dry, ignoring the fact that something made it wet! All the while the wall behind the massive furniture could be deteriorating. And this is one of my favorites - the owner who has this situation, ignores the signs, and then once the shelves are pulled out threatens to sue the Association because the bookshelves are useless and the mold on the wall is making them sick. The tenant may avoid reporting signs of a leak for fear the rent will be raised or they may have to relocate during repairs. The result - a BIG MESS! And sometimes, a BIG INSURANCE CLAIM. And that dirty word - mold.

In actuality, it is the little insurance claims that add up (like broken refrigerator ice maker lines and washer hoses), and lead to serious problems for HOAs in the arena of purchasing insurance coverage. The "negative" history of an association can lead to uninsurability, or incredibly expensive lines coverage.

So, many associations look for more accountability by changing maintenance provisions to require owners to repair damages to the interior of their units from water intrusion. The Association may beef up the provisions relating to individual insurance coverage. They may add authority to raise the deductibles to whatever amount is prudent, in an effort to stem the smaller claims on the Association's insurance. They may propose amendments that require owners to pay the deductible and get their own "gap" coverage. Some Associations have had to go to "bare walls" or as some say "studs out" insurance coverage to get coverage at all! Many want to require owners to carry individual insurance so that when there is a leak, and it gets to the interior, the owner will share in the burden of fixing up their own unit. Some attorneys say it is just easier to make the association responsible for all leak damage, whether negligent or not. Others say that an Association should not take responsibility for interiors unless it is negligent. Others say that the Association should not take care of the interiors under any circumstances, and that owners should insure for their own protection against water intrusion.

Oh, it becomes so very complicated. Managers say various things, Attorneys say various things, and insurance brokers and agents say various things. In fact, it is not easy to coordinate governing document provisions with insurance policies which are boilerplate for the most part. And it is not easy to shift a mindset that believes the Association is a landlord and should pay for any and all damage to the properties, including the interior fixtures, upgrades and personal property of the owners.

So ... when an Association Board makes an effort to gain more accountability from members, it IS NOT ALWAYS A BAD THING! When a Board seeks expert advice and proposes some amendments to shift some responsibility, it IS NOT ALWAYS A BAD THING! Many professionals in this industry brainstorm solutions to problems that Associations face every day and one big problem in this industry is that owners lack accountability in many instances. Those who do buy coverage to insure property in their own units or to pay a deductible on the Association's policy still have to pay for a share of the damages caused due to a neighbor who does not carry insurance and insists everything should be an association claim. Owners who take care of their units and report leaks early still have to pay for repairs to units where someone negligently (or intentionally) failed to report a leak. Some owners let things go so that when the leak is reported, they can work the repairs into their "remodeling plans". Yeah, it's a scam of sorts, and the innocents are paying for it. Isn't it fair to have a provision that requires owners to report leaks at the first sign, or assume some responsibility for the exacerbated damages that result from non-reporting? Isn't it fair to require owners to carry liability insurance and building coverage to fill any gaps between the protection they want and the Association coverage so that the Association's policy does not get "dinged" each time someone falls asleep in the bathtub or goes on vacation and leaves a load of dirty laundry washing in a machine with corroded and faulty water hoses?

Well, I have said my piece. I've seen many owners come unglued at the very mention of changing the governing documents, but in most Associations I have dealt with, there are at least enough common sense oriented owners to listen and absorb the explanations of what the Board is trying to accomplish. And when that happens, the responsible owners usually prevail over the "whiners".

Posted by Beth Grimm at 12:18 PM

September 12, 2005

HOA Loans - Is a [Reserve Allocation] Loan A Good Thing?

It is not unusual for a homeowners association facing extraordinary construction costs (those that far exceed what is available in the reserve fund) to look at getting a rehabilitation or reconstruction loan. There are a number of advantages, not the least of which is that it affords the membership the opportunity, without having to rely on their own credit-worthiness or steam, to pay for the construction work over a long period of time. It gives the Board the comfort of knowing that the money will be there when needed and allows the Board to enter into contracts for substantial works of improvement without fearing that the Association is likely to run into financial problems trying to collect a large out-of-pocket special assessment from each of the individual members.

There are many kinds of loans available for HOAs with HOA-friendly banks (those that have a division specifically dealing with HOA loans). There are fixed and variable interest loans. Fixed, of course, provides stable long range planning as the payment is predictable for a specified period of time. Variable interest rate loans allow for repayment and interest to be based on some identified standard, generally a federal banking rate. They are historically lower interest than fixed rate loans although this may not always be the case today.

Most bank loans to Associations require a rather rigorous application process and the financials, delinquency rate, reserve study, cash flow and other financial information are examined. Associations with good cash flow and low delinquency rates are usually a good risk because of their ability and track record in collecting assessments. Some banks require that the Association be managed by a Certified Common Interest Development Manager. Self-managed associations may find it hard to get the help they need in this department.

There are a number of ways to fund the loans, depending on the type. Some are funded by a special assessment, meaning that an assessment must be approved by the members and then the assessment is repaid by payments made toward the loan. Sometimes the loan repayment is made by an increase in the regular assessments. Sometimes there is a combination of the two.

Then, there is the "reserve allocation loan". This loan is paid by redirecting assessments that would otherwise be put in the reserve fund to make the loan payments. Sometimes, this last method results in a minimal amount being put into the reserves each month rather than the recommended contribution in the legally required reserve study. It is important to understand this.

A reserve allocation loan sounds pretty good to a Board and to owners [if they are notified about it] as it does not require any out of pocket expense over and above the regular assessments, meaning there is no "dreaded special assessment." However, some questions arise and they concern me. If the budget shows a reserve allocation each month and there is no money going into the reserves, one could argue that this is really a "borrowing" from reserves. There are specific legal requirements in the Davis Stirling Act that pertain to borrowing from the reserves account. Disclosures to the membership are required about the decision of the Board to borrow from reserves. If the budget shows a reserves allocation each month and the budget does not show re-direction of the funds to pay a loan, then the budget is misleading. One would assume the financial statements would show the re-direction of the funds but it is possible they might be confusing if the loan payment is not linked with the reserves allocation in the paperwork. Some financial statements are quite difficult to read.

A reserve allocation loan can result in a considerable shortfall in the reserves for components coming due for work in the years the loan is being paid off, especially in the case where the work that it is paying for does not include all of the major components in the reserve study, and ESPECIALLY if the payment is a substantial portion of the reserves allocation. For example, if the money is needed for a painting/siding major repair/reconstruction job involving the outside of the buildings, and the loan payment will take up most of the reserve allocation, and the work does not include roofs, fences, common area facilities, or any other major component, the question arises as to whether that/those other components are going to be adequately funded during the payoff period of the loan. Even if the money is used to essentially rehabilitate the entire project (which is not uncommon), if the loan payment takes up most of the reserves allocation, the reserve funding is essentially being "put on hold" during the repayment period. Typically, repayment periods are 5 or 7 years but some loans are stretched to 10 years so the work is more affordable. Certainly, an Association does not want to throw owners into a debt that they have no chance of paying, so the longer repayment term can be an advantage.

If the Association has a reserve study done at the time of applying for a loan (which is commonly a requirement if there is not a current reserve study within the prior year available) and the preparer knows of the loan and reserve allocation diversion to loan payments, the disclosure can be made to owners with the new reserve study. However, disclosure of the reserve study comes at the end of the year and owners should be advised of the fact that reserves are NOT GOING TO BE FUNDED TO THE RECOMMENDED LEVELS if the borrowing occurs, if that is in fact what is occurring. If the Board is not required to seek owner approval of borrowing (be sure to check ALL of the governing documents when this question arises), then there is no real opportunity, unless the Board makes one, to notify the Owners of the consequence of borrowing. Who knows, some associations may use this tactic over seeking a special assessment to avoid going to the owners for approval, and may be purposeful in its failure to notify the owners of the fact that reserve allocation loan means taking the reserve allocation and diverting it to loan payments.

One other advantage, or disadvantage, of a reserve allocation loan, depending on whether you are a "glass half empty" or "glass half full" kind of person, is that there is no special assessment per individual unit that gets paid off when a unit sells, so the loan goes on now and until paid, irrespective of how many units transfer hands. On the other hand, if the loan repayments are based on a special assessment, the Association can generally require that when a unit transfers hands, the share for that unit must be paid off. This could result in earlier payoff of the bank loan. It also results in allocation of the special assessment to the current owner, not any future owners. Who knows what is fair in any given scenario? And using a reserve allocation loan precludes a lender from denying responsibility when a unit is taken back in foreclosure. In the event of a special assessment, a lender can deny responsibility to pay after foreclosure. In the event of a reserve allocation loan, the loan repayments come from the regular assessment, the reserve allocation portion, and so a lender that forecloses cannot avoid the obligation.

The important thing is for associations to work with professionals when getting into this arena, and becoming educated as to the pros, cons, and disclosures that are needed so no one gets "blind-sided" by forgetting something important. My guess is that Boards generally are not able to figure out all of this on their own, and that omissions and failures are due more to negligence rather than intentional motives. Boards may run into big trouble, and consequently run for cover, if they do not have the benefit of professionals to help them figure out what the right thing to do in funding major rehabilitation or reconstruction projectsis. Any Board had best get the help of a team of management, construction, lending and legal professionals at the first sign of the need for a big reconstruction project.

And as for funding projects, it is true that special assessments and increased assessments hurt, but failure to fund the reserves per the reserve study preparer's recommendations will at some point lead to extra out-of-pocket costs to the owners. It is tough to avoid the inevitable when using methods to fund projects that are severely underfunded in the reserves accounts that do not require any "out-of-pocket" expense. And realtors and buyers are getting more wary of this underfunding problem. In working with one advisor, buyers are advised to require sellers to put money in escrow for a period of time to cover unanticipated shortfalls if the reserve study shows that an HOA is underfunded in reserves. The amount suggested is the amount of the seller's proportionate share in the underfunded dollar amount. For example, if the underfunded reserve amount is $50,000 and there are 10 units, the amount to be held or paid over to buyer would be $5,000. This may seem drastic, but you be the judge - would a buyer want to be strapped with this shortfall? Most do not have enough knowledge to figure this out on their own.

Underfunding of reserves will continue to be a topic of conversation among HOA professionals, legislators, California realtors, and others, forever (or that is, until, there is no problem to discuss!)

Posted by Beth Grimm at 10:53 PM

September 11, 2005

Two Annual Meetings, No Election - What To Do?...What to Do??

Here is an all too common question from a frustrated reader: "We have had 2 attempts to have elections - no quorum the 1st time and not even a quorum the 2nd time (less than 25%). I am under the impression that they have to make another attempt - for 25% participants to hold elections. Yet, I am told that the current Board will just appoint people to fill vacancies. I do not believe this is legal. Can you tell me which law pertains to it - and who is correct?"

Well, I cannot give out legal advice too freely, without being informed about a particular situation (and no, this is not an invitation for you to send me all of the particulars of your problem), but here is some general information that may help ease the frustration at least (translated: you are not alone!):

[Remember, I am speaking for California only] In order to determine what the possibilities are, a lawyer (hopefully) would first review the Association documents. It may be possible to hold an election by mail, and if so, the board is likely to get a better return than at a meeting. The Corporations Code generally allows for a written ballot for any action that could be taken at a meeting and an election would qualify (though it might not be appropriate in all cases), so long as the documents do not prohibit it. Some Boards would just appoint directors after two tries in this scenario, with or without legal advice. Sometimes holding meetings can be expensive and time consuming and boards want to move on to pressing business. If it is not a "contested election" (meaning there were not more nominees than positions open), most boards would probably just deem the nominees to be elected by acclimation. If there are more nominees than positions open, it is probably better to keep trying for a successful and legally valid meeting or election by mail. Without a contest, who is going to challenge the election? On the other hand, if there if a fight going on for the open board positions, a challenge is more likely. However, I can tell you that if there is a hotly contested election, one or more candidates will generally seek proxies from the members thus enhancing the chance for reaching a quorum of persons present (either in person or by proxy) at the meeting.

If a Board does appoint Directors without having a valid annual meeting or election, and if the process of appointment was challenged in court, a Judge would look at what happened, how the attempts to get the owners to send proxies were made, and what was fair and the most reasonable thing to do under the circumstances. The "election" naming the new directors is not automatically void under the law, although not technically valid either. However, if the Board made a laudible effort to get owners to come or send in their proxies, forcing another election still does not guarantee that a quorum would be present, and although a Judge certainly could order another election, a question arises as to whether the Judge has the power to alter the quorum requirement in the governing documents to something less than 25%. So the most reasonable choice may not be to schedule another election. I believe a Judge would have some choices here considering what is fair and resonable.

I know this sounds like a lawyer talking in circles, and it is, sort of, but the best I can do here is provide some general information because each situation is just a bit different and there are often unanticipated twists that come to light when reviewing processes. Besides, I am not fully informed about things that I would need to know if I were actually giving legal advice. In such a situation the board should really consult with a knowledgeable HOA lawyer to see what is the best thing for the association to do. All governing documents would have to be examined and all actions leading up to the election(s) would be considered before advice as to the best way to proceed should be given.

But be sure to keep in mind that this answer is for this year. There are brand new elections requirements beginning in 2006 and Associations must be aware of them because there are brand new penalties for failure to follow them. Stay tuned to my blog right here and you can also check out the CLAC website to get ongoing news about legislation.

Posted by Beth Grimm at 3:34 PM

September 10, 2005

Apathetic Owner "Reactionitis"

Apathy is probably the biggest problem in HOAs. People purchase in a CID expecting "care free" living and once on the "inside", most go into hibernation as to association actitivies and meetings until the Board pushes for a response on something big. Updating documents is something big. It never ceases to amaze me how doing something so beneficial like updating and improving the governing documents, making them readable, understandable, and more user-friendly can draw unbridled and unjustified criticism for a board that has worked their rear ends off at a very tedious and important task. If you can't imagine that its much of a commitment, try reading your own governing documents which include the CC&Rs, Bylaws and Articles of Incorporation in one sitting. One website visitor said after recently volunteering to serve on her board to help out, and appointed as Secretary, the board sent out proposed updated governing documents for a vote they had been working on for quite a long time to replace documents that were more than 20 years old. Her description of the member reactions: " ... shouting, fist-waving, ugly notes stuck on doors & terrible ill-will. She was "... kind of traumatized ... for awhile after that and the vote being unsuccessful..." and she says that "... friends don't understand". She found some solace in following my blog, finding out that it's not a perfect world in HOA land.

It's true, no one except a board member who has served on a board during a document update process can understand the frustration that occurs when members criticize the work. The Board can work on a project for months and years, keep the owners informed through a newsletter, discuss matters at open board meetings (which tend to be lacking in owner attendance unforetunately), can review several drafts and read dull paperwork until their eyes are bleary, and then become the brunt of unnecessary criticism. And at the meetings I have been to (which have been many - over 100 in the past 5 years) to answer questions, my experience is that those who criticize most vocally generally have an "ax to grind" that is totally unrelated to the update process or what is written in the governing documents. For more on document amendments that shift some responsibility to the owners, see the next blog.

Posted by Beth Grimm at 10:28 PM

September 9, 2005

Who Can You Complain To?

One of my website readers wrote: "I'm having trouble with my HOA (bet you never heard that before). Is there a regulatory agency that over looks HOA's and management companies? You know how attorneys have the California Bar assoc you can report them to? It there something like that for HOA's and property mgt companies? How do you make a board adhere to the governing documents and the law? I can't get my HOA to provide me with the financials and now they want to charge me for them."

There is no oversight agency for common interest developments in California but there may well be someday soon. The California Law Revision Commission worked on this for a few years and a bill was introduced early this year for such an agency. The bill was changed to a two year bill for further study. But for now, there is no agency. However, there are some bills that have gone to the Governor's desk that provide more rights for owner inspection of records and that provide higher penalties than previously available for failure to comply. These penalties are recoverable through small claims court. The bill is AB 1098. I happen to believe the bill will present difficulties for many associations, and will increase costs to all association members but the legislators felt the micromanagement was necessary because of constituent complaints.

Likewise, there is no reporting agency for managers. However, CACM certified managers have a Code of Ethics to follow and reports of improper conduct can be made to the organization (www.cacm.org) and they will be investigated. And managers who claim to be "Certified Common Interest Development Managers" that do not have the education required can be sued under the Business and Professions Code requirements.

There is a problem in getting some associations to act reasonably. Educating a board is a start. If the Board is notified of a law that is being ignored, and continues to ignore it, the board members are in jeopardy of losing important protections offered by statute and governing documents (see prior blog). Pointing this out may get the attention that is needed.

Often, one attorney letter can do wonders. Attorneys versed in this field tend to know the "buzz words" that get the necessary message across to a dilatory board. And occasionally, I hear that owners are able in small claims court to recover fees paid to an attorney when that is what it took to get a Board to act within the law or honor the governing documents.

Posted by Beth Grimm at 10:40 PM

Board Member Liability Protection - How to Optimize It

These days, it's getting tougher and tougher to recruit good board members in common interest developments. One has to ask what makes people serve when board members all over the state of California face thankless service, undeserved criticism, false assumptions, low (actually no) pay, sometimes long hours, the need to solve often complicated and difficult decisions, bad press and threats of being sued by every disgruntled homeowner. Board member liability is a big issue. So what protection is there?

Civil Code Section 1365.7 provides some protection for "volunteer" board members (those who are not working for the developer and who own only one or two units and not more)in residential CIDs (common interest developments). The condition is that an association must carry policies of insurance providing coverage for general liability and individual liability of officers and directors of the association for negligent acts or omissions with the minimum amounts of coverage of $500,000 if 100 or fewer separate interests and $1,000,000 if more than 100 separate interests. The statute wording means essentially that a board member cannot be sued personally for amounts up to the Association's coverage but there are other conditions as well. And an Association that sticks to the statutory limits is probably not giving adequate protection for board members because in today's world, these coverages are considered on the low side.

There are other requirements of course. The protection is not intended for rogue directors. The actions of the board member (1) must be performed within the scope of the director’s or officer's association duties, (2) must be performed in good faith, and (3) must not be wanton, willful, or grossly negligent.

Good faith is determined by motive and intent. Most board members are well-intentioned (in spite of what you read in the newspapers). Sometimes that is hard to determine for sure, but it is easy to claim innocence, so a lack of good faith would have to be fairly obvious. The scope of duties could be generally defined but there are situations where the lines blur. For example, what if a board member is out walking the neighborhood looking for rules violations and confronts an owner about the car parked on the lawn, and thereafter the confrontation elevates to a fist fight. What if a board member causes a contractor to leave the site by trying to micromanage the work, after the board member has been warned by the other Board members and the association's attorney that they are not to interfere with or have contact with the contractor. What if a Board member is sued for defamation for bad-mouthing a contractor? What if the Board member misspends association funds (like the one who bought himself an expensive airplane ticket to return early from visiting his father to attend a controversial association meeting). Are these examples performance of the duties or acting within the scope of what would be expected of a board member? Willful and wanton behavior is an act that is intended to or likely to cause distress or harm of some kind. Gross negligence is a lot worse than ordinary negligence. Making a mistake such as poor budgeting is usually ordinary negligence, but making a mistake involving conduct that one knows is wrong, is against the law, or is ill advised crosses the line. These points can be argued by lawyers. The best protection comes from acting reasonably.

There is also protection in the Corporations Code (7231 and 7231.5) in statute commonly known as the "safe harbor" statutes. If a board member acts in a manner he or she believes is in the best interests of the (in an incorporated) Association and with reasonable inquiry or reliance on information, opinions, reports, statements, or other data, financial or otherwise, prepared by officers or employees believed to be reliable and competent in the matters presented, or by independent counsel, accountants or other persons qualified to give opinions, the board member cannot be sued for the action. Again, "good faith" plays a large part in things.

Associations should also carry directors' and officers' liability insurance that protects the Association and Board members from liability (including payment of damages and/or defense costs of any lawsuit). Most governing documents include a requirement to carry this insurance, but many do not specify a minimum, so the statute mentioned above becomes the guide. However industry standards suggest more coverage than the statute dictates. If the association documents do not provide the authority for insurance coverage then I would have to suggest a document amendment. It is critical to provide protection for those willing to do service.

Many board members are covered by individual homeowner's insurance policies purchased to provide protection on their individual units. Many homeowners' policies include some coverage for service on nonprofit boards. This is something a board member might want to explore.

And most governing documents provide indemnification protection for board members that says board members are entitled to a defense of a lawsuit against them or payment for damages they might be adjudged for actions taken on behalf of the Association. The Corporations Code provides authority for corporations to "indemnify" any person threatened with a lawsuit for specific causes of action related to corporate service, or action brought by the Attorney General, and to pay judgments, fines, etc. (Corporations Code Section 7237)

One area where board members can lose some of these protections is by accepting compensation for services as a board member. The statutes only protect uncompensated (volunteer) board members. The Association's insurance policy may have limitations too - it is wise to check this if there is any compensation. Some Associations provide assessment waivers for board members (although not a commonly recommended practice) and it is important to understand that if a board member receives an assessment waiver in any proportion or amount, that could be considered compensation for purposes of analyzing liability protections.

So - there are some common protections and thank goodness for this. Most board members deserve protection from lawsuits and judgments that are a result of acting on behalf of the Association. But it is important to remember that the protections come through good faith actions, keeping within the normal scope of a board member's duties, not accepting compensation, and consulting with the right kind of experts or seeking information from the right (reliable and informed) sources. It is important to optimize the protections, so that Board members can stop losing sleep at night everytime a disgruntled owner threatens to sue. Unforetunatetly, it seems to be a common practice here in our state to threaten a lawsuit before asking how things might be resolved.

Posted by Beth Grimm at 9:16 PM