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Are Condo Board Members Liable for Damages?
Will I be liable as a board member? We are hearing this question a lot in the wake of the tragic collapse of the ...
Will I be liable as a board member? We are hearing this question a lot in the wake of the tragic collapse of the Champlain Towers South condominium, in Surfside Florida, as lawsuits continue to swirl about. This 12-story, 136-unit, waterfront condominium was only insured for $30million (or $220k per unit) and only had an $18million liability policy, which was a fraction of the nearly $1 billion awarded.
This is a very good question and while we will encourage you to seek good legal counsel around this issue, this article will help shed some understanding on the basic premise of the concepts and how you can protect your community as well as yourself from undue liability.
The question came from our most recent Building Doctor Show where one of the board members asked:
“We’ve had repeated active leaks and we need to replace plumbing. Will the board be liable if the association votes the repairs down?”
As with all legal answers— “it depends,” but it really sounds like democracy at its best. The board has taken the steps to understand the issue, obtain reports from engineers and bids from contractors, and then take this to the membership for a vote to spend the money. If the membership votes it down, then the membership has spoken. Now does the board have to bring this up again and again until it passes? That is another discussion, but the take-away from this example and from studying the Champlain collapse is as follows:
- This board has followed the reasonable and good faith steps to lead their association, presumably while following the governing documents, and listening to their advisors about what to do, and then the membership said no. All of this should be documented in the meeting minutes and related presentations and communications around this issue.
- In the Champlain case, there was a documented trail of:
- Ignoring the issues, repeatedly
- Lack of clear board vision and plan – resignations and new board members not knowing the history
- Ignoring the opinions of professionals
- Assuming they didn’t have to do anything if they didn’t have the money
Board members are afforded a certain level of protection from personal liability, both through state laws and through governing documents, if they exercise the Business Judgement Rule. This means that their actions or decisions were “reasonable and made in good faith”.
In Washington State, RCW 64.34.308 states that “the board shall act in all instances on behalf of the association and are required to exercise ordinary and reasonable care.” Some courts have gone so far as to conclude that boards are immune from liability in their individual capacity absent fraud, criminal activity, or self-dealing and that any violation must be willfully and knowingly.
What are considered examples of reasonable and in good faith?
- Knowing and following your governing documents
- Have a current reserve study
- Having updated financial reports and an updated set of minutes and decisions
- Following a maintenance program and having a consultant inspect your building every few years
- Working with a team of advisors or experts in their field – community manager, attorney, consultant, bookkeeper, etc.
- Communicating well with the association and keeping good records
- Getting a second opinion or multiple bids when necessary
What are examples of unreasonableness, self-dealing, and knowingly disregarding information?
- Ignoring professional recommendations and warnings
- Hiring your spouse’s company to make repairs
- Not following your governing documents, not keeping good records, not communicating well
- “No new taxes on my watch,” or refusing to raise dues even though all other costs are going up and your reserves are low
- Not being organized (that is, willfully being disorganized by not making time to get organized)
- “We don’t have the money,” and not taking the prescribed action to raise dues or call for an assessment
This list could go on and on, but you get the point. When something tragic happens, the hungry plaintiff attorneys will grab onto anything to prove their point.
One of the biggest mistakes or assumptions we hear boards make is that they “don’t have the money right now to address this issue.” The governing documents I have read usually state, “The association shall maintain or repair,” They don’t say, “The association will maintain or repair once they have the money.” The association’s financial health is one of the board’s biggest responsibilities. How the finances are tracked and raised are key board decisions. The duty to assess when reserves aren’t there to pay for things is a hard decision but necessary to properly maintain and repair the building.
We want you to start with good behaviors to avoid any problems. Using the above 7 examples of good behavior will prevent a lot of problems.
In addition to following best practices and exercising reasonable care we want to see you get good insurance, specifically D&O insurance (directors and officers) that will cover any legal costs associated with a potential claim. This is an association expense to protect the board. Talk to your insurance agent about this, and depending on what other operations your association has, they can update your policy. Do you have employees, a parking garage, any public spaces, etc.? It’s also a good time to update or review your property policy as costs and coverages always change.
One more item experts suggest is a personal umbrella policy if you are going to serve on any boards or committees. This goes above and beyond your association role. Think sports teams, the PTA, business groups, chamber of commerce, your church or other charitable organization that you may be involved with and help lead. These types of umbrella policies provide coverage when the other policies run out or have “holes in them” regarding coverage. They tend to cover everything we do in our lives and are very cost effective. Talk to your personal insurance agent for extra piece of mind if you serve on a board or committee.
For the most part, the courts understand that condominium boards are made up of volunteers, and they are not expected to be construction, legal, or financial experts. They also understand good boards are critical to the successful operation of communities and if we make board members unduly liable for everything, no one would volunteer. The Business Judgement Rule, as well as good governing documents and good insurance policies will protect reasonable board members from undue liability risk.
We recommend you talk to your attorney and insurance agent to understand your documents and to make sure you are conducting the board’s business in a reasonable fashion.
We enjoy working with boards and we want to see you succeed. If you have any questions about your building, or if your board needs some training on this topic, don’t hesitate to reach out.