Standard of Care, Duties and Risk Factors For Association Board Members

| Jan 9, 2020 | Uncategorized |

Board Members and Officers of Homeowner and Condominium Associations (HOAs and COAs) frequently do not understand their legal duties, potential liabilities and the risk factors related to their Association work.

In my law practice I have found that many individuals serving on Boards as a Director or Officer assume that they have a “fiduciary” duty to their Association, which Association is normally organized as a non-profit corporation. That is not the case, however. A fiduciary duty, when it does apply, is the duty to exercise a high standard of good faith with an obligation to deal fairly and to give “equal consideration” in all matters to the interests of such individuals/entities to whom the fiduciary duty is owed. Such a true fiduciary duty would apply, for example, to most Trustees, Estate Personal Representatives and Guardians.

In contrast, the Washington State Non-profit Corporation Act (RCW 24.03), which is applicable to Associations that are incorporated as non-profits (the vast majority), does not even use the word “fiduciary” in its provisions. Instead, it describes the duties of a Director of a non-profit corporation in the following manner per RCW 24.03.127:

A Director shall perform the duties of a Director, including the duties as a member of any committee of the Board upon which Director may serve, in good faith, in a manner such Director believes to be in the best interests of the corporation, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

In performing the duties of a Director, a Director shall be entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, in each case prepared or presented by:

  1. One or more Officers or employees of the corporation whom the Director believes to be reliable and competent in the matter presented;
  2. Counsel, public accountants, or other persons as to matters which the Director believes to be within such person’s professional or expert competence; or
  3. A committee of the Board upon which the Director does not serve, duly designated in accordance with a provision in the Articles of Incorporation or Bylaws, as to matters within its designated authority, which committee the Director believes to merit competence; so long as, in any such case, the Director acts in good faith, after reasonable inquiry when the need therefore is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.

Even though a person may think he/she understands the above statute, it is useful to set forth a few practical principles that I believe follow reasonably from these statutory provisions. Accordingly, by way of illustration, the responsibilities of the Board as a whole and of each individual Director/Officer would reasonably include the following:

  1. To help determine the vision/goals of the Association and develop a strategic plan to accomplish them;
  2. To adopt when appropriate and to follow Association policies and procedures;
  3. To help organize, generate and maintain Association records including governing documents, policies, minutes, resolutions, vendor contracts, financial documents, etc. so that decisions of the Board are memorialized in writing and all important documents related to the operation of the Association are preserved and readily available to current and future Boards as well as the Association members (as appropriate);
  4. To help develop and implement a system/program designed to reasonably secure and monitor compliance with Association rules, policies, covenants and bylaws;
  5. To establish a program, as appropriate to the Association and its community, to develop and evaluate the Associations goals and do strategic planning including accounting for short, medium and long-term financial and physical needs of the community and its facilities/amenities;
  6. To establish, as needed, committees to help with the above.

The size of the Association and its budget will of course be relevant to the specific nature and scope of the responsibilities of that that Association’s Board. Thus, relevant considerations regarding the “reasonableness” of any Board action or inaction will include the Association’s budgetary constraints and the number and types of facilities for which the Association is responsible. Those factors will vary widely from Association to Association, but all Directors and Officers of Associations should always act:

  1. In good faith.
  2. In a manner believed to be in the best interests of the Association and the community it governs, and
  3. With such care, including reasonable inquiry, as ordinarily prudent persons in a like position would use under the same or similar circumstances.

Additionally, as a general rule, Directors should:

  1. Attend most Board and assigned committee meetings, and participate actively in the work and decision making processes within the Board and committees;
  2. Be sure to personally read all important Association-related documents, minutes, resolutions, financial reports. In addition, they should be sure to read, understand and promote compliance with the Covenants, Articles of Incorporation, Bylaws and the community’s other governing documents;
  3. Be generally aware of and take steps as necessary to comply with applicable governmental laws;
  4. Raise questions about inaccuracies and doubtful conclusions whenever reasonable to do so and participate in an appropriate resolution of same;
  5. Make sure there is advance notice of significant upcoming decisions and that sufficient paperwork/information to understand the upcoming decision is provided;
  6. Make sure there is a clear and legible record of the procedures followed and the decisions made by the Board;
  7. Avoid actual and perceived conflicts of interest.

RISK MANAGEMENT

Another responsibility of all Directors is to take reasonable steps to reduce safety risks by adopting and following a risk management program appropriate to the community in question and the specific risks presented. The best way to do this is to emphasize safety and take all necessary steps to provide safe facilities, programs and activities. In this regard, if the Association is responsible for the operation or maintenance of facilities or parcels of land within the community, it is important that the same be inspected on a periodic basis to identify any potentially dangerous conditions. Liability insurance should be procured to insure against such risks as well.

If the Association sponsors, promotes or participates in community activities, the Board should set clear and consistent guidelines for such activities that address safety concerns. Examples of such activity-related concerns would include temperature of food served, adult supervision of children’s activities and regular inspections and maintenance of playground or park areas where activities take place.

Often the Association’s liability insurance broker can provide suggestions and helpful input with respect to managing risk and avoiding hazards could result in injuries to people or damage to property.

From a financial standpoint the Board should take reasonable steps to reduce the risk of loss in its financial affairs. The Board should wisely establish an active review process for the Association checkbook and bank statements. Requiring two signers for larger checks is normally prudent and often necessary, although bank practices in this regard are sometimes disappointing respecting the degree of scrutiny given to check signatures.

CONFLICTS OF INTEREST

All Directors should be sensitive to possible conflicts of interest involving themselves and others. If a conflict is identified, it should be immediately disclosed to the Board and discussed. Directors and Officers should be cautious about contracting personally, or via businesses in which they have an interest, with the Association as such arrangements can be viewed with suspicion by Association members – often with good reason. On the other hand, unless the governing documents prohibit it, it is not unlawful or necessarily improper for a Board member or Officer to provide work or services to the Association. In such circumstances, however, the Board member in question should not participate in any voting to approve such arrangement.

Associations should consider adopting a written policy about conflicts of interest, either via Bylaws amendment or Board resolution.

FINAL THOUGHTS

In this blog I have addressed only a few of the many legal, ethical and practical issues that can arise in connection with the work of an Association Board. I would encourage Association Boards to seek legal advice when facing a decision or issue that has potential legal ramifications for individual Directors or the Association as a whole.