QUESTION: I have lived in a condominium for the last few years. An election for the condominium board of directors is scheduled shortly, and I am considering running for a position on the board. However, I have heard that, as a director, I personally could be liable and sued. Obviously, my resources are not unlimited, and this troubles me greatly. What advice can you give me?
ANSWER: It has been said that a condominium is a mini-democracy. The board of directors is a combination legislative and executive branch of government. The directors are elected by the unit owners of the condominium, and the board--or its designated management agent--carries on the day-to-day activities of the community.
Serving on a board of directors is perhaps the most important function one can perform while living in this community. Unfortunately, it is a thankless task. The hours are long, the demands are great, the constituents are vocal and often abusive, and the pay generally is nonexistent.
Generally, directors and officers of a corporation are under obligations of trust and confidence to the stockholders of that corporation. The directors must act in good faith, for the interests of the corporation and its stockholders, with due care and diligence, and within the scope of their authority. Legally, it can be said that the directors and officers of a corporation have a fiduciary relationship to that corporation and its stockholders.
Under this analysis, no one in his or her right mind would assume the position of a director of a condominium association, subjecting himself or herself to litigation and liability, with little, if any, corresponding benefits.
In order to convince condominium owners to take on the position of an officer or director of a condominium association, most condominium associations limit the liability of their officers and directors. Generally speaking, unless a director acts in a grossly negligent manner, or in bad faith, a director or officer of a corporation need not fear being sued for the performance of his or her functions. Most condominium documents not only specifically relieve a director from any liability--other than for willful misconduct or bad faith--but also reimburse that director for any costs and expenses incurred if lawsuits are brought.
Before you decide to run for the board of directors, you should do the following:
Your condominium association is governed by a set of documents, generally referred to as a "declaration and bylaws." Read these documents carefully, and look for the indemnification clauses regarding the liability of the directors and officers of your association. Consult your attorney and the condominium association attorney for clarification if these documents sound too legalistic.
Even though the condominium may be obligated to indemnify you, if the association has no money, the indemnification may be worthless. Thus, your association should have insurance coverage protecting the directors and officers. This is generally referred to as "D&O insurance." Ask the association management for a copy of the insurance policy, and satisfy yourself that you will be covered in the event of any litigation. Will your attorney be reimbursed for all legal fees, costs and expenses? When will the insurance company pay these claims?
Incidentally, if you are not a member of the Community Associations Institute (CAI), I strongly recommend that you (and your association) join. CAI is a nonprofit organization dedicated to helping condominiums and cooperatives improve themselves. It has a national convention scheduled for Oct. 6 through Oct. 10 here in Washington, and you will learn a lot if you can attend. For more information, call CAI at (703) 548-8600.