Arizona Homeowners, HOAs, & Condo Associations

Fiduciary Duties of Board Members

The day-to-day business of most developments, such as managing finances and maintenance, is typically run by its homeowner association (HOA) board of directors (the "Board"). If you live in a planned unit or joint interest development, serving on the board can be an important way to impact and help maintain your community's well-being. However, to operate responsibly and avoid potential legal liability, you'll need to know your fiduciary obligations as an HOA board member. Breach these, and you could face personal liability for your actions or errors.

The fiduciary duties of HOA board members mainly arise from state corporate law. Most HOAs are nonprofit corporations, typically formed by filing articles of incorporation in the state where the development is located. Recognizing that a corporation's board members serve in a position of trust, every state's corporation law imposes a fiduciary duty on the corporation's board of directors, requiring them to act in its best interest.

Subject to some limitations, this fiduciary duty applies to HOAs, though they are typically nonprofit corporations and even though HOA board members are usually volunteers.

A board member's fiduciary duties involve three essential components:

• The duty of care
• The duty of loyalty, and
• The duty to act within the scope of its authority.

HOA Board Members' Duty of Care

To meet the duty of care, an HOA board member must make informed decisions, which might require some research before you act or vote on an HOA matter. For example, before fining a homeowner for a rule violation, you must familiarize yourself with the association's CC&Rs, and the details of the situation, such as by talking with the homeowner.

HOA board members must also act prudently and reasonably, using sound business judgment and avoiding arbitrary or capricious actions. For example, you can't issue a fine against a homeowner for painting a home red just because you don't like that color if this is not a violation of association rules about house paint color.

HOA Board Members' Duty of Loyalty

The duty of loyalty requires that HOA board members act fairly, in good faith, in the interest of, and for the benefit of, the HOA as a whole, rather than making decisions based on any personal interest or gain.

HOA board members should also avoid acting where there is a conflict of interest. For example, a board member helping select landscapers for the property should not steer contracts for landscaping to family members. For example, a board member who owns a purple house should not participate in a board vote on whether or not to allow pink and purple homes in the development.

Additionally, an HOA board member must protect members' confidentiality and not divulge information provided in confidence. For example, suppose a homeowner confides in a board member about his impending home foreclosure to arrange a payment plan for HOA dues. In that case, the board member should not disclose the information to a friend or neighbor.

HOA Board Members' Duty to Act Within the Scope of Authority

This duty requires the HOA board to perform the tasks it's obligated to carry out but prohibits the board from making decisions or acting on matters without the authority to do so. The power of an HOA comes from its obligations under state laws and the authority granted to it in the development's governing documents.

To ensure you meet your obligations as a board member, you must know what duties are required. Review your state law and HOA's governing documents, specifically the articles of incorporation and bylaws, and your development's CC&Rs to determine the HOA's obligations and the extent of its authority.

For example, if the laws or governing documents do not grant your HOA board the authority to adopt new rules and regulations, any restrictions it adopts about house colors might be invalid.

HOA Board Member Protection from Personal Liability

Many HOA board members are understandably concerned about their liability for lawsuits. Unhappy homeowners can sue the HOA and the board members individually for several reasons; for example, if the HOA fails to maintain a common area properly or discriminates when enforcing a rule.

The best protection against liability as an HOA Board member is to take what you do seriously. You can avoid a breach of fiduciary duty by fully informing yourself before making decisions, ensuring you have the authority to act, and always acting in the best interests of the HOA.

In addition, some forms of protection from personal liability are available from your state law, your development's governing documents, and your HOA's D&O insurance.

HOA Insurance That Protects Board Members

Your HOA's insurance can also provide significant liability protection for board members. General liability insurance is not enough, however. Liability insurance protects the HOA from personal injury or property damage claims. Therefore, your HOA should have adequate Director's and Officer's (D&O) insurance to protect board members in claims for the breach of fiduciary duty.