Client Center
Financial Alternatives

Financial Alternatives News and Insights

Integrated Wealth Management

Protect Your Personal Liability while Serving on a Homeowners’ Association Board

board meeting

The tragic loss of life from collapse of the Champlain Towers South in Surfside Florida should be a wake-up call to condo boards across the country. Being on a Homeowners‘ Association (HOA) board is a serious job that comes with it a high degree of responsibility. Board members need to ensure the safety of residents as well as protect themselves. Here are five things you can do to help protect yourself from personal liability while serving on a HOA Board.

1. Evaluate the Board prior to agreeing to be a member

Board members can be made personally liable and named in lawsuits if they do not use “good business judgment.” They don’t need to be construction or financial experts, but they do need to use common sense and make sound decisions. Their fiduciary obligation can lead to enormous liability if the recommendations or warnings from outside professionals are ignored.

Before agreeing to be on a board, try to get a sense of the professionalism and decision-making process of the board. What is background of each board member; are they residents or outside members? Also consider finding out:

  • What services are hired out and to whom?

  • Who performs building inspections (the cousin of a board member is not a good sign)?

  • Are the financials well-maintained by a third-party firm and tax returns filed promptly?

Be sure to sit in on a couple of meetings to see how they operate and to verify business is being done. Are the meetings well-structured, or do they devolve into gossip sessions with few facts shared or informed decisions made? Are comprehensive notes and records maintained? You can be sure that all the meeting minutes, agendas, notices and correspondence among the board and residents of the Champlain Towers will be scrutinized.

2. Make sure that you have adequate Directors and Officers Insurance.

There are a lot of things that can go wrong for board members, such as the misuse of funds, improper adherence to CC&Rs (Covenants, Conditions, and Restrictions ) and bylaws, recordkeeping failures, regulatory infractions, etc. Actions and decisions, or even the lack thereof, by board members can be challenged through the courts.

Directors & Officers (D&O) insurance coverage is critical for any association. It can help protect not only board members, but committee members, volunteers, and others. As the surviving board members of the Champlain Towers South are now aware, D&O can pay for the cost of legal representation and damages awarded. This coverage also protects the HOA itself because these legal costs would otherwise be borne by the liquid assets of the association, and if insufficient, the owners by way of a special assessment.

3. Ensure you and the HOA have enough property insurance coverage

It is very common for both individuals and HOA boards to keep coverage costs low by underestimating the costs to repair or replace their property – which is a mistake. Costs to build or repair are higher than ever, and it’s now more expensive to rebuild in San Francisco than Tokyo! Nationally, replacement costs are $180-$250/square foot; California averages $300/square foot; and high-rise buildings close to the water could be $500 to even $900/square foot - as discussed by panelists of the recent “Protecting Your Board Members” webinar hosted by Hub International. Work with your insurance representative to be sure your condo policy is coordinated with the association’s master policy (e.g. do floors and interior walls need to be covered under your policy?).

The least expensive policies may have coverage exclusions which could lead to devastating costs later. Shop around with experienced brokers to get a professional review and sense of the market prices for policies. Association boards should try to get a catastrophic risk modeling report from their insurer (e.g. flood, hurricane, earthquake), which can help them prepare and understand what their insurance can do.

4. In addition to general liability, consider umbrella coverage

The potential for extraordinary losses is ever present, and you should assess this for both yourself and that of the association. Umbrella insurance coverage can take over if lawsuits or claims exceed the limits of general liability coverage.

For instance, say a visitor was gravely injured and a legal settlement assigned fault to you personally for $1 Million, and the association for $5 Million. But what if your general liability coverage is capped at $500,000 for individuals? Personal umbrella would cover you and your family, while commercial umbrella would cover the association. Work with insurance brokers and risk managers to assess the potential for loss and ways to mitigate this risk.

The Champlain Towers HOA had $30 Million in property insurance and $18 Million in liability coverage – deemed by a judge as inadequate, and a fraction of the estimated $1 Billion lawyers say would be needed to compensate residents and their families. While no amount of money can compensate the families who have lost so much in the collapse, some funds can make life a little easier for those who remain.

5. Evaluate the HOA’s financial condition

A financially challenged association can lead to a set of unbearable choices. As the Wall Street Journal shows in their article on the Surfside collapse, the lack of funds impacted the ability for the Champlain Towers board to start repairs that were clearly identified back in 2018 (and were no doubt suspected well before then).

Before joining the board, you should make an assessment yourself and ask questions like:

  • Are the buildings and landscape up to date on repairs and basic maintenance?

  • Are the budgeted repairs or upgrades funded (reserve funding ratio)?

  • Have special assessments been used in the past or will be needed going forward?

  • When was the last reserve study done?

Summary

As you can see from the five points above, most of the risks that come from being a board member can be mitigated considerably. With that understanding, we encourage you to participate in your association and board meetings - this is a crucial way to be aware of the condition of your building and association, which in turn may impact your personal safety and wellbeing.


Chris-Jaccard-CFP-CFA-200sq.jpg

Contributor

Chris Jaccard, CFP®, CFA is a lead advisor with Financial Alternatives in La Jolla, CA. When he’s not working on home improvement projects or trying to keep up with his kids, he loves to help successful families consider their alternatives and make better financial choices with the EXPERT™ Advisory Process. Schedule a time to chat about your situation or the latest project.

Sources:

Blog, General, Personal FinanceChris Jaccard, CFP®, CFAFinancial AlternativesHOA, insurance, board, lawsuit, risk