For many new board members who are trying to get up to speed on their duties and obligations, few things could be as important as reviewing their governing documents to ensure they contain comprehensive indemnification provisions. No board member wants to be in a position of serving on the board with the possibility of being held personally responsible for paying the costs to defend a lawsuit. Ensuring adequate indemnification protection for board members is included in the association’s governing documents affords peace of mind while board members continue to serve their community.
“Indemnification” is the right or duty to make good on any loss, damage, or liability incurred by another party. Indemnification provides financial protection to board members in the event they are sued in the course of their board member duties and are forced to defend against a lawsuit. Indemnification, however, is not unlimited. It generally only applies if the board members’ decisions are reasonable and made in good faith while acting in the course of their duties. With this provision, any board member is likely to be indemnified in the event of a lawsuit, unless they were grossly derelict in their duties. The key point though, is that the association’s governing documents must provide for it.
For example, if a board member, in reviewing an owner’s architectural improvement application, sends an email to the entire community stating the application was denied because that owner is a person of a certain age, sex, or race, and the owner subsequently sues, it is extremely unlikely an indemnification provision in the governing documents would protect that individual board member. Not only was the action egregiously wrong, but the conduct and decision to deny the application for that reason was not made in good faith and was unreasonable. As a result, it is possible that the board member could be personally responsible for the financial costs of the lawsuit. On the other hand, if a board decides to fire an underperforming landscaper and the landscaper sues the individual board members for breach of contract, it is likely indemnification would provide financial protection for the individual board members involved in that decision.
If the governing documents do not include indemnification protection for board members, the best course of action is to contact legal counsel to draft an amendment that adds it. To be clear, an indemnification amendment must be voted on and approved by the owners. Hopefully there would not be much pushback to an amendment that adds a standard and essential provision for non-profit corporate board members.
One of the greatest benefits of indemnification is that it serves as a great tool to recruit new board members. After all, if board members know they will be financially protected when making reasonable, good faith business decisions, they will feel more comfortable serving on the board.