Community associations play a vital role in managing and maintaining common property, safeguarding the community’s financial investments, and fostering a strong sense of unity among homeowners. Their effectiveness, however, depends on the active participation and commitment of their members, and many associations struggle to recruit individuals to serve on the board. Below are three strategies community associations should implement to encourage greater involvement and support members interested in running for the board.
- Incorporation: Ensure the association is properly incorporated as a nonprofit with the Secretary of State. Incorporation creates a legal entity separate from directors, establishing a liability shield: lawsuits target the association, not individual board members. Generally, personal assets aren’t at risk for board members if the association is successful, with limited exceptions. If not properly incorporated, Kaman and Cusimano can assist with filings and can serve as registered agent to receive legal notices, offering additional protection.
- Indemnification in Governing Documents: Boards should review governing documents to include strong indemnification provisions that shield board members from personal liability for actions taken in good faith. Indemnification can cover defense costs if reasonable business judgment was exercised, using association funds when insurance defense funds aren’t available.
- Director and Officer (D&O) Liability Insurance: Boards should obtain D&O liability insurance. A policy protects present and former directors and officers from personal liability for acts, errors, or omissions, and can fund defense costs, judgments, and settlements. Kaman and Cusimano recommends at least one million in coverage, extension to committee members as appropriate, inclusion of “full prior acts,” non-monetary defense costs, and coverage for civil rights violations. Policies should be tailored in consultation with the association’s insurer to fit specific needs.
The success of a community association is driven by its members and those who volunteer to serve on the board. Incorporation, indemnification, and maintaining a D&O policy are all ways to effectively operate an association, attract and incentivize community members to serve, and most importantly, minimize the potential of personal liability for board members. If your association is interested in learning more about our services and how we can help, please click the following link: Request for Proposal and type “VOLUNTEER PROTECTIONS” in the subject field.
