It is possible our board may be sued personally by a resident. It is also possible the board failed to act on it’s fiduciary duty. If the insurance company fails to honor the D&O may the board utilize association funds to defend the board members personally?

1. Yes, it is possible for the Board members to be sued personally, and usually it will involve a breach of a fiduciary duty or some action taken outside of their Board authority. The fiduciary duties are: good faith, fair dealing, trust, care and loyalty.  Loyalty is where most board members fall down, in that a board member will not recognize his own “conflict of interest” and act in his own best interest instead of the association’s best interest.
2. If the association’s D&O insurance will not defend a claim, then the Association will have no choice but to use its own funds to defend, and it is entirely proper to do so.  It may be necessary to special assess the members to cover the costs of defense if the insurance company will not step in to defend.

Fellow, College of Community Association Lawyers
Two Miranova Place | Suite 380 | Columbus, OH 43215
P: (614) 228-0207 | F: (614) 228-6984
Toll Free: 888-228-9682

Normally the Articles of Incorporation, or the by-Laws, or the Declaration will contain indemnification language whereby the Association will indemnify the members of the Board from any liability, including costs of defense, if sued by reason of performing their duties as board members.  The costs of that indemnification can be covered by insurance or from Association funds.  If a Board member is found, by a court, to have acted in a willful, criminal or grossly negligent manner the indemnity ceases and the board member will become personally liable and be required to repay any costs advanced. You need to look to your documents to determine the scope of the indemnity.  
In cases where the documents are silent, IC 23-17-16 provides a statutory indemnity for directors of a non-profit corporation and allows for advance payment of the costs under IC 23-17-16-10.  
Thrasher Buschmann & Voelkel PC
Stephen Buschmann
151 N. Delaware St.
Suite 1900
Indianapolis IN 46204-2505
(317) 686-4773

The inquiry concerns personal liability of the Board members, and possible use of Association funds to pay for legal costs of defense.  What are the reasons that the Directors and Officers liability insurance carrier states if it declines to cover the claim? Regardless, the organizational documents, likely the By-Laws, of the Association need to be reviewed to determine if a provision for indemnification exists.  If such a provision exists, the specific terms also need to be considered.  Often there is an exception to indemnification for matters as to which an officer or director is adjudged to have breached her or his duty to the Association.  There also may be stated exceptions to indemnification for acts of willful misconduct or acts made in bad faith.  I would recommend that the organizational documents be reviewed with the legal counsel of the Association.

Lewis Montana
Levine & Montana
1019 Park Street – P.O. Box 668
Peekskill, New York 10566
(914) 737-3515

Board members can be sued individually over their alleged failure to discharge duties, be they fiduciary, or otherwise. Further, an association’s insurance carrier may elect to decline coverage for a variety of reasons (e.g., exclusions under the insurance policy, willful acts by the respective director(s) and the like), and in such instances the association would be responsible to fund a director’s legal defense, either pursuant to an applicable statutory provision contained in the respective state’s non-profit corporation act or the by-laws of the association, unless the actions of the director in question were egregious for which indemnification may not be mandated. It is best to consult an experienced community association attorney in your area to receive guidance and direction regarding your duties and responsibilities as a board member.
Patrick F. O’Dea, Esq. 
Nelson Mullins Riley & Scarborough, LLP 
BNC Bank Corporate Center, Suite 300
3751 Robert M. Grissom Parkway
Myrtle Beach, SC 29577
Tel: 843.946.5631

If the suit is against the Board members in their fiduciary capacity and personally, the defense attorney paid for by the D&O carrier will essentially be representing them in both capacities as long as there is no ruling that they acted outside of their fiduciary capacity. At that time, D&O coverage ends and they are in the suit solely in their personal capacities. That means that they must obtain their own defense attorneys at their own cost; the Association may not foot that bill (as there is no benefit to the Association).

Sara A. Austin
Austin Law Firm LLC
226 E. Market St.
York, PA 17403
717.846.2246 phone
717.846.2248 fax

In general, there are three major protections for Board members who are sued in the course of providing Board member responsibilities.

1. Directors and Officers Liability Coverage. This insurance coverage protects against allegations of breach of fiduciary duty and acts or omissions by a Board member taken in his/her Board member capacity. Coverage is generally excluded for actions taken in bad faith or for personal gain.

2. Indemnity:  Most governing documents contain an indemnity provision which requires that the Association defend and even pay a judgment if a judgment has been obtained based upon the good faith act of a Board Member.  These provisions often (like the insurance provisions for D & O coverage) have an exclusion if the Board member acted in bad faith, committed fraud or engaged in self-dealing.

3. There are statutes associated with volunteers which sometimes exempt volunteers from liability for acts taken in good faith, and without fraud or self-dealing.

Thus, if the Board believes that the Board member acted in good faith, and if its governing documents provide for indemnity, the Association is duty-bound to indemnify and defend the Board member.  

It is a more difficult decision when there is evidence of bad faith or self-dealing, but the Board’s decision must be based upon the particular facts at issue.  The Board’s business judgment in this regard is protected from judicial scrutiny, as long as the Board’s decision was based upon sound reasoning and did not result from bad faith or self-dealing.
Robert Griffin, Esq.
Griffin Alexander PC
415 Route 10 
2nd Floor
Randolph NJ 07869-2100
Tel:973- 366-1188

There are two sources of funds for a Board defense – insurance and indemnification. Typically the insurance policy will cover the Board against damages incurred by the claimant unless the Board member has committed fraud,  engaged in intentional illegality, or received a profit to which he or she was not legally entitled. Sometimes the claim will not be covered if one insured party sues another. There are numerous other exclusions as well; it is recommended that you review the policy.

Separately, a Board member may be entitled to indemnification by the Association. In New York, the broadest indemnification would cover a Board member against all third-party claims in the absence of “bad faith” and receiving a personal profit to which he or she is not legally entitled. Your governing documents may establish a narrower standard for indemnification, though, or make indemnification discretionary on the part of the Board rather than mandatory. In short, the Board may use Association funds to defend a Board member against a third-party claim, subject to the nature of the claim and the terms of the governing documents.

Kenneth Jacobs
Smith, Buss & Jacobs LLP
733 Yonkers Avenue
Yonkers, NY 10704
914-476-0600 X4102

60 East 42nd Street
46th floor
New York, NY 10165
212-688-2400 X4102