Question: I am on my association's board of directors. At our last board meeting our current management company presented the board with a "questionable" contract, one that would supersede the present contract that is presently in force and unexpired. After briefly looking over the questionable contract, I found several items that the association could be sued for, and other items directors could be sued for personally by owners. When I brought this to the president's attention during the meeting, he said he would sign it anyway. When told it could subject the association to liability, he said he wasn't worried because "the lawyer's job is to protect the board and get us out of trouble." He said that my concerns didn't matter because if the board got sued for any management contract we signed, we were indemnified by the association's insurance policies and the legal fees would be paid for. Is that true?
Answer: Insurance indemnification is not a blank check that allows board directors to do as they please. The purpose of indemnification is to protect board directors who act in good faith and in the best interests of the association and its titleholders. To qualify, each director must exercise prudent business judgment, to which your board president's comments are the antithesis thereof.
Each insurer has its own conditions for invoking indemnification and denying it. Whether your insurer will indemnify or not depends upon the terms of the association's agreement with that particular insurance company. That insurance agreement will detail actions for which the insurer will provide either or both the defense and the damages. It also includes several exclusions, circumstances under which the insurance company will not defend or will defend under a "reservation of rights," meaning they will expect the association or the defendant directors to pay the attorney's fees and damages.
Insurance policies usually do not cover intentional acts of the board that cause harm or acts in violation of the law. Association attorneys are in the business of collecting fees, whether they win or lose. Their job is not to protect the board or get them out of trouble. In this case, they should examine the critiques raised by the contract and submit a written opinion to the board on the validity of the fears.
Association boards consist of more than one director for good reason. The board functions as a "body" of minds who deliberate and together use their collective due diligence in performing their duties. Even if the president decides to unilaterally sign the management company's contract, the entire board must vote. If the president acts on his own, without the board, he does so at his own risk. He could be held liable for any damages that are charged against the association and the insurer may not indemnify his actions. If not properly voted on or executed, the contract may also simply be invalid.
An association's attorney is not an insurance policy for bad board decisions and rogue director actions. Directors who act in good faith can expect association attorneys to defend those actions, but that does not give the board the right to act outside the scope of their statutory duties. The attorney's job is to advise the association to follow the law, but it is still up to the board to follow through. If your president expects the association's attorney to protect the board, it may mean that not only will the association's insurance policy not pay the defense costs, but also any damages that might be assessed. In other words, owners may be paying for insurance that won't do any good when owners need it most.
The late Stephen Glassman, an attorney specializing in corporate and business law, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to P.O. Box 10490, Marina del Rey, CA 90295, or firstname.lastname@example.org.