As a fiduciary in a community association, each board member is expected to act in the best interests of all residents, and act responsibly in carrying out their duties. This protects both the association and board. However, if they do not fulfill their fiduciary obligations to the association, such as not disclosing a conflict of interest regarding a board action, they will be held accountable for their actions.
Fiduciary Protections
By adhering to fiduciary duties, HOA board members are protected from personal liabilities. For instance, a disgruntled homeowner can sue a board member for making bad decisions, but if meeting records prove the decision was done in the best interest of the community — regardless of the bad outcome — the business judgment rule will not hold them personally liable. This empowers board members to serve their community without fear of losing their personal assets.
Most associations have an indemnification clause, which allows board members to reimburse legal expenses in case of a lawsuit. If you want to protect the finances of your association, directors & officers (D&O) insurance coverage is a must.
Avoiding Conflicts of Interest
Often, a conflict of interest may arise when hiring a vendor. Board members who would profit financially from hiring a particular vendor risk of putting their own interests above the association’s interests. In a small community, such as might occur in Maui County, board members may be friends or related to a vendor who bids on association projects. With a small pool of contractors to choose from, it might not be in the best interest of the association to automatically bar those vendors from bidding.
There are a number of ways association boards can ensure the community’s interests come first. Here are the steps the board should follow.
- Each board member should fully disclose when they think there could be a conflict, whenever objectivity could be questioned by others.
- The entire disclosure should be reflected in the board minutes.
- The board member who believes there is a conflict should refrain from attending, or sit out of, the board’s decision and any related executive meetings that are conducted.
- Sealed bids, opened at the same time, help reduce any claims that competing bids were released in advance of the meeting. Multiple bids should be sought and reviewed before the board makes its decision.
You could consult with your community association manager or attorney, but if a question arises over whether a conflict exists, it probably does.
