A homeowners’ association (“HOA”) is intended to protect the interest of all members of a community so that it is a great place to live. Run by the HOA Board, the association, through the Board, establishes a set of standards for care, maintenance, and appearance for all homes and acts on behalf of their fellow homeowners.
The fiduciary duties of HOA board members arise from Arizona corporate law because most homeowners’ associations act as nonprofit corporations. They are formed by filing articles of incorporation with the state, and Arizona imposes a fiduciary duty on the board of directors, requiring each member to act in the best interest of the corporation (e.g., the association of homeowners).
Being part of an HOA board is a major responsibility, and it comes with its risks. Fortunately, an HOA board member can consult a real estate attorney if these risks are of any concern.
What Fiduciary Means
Being a fiduciary means that you have to refocus your perspective to act as a member of a corporate association rather than as a homeowner in a community. This requires total objectivity and the ability to use business, not personal, judgement. A fiduciary in the HOA space represents the best interests of the community as a whole rather than the familiar segments.
There is also the confidentiality aspect of being a fiduciary that may require maintaining a tight-lipped protocol on board discussions or individual homeowner meetings with the board. This is similar to attorney-client privilege, which protects both parties when maintained.
Responsibilities of HOA Board Members in Arizona
HOA board members must act in accordance with the applicable duty of care, the duty of loyalty and the duty to act within their authority.
The Duty of Care
This duty requires that you be informed, reasonable and communicative before acting or voting on an HOA matter. It requires familiarity with the HOA’s CC&Rs (covenants, conditions and restrictions) and conducting research of each situation prior to making a decision
The Duty of Loyalty
This refers to HOA board members needing to remain unbiased, acting on behalf of the community rather than their own personal interests. There is loyalty to the community and to the association. This is a two-part component because it covers conflicts of interest and confidentiality. Specifically, board members must not act when there is a conflict of interest, such as a landscaper voting on which landscaping company to use for the community. Also, any information shared with the board in confidence must remain with the board and not shared outside of the association.
The Duty to Act Within the Scope of Authority
This component details the obligation that HOA board members have to adhere to the CC&Rs, HOA governing documents and relevant state laws while serving on the board. It means they must act when necessary but do not have unlimited authority and, therefore, sometimes cannot act at all.
HOA Board Member Protection from Personal Liability
It is normal for someone that considers becoming a board member to worry about potential liability that could arise from their position. After all, angry homeowners have the right to sue their HOA, and their attorneys often like to cover all bases and name specific board members in the lawsuit. Here is how you may be protected as an HOA board member in Arizona.
HOA Board Insurance
Most HOAs provide the Directors and Officers (“D&O”) insurance to provide a defense for any lawsuit resulting from a Board member’s actions as a board member. If the policy is especially robust, it will also include any costs of litigation. The HOA insurance policies should be on file with the community manager or insurance agent.
Board Member Liability Limitations
State laws and HOA governing documents may also limit board members’ liability, protecting them from lawsuits. The one exception is negligence on the part of one specific board member, which you may be avoided by honoring your fiduciary duties and staying informed, loyal and within the scope of authority.
What to Do if You’re Named in a Lawsuit
If you’re specifically named by a member of your community in a lawsuit, be sure to first review the above entities (insurance, laws and governing documents) to see if you’re protected. Then, contact a real estate attorney and have copies of those same entities on hand to begin building your case.
Find an Experienced Real Estate Attorney in Arizona
The attorneys at MacQueen & Gottlieb have significant experience with representing HOA board members and assisting in the resolution of HOA disputes. Our firm can help you review your HOA’s bylaws and your development’s CC&Rs and easements to find out your rights to indemnification. Contact us today at 602-562-7218 to schedule an initial consultation or make an appointment online.