MxGowan D&O claims for HOA boards

3 Common Causes of D&O Claims for HOA Boards

Most Homeowners Associations (HOAs) and other Community Associations—such as condos, co-ops, or Master Associations—operate smoothly with very few issues. The most recent Zogby poll of property owners’ opinions regarding their HOA revealed an 89% satisfaction rating. However, when problems arise, they often result in lawsuits or D&O claims.

Volunteer directors and officers are primarily protected by the indemnification provisions contained in HOA governing documents. These provisions provide protection when they are challenged for work, decisions, or the failure to make decisions or enforce rules. Directors and Officers Liability Insurance (D&O) is a vital tool to fund the board’s protection. While D&O insurance is critical for HOAs, the most valuable tool is the proactive prevention of issues that may result in claims against the board.

It is important to keep a few things in mind about D&O policies:

  • Not all conduct and decisions by board members are protected.
  • Not all policies are created equal; some may have much broader coverage than others.
  • If the D&O policy does not cover a director and is indemnifiable, HOA assets or a special assessment will fund it.
  • Most indemnification provisions apply only to directors and officers—not other volunteers often covered by D&O policies.

D&O claims often stem from a few common root causes. This blog post will explore those causes and suggest strategies for HOA boards to minimize risk.

Also read: The D&O Insurance Basics that Community Associations Need to Know

Ignoring the governing documents

HOA conflicts are often the result of new members moving into a development without reading or fully understanding their governing documents. These documents detail what HOA members can and cannot do within the confines of their community and the core roles of board members. The unit owner must give up certain rights and choices as a community resident. The prospective buyer must do their due diligence. See the Unit Buyer’s Check List.

For example, a new owner operates an ice cream truck and parks it in his driveway so he can wash it down and restock it for the next business day. However, the CC&Rs and promulgated rules do not permit commercial vehicles to be parked in driveways. The unit owner receives a citation. The citation may lead to a conflict between the board and the community member. The unit owner says he just moved in and has not had a chance to read the governing documents.

Unfortunately, failing to review the governing documents before closing on the unit is not a defense.

Prospective board members need to understand the various governing documents, the rules and regulations of the community, and applicable governmental regulations before they plan to serve. There are four primary types of governing documents: Articles of Incorporation, Declarations/CCRs, Bylaws, and Association rules.

Articles of incorporation

HOAs require legal status to exist and operate. Without legal status, an HOA cannot enter into agreements through its officers, directors, employees, or community association managers. In some states, an HOA does not have to be a corporation, but obtains legal status through an enabling statute that sets forth the specific requirements that must be met. HOAs can also be both. Finally, some HOAs are set up as a real estate trust.

CCRs, or Declarations

Covenants, Conditions & Restrictions (CCRs), or Declarations, are legally binding documents that detail the rights and obligations of HOA unit owners. These are filed with the county clerk where the HOA is physically located and is available for public review. Changes to CCRs documents are difficult to amend because it usually requires a supermajority of unit owners (67% or 75%). Any governing documents should be changed only after consulting a community association attorney.


The bylaws are an HOA’s operating manual. Bylaws cover the standard guidelines and structure of an HOA. For example, the document might include the requirements and timing for board meetings, the timeline for board elections, the length of board member terms, board member duties, and the insurance and indemnification requirements of the HOA. Bylaws are sometimes included in the CC&Rs of the HOA. Changes to the bylaws generally require a majority vote of the unit owners.

Association Rules

The Rules and Regulations document is the easiest of the three governing document types to change. These rules are ones meant to be reviewed regularly. As an example, assume that skateboards are not allowed in the community. If the board later decides to put in a skate park on the property, they will need to amend the rule before proceeding.

Unlike the former document types, association rules only need to be changed by a vote from the HOA board, not the entire community of unit owners. The board will vote a new rule into effect, then send it to the HOA members for review. During a 30-day grace period, members can give feedback on the proposed rule change. After 30 days, the board will finalize the rule in the association rules document. Legal counsel should review rules to avoid any potential conflicts with state statutes or any potential desperate discriminatory impacts.

Also read: HOA Community Pools: Understanding D&O Insurance Coverage

Putting self-interest first

Some board members make the mistake of thinking that board membership is an opportunity to further their self-interests. Also, some board members may believe that their best interests are in the best interests of the HOA. For example, the food truck owner from the previous example might attempt to facilitate a rule change that would allow commercial vehicles to park in the community. Such an attempt would be considered a conflict of interest.

In many states, HOA board members are fiduciaries, meaning they are legally obligated to put the community’s well-being first and act in good faith. They must avoid conflicts of interest and keep information about their fellow members confidential. Failure to do so may expose them and the rest of the board and community to D&O claims.

Misunderstanding the role of board members

Probably the number one cause of D&O claims is the failure of board members to fully understand their role as volunteer board members. Potential board members must read or reread the governing documents before deciding to run for the board. Unfortunately, some unit owners do not read their governing documents until they receive a citation or have an architectural board variance application denied. Boards should provide educational opportunities and training to all their members, especially the new ones. Board members need to know how to fully transfer risk and avoid causing situations that might result in D&O claims.

In addition to familiarizing themselves with governing documents, board members must review and study board packets before attending board meetings. Failure to do so may result in time wasted explaining things to unprepared members. The board should consider adjourning meetings until all members are fully prepared. If a board member is consistently unable to review meeting packets, they should consider resigning. Ultimately, an HOA board works best when its members are engaged and committed to operating as a unit.

At the very least, once board members have read the governing documents, they must sign a document confirming that they have read and understood them.

This handy test provides an accurate assessment of the knowledge of new board members. To obtain an answer key, email Joel Meskin at

Also read: The Ins & Outs of Community Association Risk Management

Avoiding D&O claims and minimizing risk

The goal of any community association is to transfer risk from the community members and the association. When board members read and fully understand their governing documents, put the needs of their community first, and fully embrace the fiduciary nature of their roles, they have a far better chance of preventing D&O claims before they arise. However, not every board member will be willing to do the work. It is vital to require all new board members to attest that they have read the HOA governing documents and invest in their training.

HOA boards must be prepared for the unexpected, and the easiest way to do that is by choosing a D&O insurance policy that provides appropriate coverage. McGowan Program Administrators is a leading provider of Community Association Insurance products. Their offerings include D&O, Umbrella Coverage, Single Family HOA insurance, and other policies.

To learn more, click here.

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