Risk Management Considerations for Condo Association Boards

Article Courtesy of The Insurance Journal

By Patrick Wraight

Published April 5, 2023

The condo association takes on a special level of responsibility because of the unique form of ownership that is the condominium. To make sure we are all on the same footing ó a condominium is a form of ownership where a person (in the broadest possible sense) purchases a unit within a building. By purchasing the unit, they also buy their spot as co-owner of the entity that owns the entire property, whether it is a single building or a group of buildings, including their appurtenant structures (the clubhouse, pool houses, pools, etc.), the condo association.

The association elects a board of directors. The board acts on behalf of the unit owners to conduct the business of the association. This allows business to be done without the need to bring the body of owners together to make decisions. That exposure creates the need for the board to have directors and officers liability (D&O) insurance in place.

D&O insurance provides coverage for the decisions of the board and the individual members of the board.

Consider the Surfside Condominium collapse in June 2021. The evidence to date suggests the collapse was due at least in part because of deferred maintenance to the building. Deferred maintenance is a fancy term that means that they havenít taken care of the building as they should have. The association board was made aware of repairs that the buildings needed, and they chose not to start on those repairs because of the cost associated with them.

There are other decisions that boards have to make, from hiring lawn maintenance contractors to handling the associationís funds to purchasing insurance for the associationí various exposures. All of these decisions can lead to a D&O exposure.

While it seems like it would be impossible to reduce the chance of a D&O claim to zero, it is possible to reduce the chances, and to mitigate the impact of the claim, if filed.

Validate Board Members

In order to best manage the risks of a D&O claim, the association should start at the source of potential D&O issues and that is with the board members.

Each member, and potential member, of the board should be required to submit to some degree of scrutiny. Their personal business is not personal if they want to take on the responsibility of leading the association for the good of the members. Board members should be required to, at a minimum, submit an application that details the board position they are seeking and why they think they would make a good board member.

The application process should include divulging any businesses that the potential board member has an ownership stake in, especially any businesses that could end up bidding as a vendor for the association.

Additionally, the application should include an anti-conflict of interest provision that requires board members and potential board members to report any potential conflicts of interest before any business is considered.

It may seem intrusive, but especially if the board members have access to association funds, a review of potential board membersí financial situation may be in order. Financially insecure board members may be swayed in their decision-making process to vote in such a way that helps their finances rather than protecting the financial investments of the association.

Document Board Proceedings

If there is an item that can prevent a problem as quickly as it can create a problem, itís documentation. Properly documenting meetings allows for the transparency that people expect and can provide answers for most questions that come up. A decision may have turned out to be the wrong one and created a problem, but if the decision-making process is documented and the conversation captured, it tells why the decision was made in the way it was.

The documentation of meetings creates the historical records that describe the chain of events that ocurred before each decision. It helps to answer questions such as why to choose vendor A over vendor B, or why to choose solution one over solution two.

This takes away the potential for accusations of misconduct in fielding business proposals, or other business where the board could be questioned.

In the past, a secretary might record the meeting minutes, which may still be the preferred method for many boards, but it would be easy enough to create a video (or audio) record of board meetings so that there are no questions as to how the board came to a decision.

Communicate Board Decisions

After documentation, communication is another simple way to avoid D&O trouble and the lack of communication is a way to invite trouble. Communication should be simple, direct and complete. All board communications should be sent in the same way every time, and in a way that is clear to the members of the association.

Any time the board meets, they should communicate the results of that meeting, even if it seems as though there was nothing to report. The more information that is available to the association, the easier it will be to defend issues that might come up.

If every board meeting is communicated to the association, including those meetings where major decisions are made, it reduces the likelihood of someone accusing the board of making decisions without informing the association about whatís happening.

Continual open communication with the association also allows the board to seek the input of the association members. If the members choose not to make their voices heard, either by attending meetings, or by responding to the reports of the board, then they help make the case that the board is acting according to the wishes of the members.

There are other ways in which a condo association board might mitigate their D&O exposures, but whatís most important to note is, whether the board actively works to mitigate their risks or not, those risks are still there. Itís just a matter of time before the claim comes that the board made the wrong decision or failed to make a decision and something happened.