BOARD MEMBER IMMUNITY
BOARD MEMBER IMMUNITYMARYLAND HOA LAW ATTORNEYS
By Nicholas D. Cowie of Cowie Law Group, P.C., Maryland HOA Law Attorneys
Introduction – Statutory Immunity From Lawsuits for HOA Board Members
Question:
Are Maryland homeowners association (“HOA”) board of director members and officers (collectively “board members”) subject to personal liability for actions they take on behalf of the HOA? As Maryland HOA law attorneys, we are often asked this question when difficult decisions need to be made by HOA board members.
Answer:
In general, one cannot sue individual HOA board members as a result of their actions or decisions on behalf of the HOA. Instead, a lawsuit can only be filed against the HOA as a legal entity. This immunity from personal liability for individual HOA board members is not absolute. There are two layers of conditional immunity available to HOA board members. The first layer of immunity protects HOA board members from personal liability in “tort” lawsuits if board members adhere to statutorily prescribed good faith standard (discussed below). The second layer of statutory immunity applies more broadly and protects HOA board members from personal liability in “in any suit” if the HOA maintains statutorily prescribed insurance coverage at specified rates (discussed below).
Background – Maryland HOA Immunity Laws
Maryland HOAs act through directors and officers who consist of homeowners who have volunteered to take on important role of governing the affairs of the HOA, including establishing its annual budgets, maintaining its common areas, and enforcing its rules and regulations. Actions taken by an HOA can result in lawsuits by disgruntled homeowners or third parties such as discharged vendors or visitors injured on common area property. Sometimes these lawsuits will name individual HOA board members and seek to impose personal liability upon them for participating in making the decision that has aggrieved the person filing the lawsuit.
The rationale behind the Maryland HOA laws providing legal immunity to board member is to encourage the homeowners members of the HOA community to serve on the the board of directors as unpaid volunteers. Without this immunity, homeowners would be discouraged from volunteering for fear of being dragged into lawsuits and the HOA could not function.
Immunity Law for “Torts” Based on Good Faith Conduct
Maryland condominium law provides limited immunity to board members against “tort” liability for their “tortious” actions on behalf of the association. The legal terms “tort” and “tortious” refer to wrongful conduct that can range from careless or negligent acts to intentional conduct deigned to harm others.
A typical example of a tort liability claim is a negligence lawsuit in which a claimant sues an individual HOA board member for alleged carless or “tortious” decisions made on behalf of the HOA that resulted in damages to the claimant. Another example of a tort liability claim would be a negligence lawsuit in which a visitor to the condominium is injured by a dangerous condition in the common elements and sues individual HOA board members for their alleged careless, or “tortious,” failure to to repair the dangerous common area condition. In these examples of negligence lawsuits, the claimant may only seek recovery from the HOA as a legal entity. The individual board members cannot be held personally liable for their actions or decisions on behalf of the HOA, and cannot even be named as defendants in a tort lawsuit, unless there is evidence to show they engaged in intentional wrongdoing or other serious misconduct, such as fraud or bad faith (e.g., dishonesty, self dealing, and egregious arbitrary decisions not supported by facts or outside their legal authority).
Maryland’s statutory immunity law applicable to “tortious” acts of HOA board members breaks down into two parts:
PART ONE: first, the law provides that so long as an HOA board member’s actions meet the good faith standard of conduct described in PART TWO below, they cannot be named in a tort lawsuit. Instead, the suit must be brought “only” against the HOA as an entity: “a person sustaining an injury as the result of a tortious act of [an HOA board member] while the [board member] is acting within the scope of [his/her] duties may only recover in an action brought against the [HOA] for “the actual damages sustained.” Maryland Annotated Code, Real Property Article (“RP”), § 14–118(b) and Courts and Judicial Proceedings Article (“CJ”) § 5–422(b).
PART TWO: second, the law provides that in any tort lawsuit brought against an HOA, a board member “shall have immunity from liability” and “may not be held personally liable” for damages sustained by a party to the lawsuit, if the board member: “(1) acted within the scope of [their] duties; (2) acted in good faith; and (3) did not act in a reckless, wanton or grossly negligent manner.” RP § 14–118(c) and CJ § 5–422(c). Gross negligence is complicated term but generally it exists where one injures another deliberately or with reckless indifferent to their rights. A detailed examination of what constitutes “reckless, wanton or grossly negligent” conduct in Maryland can be found in a University of Baltimore Law Review Article. In Essence, these three standards can be summed up as acting in “good faith.”
Board members should ensure their activity on behalf of an HOA conforms with these three (3) standards of good faith conduct (quoted in PART TWO above), and associations should consult with a Maryland HOA law attorney to obtain an opinion if there is any question as to whether these standards will be met by any planned decisions of the HOA board of directors.
In the event a tort lawsuit is filed against individual board members, a Maryland HOA law attorney can usually get the case dismissed based on the Maryland immunity laws cited above, so long as there has been compliance with the three (3) good faith standards of conduct listed above. If, however, a lawsuit were to go forward, adherence by HOA board members to these good faith standards of conduct puts the HOA and its board members within the protection of the “Business Judgment Rule” under which and HOA and it’s board members cannot be held liable for their decisions if a court finds that at the time made, the decision was reasonable, made in good faith, within the scope of board authority, and with the best interest of the HOA in mind, even if the decision ends up being a bad one. In such situations, a court will not second guess board member judgments in hindsight as to what is best for the HOA, even if the board made a mistake. In other words, even if immunity laws do not apply, HOAs and their board members have leeway to make honest mistakes under the business judgment rule.
The business judgment rule can be used as a defense to have a suit involving individual board members dismissed. For example, in Reiner v. Ehrlich, 212 Md. App. 142 (2013), the appeals court upheld a trial court’s dismissal of lawsuit filed against an HOA and individual homeowners, including HOA board members. The claimants, homeowners in the community, sued because the HOA board denied their request to install a new roof using materials not authorized by the HOA bylaws. The court found that the decision of the HOA to deny the homeowners request to install the unauthorized roofing material was protected by the “business judgment rule,” and that by naming individual homeowners in their lawsuit the claimants had also violated RP § 14–118(c) and CJ § 5–422(c), thus justifying dismissal of the lawsuit as to the individual homeowners as a matter of law in the absence any allegations that they had “acted outside the scope of their duties, acted in bad faith, or acted in a reckless, wanton, or grossly negligent manner.”
Immunity Law Based on Maintaining Insurance Coverage
Maryland HOA law provides even broader board member immunity from personal liability “for damages in any suit”(not just tort lawsuits) if the HOA maintains a “Directors and Officers Liability Insurance” (“D&O”) policy that meets the following statutorily prescribed requirements:
- The insurance must cover liability incurred by the association or its board members, or both, as a result of the acts and omissions of its board members in providing services or performing duties on behalf of the association (a “D&O” insurance policy).
- The terms of the insurance policy must provide coverage for the acts or omissions, which are the subject matter of the suit (without meritorious basis for coverage denial).
- The insurance must have coverage limit of not less than (a) $200,000 per individual claim, and $500,000 per total claims that arise from the same occurrence; or (b) $750,000 per policy year, and $500,000 per total claims that arise from the same occurrence.
- If the insurance has a deductible, the deductible amount must not be greater than $10,000 per occurrence.
- If there is a coinsurance penalty, the rate of coinsurance must not be greater than 20 percent.
CJ § 5–406(b).
An additional benefit of having the statutorily prescribed insurance coverage is the imposition of a statutory cap on the association’s liability to the amount of insurance coverage. Specifically, Maryland HOA law provides that if the association has maintained the statutorily prescribed insurance (meeting the 5 listed requirements above), then any person bringing a lawsuit against the HOA will only be entitled to recover damages from the association “to the extent of the applicable limit of insurance coverage including any amount for which the [HOA] is responsible as a result of any deductible or coinsurance provisions. CJ § 5–406(c).
A further benefit of having D&O insurance is that the policies may pay for all or a substantial amount of the HOA’s legal defense and any judgment that may be entered against the association in a court of law if the case fails to settle before trial.
Finally, there is a limited exception to immunity based on maintaining the statutorily prescribed insurance, which can render a board member personally liable for any damages above what is covered by the HOA’s D&O insurance policy. Specifically, Maryland HOA law provides that a board member “shall be liable for damages in any suit in which it is found that [they] acted with malice or gross negligence,” however, such personal liability is only to the extent that a judgment for damages exceeds the limits on liability under the statutorily prescribed D&O insurance policy maintained by the HOA. CJ § 5–406(d).
An HOA that wants to attract and keep board members, and cap its liability from lawsuits, should make obtaining the statutorily prescribed D&O Insurance an integral part of its risk management plans. The statutorily prescribed insurance is merely a minimum standard and insurance coverages can, and probably should, be increased for many HOAs. D&O insurance coverage can differ depending on the policy. Generally, D&O policies will cover all board of director members, who also typically make up the HOA’s officers. However, some policies can provide additional coverage for non-board members such as committee members, employees, and non-board member volunteers. Contact one of the Maryland HOA law attorneys at Cowie Law Group, P.C. for more information about immunity for HOA members of the board of directors and officers.
Maryland HOA Law Attorneys
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NOTE ON LEGAL ADVICE: This Article should not be relied upon as a legal advice applicable to any specific case concerning members of the board of directors and officers of a Maryland HOA. Rather, it is a general statement of legal principles that may or may not apply to your Maryland homeowners association. The individual facts of each case need to be analyzed to determine the application of law. Speak with a Maryland HOA law attorney at Cowie Law Group, P.C. for a consultation relative to your specific situation.