Serving on the board of a homeowners association, condominium association, or other community association comes with more than the authority to make decisions. It also comes with responsibilities to the association.
One of the most important is fiduciary duty.
The term can sound intimidating, but the basic concept is straightforward: board members are entrusted to make decisions for the benefit of the association—not for their own personal interests.
What Is a Fiduciary Duty?
The exact legal standards vary by state and the association’s governing documents, but fiduciary responsibilities generally involve concepts such as acting:
- In good faith
- With reasonable care and diligence
- In the best interests of the association
- Within the board’s authority
- Without allowing personal interests to improperly influence decisions
Board members don’t have to agree on every issue. They also aren’t expected to predict the future or guarantee that every decision will work out perfectly.
What matters is how the board reaches its decisions.
What Does That Look Like in a Community Association?
Fiduciary duty touches many everyday board responsibilities.
Consider a major repair project. Before committing association funds, a board might obtain professional recommendations, review proposals, consider the association’s finances, discuss alternatives, and document its decision.
Or consider rule enforcement. A director shouldn’t push for enforcement against one owner because of a personal disagreement while ignoring similar violations elsewhere.
In both examples, the board’s decision-making process matters.
Common Areas of Fiduciary Risk
Community association boards routinely make decisions involving:
- Budgets, assessments, and reserve funds
- Maintenance and capital projects
- Vendor selection and contracts
- Enforcement of rules and governing documents
- Architectural requests
- Conflicts of interest
- Confidential information
- Insurance and risk management
These decisions can affect property values, association finances, and individual homeowners—which is why disagreements can sometimes turn into allegations that the board breached its duties.
Does a Bad Decision Mean the Board Breached Its Fiduciary Duty?
Not necessarily.
A board can make a reasonable decision that ultimately produces an unfavorable result. The fact that homeowners disagree with a decision—or that the decision looks different in hindsight—doesn’t automatically mean directors breached their fiduciary duties.
Good governance can help.
Boards should seek appropriate professional advice when needed, disclose potential conflicts, review relevant information before major decisions, follow their governing documents, and maintain clear records showing how important decisions were reached.
Where Does D&O Insurance Fit In?
An allegation that a director or board breached a fiduciary duty is one example of the type of governance-related claim that may implicate the association’s Directors & Officers Liability (D&O) Insurance.
Coverage depends on the specific policy and circumstances. D&O insurance doesn’t give directors permission to ignore their responsibilities, but it can provide important protection when board decisions are challenged.
For community associations, the goal shouldn’t be to eliminate every possibility of disagreement. That’s unrealistic.
The goal is to create a thoughtful, informed, and well-documented decision-making process—and make sure the association has an insurance program designed for the risks that come with governing a community.
Community Risk Advisors provides insurance and risk management guidance specifically for community associations.
This article is for general educational purposes and is not intended to provide legal advice or determine the fiduciary obligations of a particular board or director. Fiduciary duties and legal standards vary by jurisdiction and circumstances. Associations should consult qualified legal counsel regarding their specific obligations. Insurance coverage is determined by the terms, conditions, limitations, and exclusions of the applicable policy.