Every now and then, homeowners may sue HOA board members for their decisions or actions. More often than not, board members are protected by the law and insurance. That said, there are cases where the law may hold them personally liable.
Why Owners Sue HOA Boards in Illinois
Anyone in a place of authority knows that legal action is just part of the job. Board members find themselves in the same position. Their decisions and actions are not always popular, resulting in residents suing the homeowners association or condominium.
Here are the common reasons for an HOA lawsuit.
1. Selective Rule Enforcement
One of the most common reasons involves selective enforcement. Owners may argue that the board enforces rules against some residents but not others or enforces only certain rules. To avoid this, board members must apply the rules in a fair and consistent manner across all residents.
2. Failure to Maintain Common Areas
Associations have a duty to maintain common elements such as roofs, hallways, elevators, landscaping, and parking areas. Owners will sometimes sue when the HOA fails to repair or maintain these areas, and the neglect causes property damage or safety issues.
Fortunately, avoiding this is easy. Boards must simply establish and follow a consistent maintenance schedule. If repairs are necessary, the board must act efficiently and contact their vendor.
3. Improper Dues or Assessments
When money is involved, litigation is almost always a guarantee. Owners may challenge condo fees if they think they are too high or if the board acted outside of its authority. Provided the board followed proper procedures and can justify the increase, directors have nothing to worry about.
4. Discrimination or Fair Housing Violations
Associations must comply with federal and state fair housing laws. Lawsuits can arise if an owner believes that they were denied a reasonable accommodation or discriminated against. Board members are not usually knowledgeable in the law, so consulting a legal professional before acting is always a good idea.
5. Breach of Governing Documents
Boards must follow their governing documents, including the CC&Rs and bylaws. Sometimes, an owner will sue the HOA if they think the board violated the provisions of these documents. To avoid liability, boards must always adhere to these documents and seek help from a lawyer for interpretations.
6. Misuse or Mismanagement of Funds
The condo board is responsible for managing the association’s funds. If owners suspect that there was misuse or mishandling, they can initiate a lawsuit. Common reasons include improper spending, lack of transparency, or failure to maintain financial records.
7. Architectural Review Disputes
In a planned development, architectural changes often follow a request and approval process. If an owner wants to modify their home, they must seek permission from the board or the Architectural Review Committee first. Denials usually trigger a dispute or even a lawsuit, but they don’t always have merit.
Can Condo Board Members be Held Personally Liable?
While condo board members have certain protections in place, there are circumstances when a court will find them personally liable. Here are the most common scenarios.
1. Fraud or Intentional Misconduct
Board members can be personally liable if they commit fraud or knowingly engage in dishonest conduct. Examples include falsifying financial records, misrepresenting information to owners, or intentionally concealing important facts from the association.
2. Self-dealing and Conflicts of Interest
Directors must act in the best interests of the association. If a board member approves contracts that personally benefit them, their family, or their business, they can face personal liability. To avoid this, directors must always disclose potential conflicts of interest and even recuse themselves from the discussion and vote.
3. Willful Misconduct or Bad Faith Decisions
Courts may hold directors personally responsible when they knowingly make decisions that harm the association or intentionally ignore the governing documents. This is known as acting in bad faith, which can expose the board to personal liability.
4. Gross Negligence
As part of their fiduciary duty, board members must exercise reasonable care. They violate this duty when they practice gross negligence, which demonstrates a serious disregard for their responsibilities. For example, if board members ignore obvious safety hazards in common areas, a court may find them personally liable.
5. Actions Outside the Scope of Authority
Board members must operate within the authority granted by the governing documents and state law. If a director takes actions that go beyond that authority, they may face personal responsibility.
6. Misuse or Misappropriation of Funds
Money is always a touchy subject. Condo boards have an obligation to use association funds properly and in the best interest of the association. If a board member uses it for personal purposes, they may find themselves personally liable. Another example is when the board approves improper payments.
7. Violation of Laws or Fiduciary Duties
Board members have fiduciary duties to the association. These duties require directors to act with loyalty, care, and in good faith. Violating these duties, especially when it harms the association or its members, can lead to personal legal exposure.
What Protects Board Members from Lawsuits?
In Illinois, condo board members generally enjoy a degree of protection from personal liability when they are acting within the scope of their duties and in good faith. According to the Illinois Condominium Property Act, board of directors are afforded certain protections to encourage individuals to volunteer for these positions without fear of excessive personal risk.
Here are some protections board members typically have:
- Protection Under the Business Judgment Rule. Condo board members are protected under the business judgment rule, which presumes that decisions made by board members are made in good faith and in the best interest of the association. As long as board members act reasonably, in good faith, and as fiduciaries, they are generally shielded from personal liability for their decisions.
- Protection Under Insurance Coverage. The ICPA also requires condo associations to maintain directors and officers (D&O) liability insurance at “a level deemed reasonable by the board, if not otherwise established by the declaration or bylaws.” This insurance helps protect board members from personal liability arising from decisions made in their official capacity. It covers legal expenses and damages resulting from lawsuits against board members.
On the flip side, board members can be held personally liable if they engage in illegal activities, breach their fiduciary duties, or personally benefit from association transactions. They may also be held personally liable if their actions involve gross negligence or willful misconduct.
How to Reduce Legal Risk in Condos
Serving on the condo board can be rewarding, but it also comes with legal risks. Fortunately, mitigating these risks is easy enough. Board members can do this by implementing the following strategies:
- Follow the governing documents and state laws
- Act in good faith and in the association’s best interests
- Document decisions and meetings carefully
- Seek professional advice when necessary
- Maintain clear financial oversight
- Avoid conflicts of interest
- Communicate openly with owners
- Maintain appropriate insurance coverage
To ensure board members are protected from personal liability, it’s advisable to seek legal counsel when making significant decisions, especially when legal or financial complexities are involved. Boards should also work with their association management company and insurance broker to discuss the essential insurance coverage and policies they need to protect the condo association and board members.
Can You Sue HOA? Answered!
While it is possible to sue both the HOA and the board, it doesn’t always work out. Lawsuits are expensive and time-consuming, and legal fees are paid through owner dues anyway. For owners, the best course of action is to resolve the dispute internally before escalating to litigation. For boards, avoiding liability is the better option.
To learn more about condo management in Chicago, get in touch with our team at First Community Management.