Risk vs. Reward: How to Make Community Service Fair

It is a basic truth that the risk in any venture should match the reward. High risk investments should bring high yields, while low returns may be acceptable for very secure investments.

The same principle should be applied to volunteer board service. Start with the reward – what is the compensation for board (volunteer) service? Of course, there is none – if the director receives any compensation, the director is not a volunteer. If there is no compensation, what is the amount of personal risk the volunteer leader should be expected to take on? If the “books are balanced” and things are fair, then the officers and directors should never be personally at risk for the volunteer service they provide to their neighbors.

Fortunately, there are at least three very important legal protections California law provides to HOA volunteer leaders. However, too many volunteers are unaware of the critical importance of these protections, and all too often stray from their safety zones into areas where they are exposed to legal risk.

Business Judgment Rule

The first protection, the “Business Judgment Rule”, can be found at Corporations Code 7231. The Business Judgment Rule protects volunteers in the scope of their service so long as they act in good faith, in the best interests of the organization as a whole, and upon reasonable inquiry. Well-intentioned (and sometimes overly zealous) volunteers can step outside of these protections. Common mistakes include retaliatory action, favoring or disfavoring certain owners, or deciding without having a proper basis for the decision.

Civil Code Section 5800

A second protection also comes from a statute, Civil Code Section 5800. This law provides personal immunity for volunteer officers and directors so long as the HOA has specified minimums of directors and officers (aka “D&O”) insurance. Associations with 100 or less residences must have at least $500,000 of such insurance, and associations larger than 100 homes must have at least $1,000,000 of “D&O” coverage. The immunity is subject to some important qualifications – the volunteer officer or director must act within the scope of their duties, in good faith, and not be willful, wanton or grossly negligent. Common mistakes in this regard include directors “taking matters into their own hands” and acting outside board authority, or ignoring advice given to the HOA by the manager or other appropriate HOA expert.

Corporate Process

The last protection is the corporate process. Corporate process is rarely viewed as anything but a formality, slowing down HOA action. However, the existence of the corporate entity is the most basic protection of all. By filing “Articles of Incorporation” with the Secretary of State, the association corporation, a separate legal being, is created. The corporation can sue or be sued in court, and has legal rights. Most importantly for the volunteer director, it is the corporation, not the director, which is bound to HOA contracts, and the HOA obligations are thereby separated from the individuals which govern it. However, and unfortunately, most volunteers do not understand the critical importance of documenting contracts or other decisions as authorized by the board, and that the board’s written minutes document all HOA decisions.

Understand and embrace these important protections, and make sure the “books balance” in your HOA. It is not fair that one’s volunteer service to the neighbors should bring about any risk.

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.