How HOAs Should Manage Legal Losses

Legal BudgetingPreventing and managing legal challenges from residents, the government, the larger community or even fellow board members is always challenging. What is sometimes overlooked by HOA boards is the aftermath of legal action against a community. So, the HOA has lost a legal case--now what? Like preventing and managing legal issues, the aftermath of a lost case needs to be planned for and then facilitated carefully.

We’ve discussed in past blogs about the importance of creating policies, following procedure and being consistent in preventing disputes to reduce the number of them that go to court. The same approach needs to be focused on the end of the formal legal process: The verdict.

If your board assumes victory, or has too much confidence in the high end law firm the HOA has retained, planning for the worst case scenario might fall by the wayside.

Instead, the legal prep process needs to pay attention to the full lifecycle and host of potential outcomes to ensure complete preparedness. That means putting processes in place for when your defense fails and the HOA is on the hook for fees that, if not planned for, can seriously hurt your community’s financial stability and reputation.

Download The Community Association Guide To Legal Disputes

Here are a few ways to reduce the impact of a failed legal case:

  • Budget in advance for legal fees and costs. Your operations budget should intelligently account for potential legal fees beyond the normal, annual legal fees incurred by the HOA. Like the reserve fund the board manages for future improvements and large-scale projects, some portion of your operations budget needs to be protected to offset the financial repercussions of a larger lawsuit. Tapping into your reserve fund to pay for legal costs could harm the financial stability of your community, and ultimately could lead to unrest among residents if you pass these losses on by increasing their fees or levying a special assessment. Getting into this scenario will compound legal issues, put the community at risk and could severely damage your reputation, both in the community and the media.
  • Make sure your lawyer contract is sound. Ensuring that your contract with your legal representation is strong and controls costs for your given situation is crucial to protecting budgetary funds that can later be used to pay for a legal loss. For example, paying by the hour versus a retainer style agreement can make a huge difference to your ultimate legal costs. A retainer based agreement is based on a set fee per month or quarter; an hourly contract will charge your HOA board every time a board member might get nervous and pick up the phone to call your lawyer. It’s always important to set limits within your agreement so that legal fees don’t get out of control and impact other parts of your budget that could help pay for subsequent legal losses.
  • Educate the Board on the Appropriate Use of Your Lawyers. Nervous board members that pick up the phone and call your lawyers is a recipe for exorbitant legal fees that will hurt the HOA’s ability to manage a larger legal loss. Train your board members so they can understand when legal counsel is necessary and what can be resolved via your established governance documents and set processes.

Reserve funds can, in many cases, be used to help pay legal fees that pertain specifically to construction and maintenance related litigation, but it’s always best to avoid tapping the reserve if you can.

HOA Leader offered this advice from attorney Robert Galvin: "There are certain matters where you don't need a lawyer. In one of the condos I represent, one of the unit owners who happens to be very well–known local political figure was playing her hi–fi loudly. I said, 'You don't need a lawyer. Why don't you knock on the door and ask her to turn it down?' Not everybody's experienced enough to make that distinction intelligently, but you can begin to gain that experience.”

  • Make sure your insurance coverage is up-to-date and accurate. Insurance coverage for HOAs is a complex topic that needs a blog series of its own. The overall takeaway here is to be proactive in managing and monitoring your lineup of coverage. Lapsed insurance or insufficient coverage can be a deathblow to an HOA. In addition, to ensure your board feels empowered and protected to handle disputes according to policy, your D&O insurance needs to be active and appropriate; Directors and Officers Insurance is critical for your board to do its job effectively. General liability insurance does not protect individual board members from legal action, D&O insurance does, to a large degree.
  • Pay Attention to Public Relations. Don’t ignore the potential cost-both financial and in good public opinion-of legal action and a legal loss. It’s critical to be transparent with your community members, communicating as openly as possible about what’s transpiring, what the board is doing and what the possible outcomes might be. That said, every board member needs to be careful about divulging confidential information, so it’s advisable to appoint a single board spokesperson, or perhaps two, to communicate information to the wider community.

Your goal should be to have planned for a larger legal loss from a budgetary standpoint and communicated clearly to your residents throughout the process to avoid surprises and create a sense of ownership between the board and the homeowners it serves. The worse case scenario is a secretive process that comes as a surprise to the residents and results in special assessments that increase their fees. This must be avoided at all costs because even if the board acted in the best interest of the community, the perception will be otherwise.

If you’d like more helpful information like this, check out and subscribe to our blog. Comsource can help you and your board prevent challenging situations like lawsuits and managing losses in court. Reach out to us today. We’d love to talk through some of your challenges.

Download The Community Association Guide To Legal Disputes

Tags: reserve funds, operational funds, HOA and condo associations, Rules and Regulations, HOA legal process