Okay, so you’ve made your best effort to resolve conflict. You’ve attempted mediation but your HOA board is now a party in a lawsuit. Now what?
Don’t Panic When the Summons Arrives. The summons is in hand. Things just got real. The worst thing a board or board member can do is panic or do nothing. Remain calm. Think logically and unemotionally. Get together and discuss next steps with your fellow board members and then take quick, thoughtful, rational action. Don’t wait or hesitate. Remain calm but understand that time is of the essence to mount your defense.
Formally Engage Your Legal Team. Now is the time to fully engage your legal counsel. Whereas early on you were giving legal a heads up about an ongoing issue, with a lawsuit now active it’s time to lean on the experts.
Notify All Insurers of the Legal Claim. Again, how to proceed with notifications of your insurers varies by case and by insurance type. However, it’s a universal best practice to notify your insurers of active claims as soon as is humanly possible. Swift, appropriate action in this area will help you ensure coverage; delays or hesitation can open the door to your insurers denying coverage due to timeliness clauses in their respective policies.
Make Sure Your D&O Insurance is Active or Get It. Directors and Officers insurance is critical for your board. General liability insurance does not protect individual board members from legal action, D&O insurance does, to a degree. According to HOA Leader, D&O insurance “protects directors and officers from claims that they failed to act or acted wrongfully in their individual or group capacity on behalf of the association.” The scope of D&O insurance can be complex and varies policy-to- policy. However, D&O insurance typically protects individual board members against perceived breaches of fiduciary duty but not against fraud. Having D&O insurance not only protects board members, but it also helps in recruiting volunteers and giving board members the confidence to handle community disputes without fear of personal repercussions.
Be a Great “Discovery” Partner. Once your legal counsel or legal team is engaged, and the lawsuit moves through the litigation process, you need to be a great partner to your lawyer or lawyers. One of the first and most important steps in your HOA board’s defense is the discovery process. Isaacs & Isaacs, a law firm out of Kentucky, defines discovery as “...the exchange of legal information and known facts of a case. Think of discovery as obtaining and disclosing the evidence and position of each side of a case so that all parties involved can decide what their best options are – move forward toward trial or negotiate an early settlement. Parties in a case are required to participate in the discovery process, meaning they must hand over information and evidence about a claim so all participants can know what they are facing at trial.”
How can a board help with discovery? Well, this starts well before the lawsuit. A highly organized board with clear processes and organized documentation is your legal counsel’s best friend. Being able to furnish documents-emails, letters, phone calls, fines, financial statements, etc.-is critical to mounting a strong defense or pushing the suing party to settle.
It’s really pretty simple: HOAs that are poorly run, are not organized and have weak process will be sued more frequently and be less able to defend themselves even against spurious claims.
The lesson, here? Be organized. Document everything. Follow the governance documents. In reality, the everyday actions of the board and its strict adherence to established processes means a board is always preparing to support the discovery process in a legal dispute.
Maintain Confidentiality. You and your fellow board members need to keep quiet about the lawsuit. Emails, letters, conversations outside of the board and other communications about the nature of the lawsuit can be used against the HOA board and damage its defense. Mum’s the word.
Educate the Board on Basic Legal Matters. It’s possible that you might have a lawyer or lawyers on your board. Regardless, every board member should have some basic knowledge of the law as it pertains to HOA community management. Every board member shouldn’t be ready to pass the BAR exam, but knowing the fundamentals can’t hurt.
Being sued is not unusual but it doesn’t have to be a frequent occurrence. If you and your fellow board members remember and fulfill the three basic components of your fiduciary responsibilities, this will go a long way in reducing legal action in your community.
- The Duty of Care. You and your fellow board members must make informed decisions.
- The Duty of Loyalty. You and your fellow board members must act fairly and in good faith with the best interests of the community in mind.
- The Duty to Act Within Scope of Authority. You and your fellow board members must meet its obligations while not acting on matters beyond its authority.
Focus on meeting your fiduciary responsibilities, first and foremost. But always be prepared to mediate conflict and support the legal defense of the HOA board by remaining organized, process oriented and transparent in the day-to-day management of your community.
Comsource can help you and your board prevent challenging situations like lawsuits, as well as provide assistance should legal action be taken against your board. Reach out to us today. We’d love to talk through some of your challenges.