3 Best Practices for Condo Board Members to Minimize Personal Liability
Being a Board member of a condominium association can often be a thankless job: you receive all the complaints and are the face of every perceived issue that has ever happened or will ever happen in the condominium. And when things run smoothly or problems are resolved, there is no parade in your honor. Board members volunteer their time and energy to help their community run smoothly, resolve disputes, and promote a sense of good-neighborliness in the condominium. But even with the best intentions, things can go wrong, and Board members can be brought into a lawsuit. In that circumstance, a Board member could face personal liability for their acts or omissions unless the condominium association has taken appropriate steps to minimize the potential personal liability for its Board members. This article discusses three best practices that a condominium association can implement to provide as much protection as possible for board members, thereby minimizing their personal liability.
Maintain Insurance
A first line of defense for Board members to minimize their personal liability is to obtain and maintain an insurance policy for the condominium association’s directors and officers, often referred to as a Directors and Officers (D&O) policy. As with all insurance policies, a D&O policy will likely contain some exclusions allowing the insurance carrier to decline coverage. Nonetheless, a D&O policy can still provide coverage for monetary damages, legal fees, and costs incurred in a lawsuit.
The bylaws for most condominium associations will contain a provision that addresses the association’s ability to obtain a D&O policy. This provision can either require or permit the association to obtain a D&O policy. Regardless of whether a D&O policy is required or just allowed, having a D&O policy can provide Board members with a level of peace of mind that the insurance carrier may handle specific claims.
Amend the Condominium Documents
Certain protections are available to Board members only if the protections are provided in the condominium documents. The directors of condominium associations should have a level of protection in the association’s bylaws because Section 54(6) of the Michigan Condominium Act, MCL 559.154(6), requires the bylaws to contain an indemnification clause for the board of directors. However, the indemnification clause must exclude indemnification for “willful and wanton misconduct and for gross negligence.”
Before 2015, the Michigan Nonprofit Corporation Act permitted a condominium association’s articles of incorporation to eliminate a volunteer Board member’s personal liability for monetary damages only for a breach of the Board member’s fiduciary duty. MCL 450.2209(1)(c), as amended by 1996 PA 397.
In 2015, Section 209 of the Michigan Nonprofit Corporation Act, MCL 450.2209, was amended to expand the limitations of a Board member’s personal liability. Currently, MCL 450.2209 allows a condominium association’s articles of incorporation to eliminate or limit a Board member’s liability for any action or failure to take action, except for the following claims:
(i) The amount of a financial benefit received by a director or volunteer officer to which he or she is not entitled.
(ii) Intentional infliction of harm on the corporation, its shareholders, or members.
(iii) A violation of section 551.
(iv) An intentional criminal act.
(v) A liability imposed under section 497(a).
MCL 450.2209(1)(c). Accordingly, the 2015 amendment to MCL 450.2209(1)(c) greatly expands the types of claims that a Board member may be protected from liability for, provided the association’s articles of incorporation contain a limitation of liability consistent with MCL 450.2209(1)(c).
Beyond limiting a Board member’s liability, MCL 450.2209(1)(e) provides that a condominium association may assume the liability for all acts or omissions of a volunteer director, a volunteer officer, and other volunteers if all of the following are met:
(i) The volunteer was acting or reasonably believed he or she was acting within the scope of his or her authority.
(ii) The volunteer was acting in good faith.
(iii) The volunteer’s conduct did not amount to gross negligence or willful and wanton misconduct.
(iv) The volunteer’s conduct was not an intentional tort.
(v) The volunteer’s conduct was not a tort arising out of the ownership, maintenance, or use of a motor vehicle for which tort liability may be imposed under section 3135 of the insurance code of 1956, 1956 PA 218, MCL 500.3135.
Just as with MCL 450.2209(1)(c), the ability for a condominium association to assume a director’s or officer’s liability is only available if the articles of incorporation allow the association to assume their liability.
Volunteer Status
As the text of MCL 450.2209(1)(e) states, a condominium association can assume a Board member’s liability only if the Board member is a volunteer director. A “volunteer director” is defined as “a director who does not receive anything of more than nominal value from the corporation for serving as a director other than reasonable per diem compensation and reimbursement for actual, reasonable, and necessary expenses incurred by a director in his or her capacity as a director.” MCL 450.2110(2). A “volunteer” is similarly defined as “an individual who performs services for a corporation, other than services as a volunteer director, who does not receive compensation or any other type of consideration for the services other than reimbursement for expenses actually incurred.” MCL 450.2110(1).
Directors and officers who receive compensation for serving as a director or officer may preclude the protections available under the Michigan Nonprofit Corporation Act and the condominium documents, resulting in the director or officer potentially facing personal liability. To ensure that an association’s directors and officers retain their volunteer status, condominium associations should refrain from paying directors and officers for their service. Receiving compensation clearly shows that the director or officer is not a volunteer.
Closely related to compensation is receiving a discount on the amount of assessments a director or officer must pay. A condominium association likely has the authority to discount the amount of assessments a director or officer must pay, provided that the discount is not apportioned among the other co-owners. See Deep Harbor Condo Ass’n v Marine Adventure, LLC, unpublished opinion of the Court of Appeals, issued December 29, 2020 (Docket No. 349471) and the previous article Michigan Court Rules Condo Association Has Authority to Waive Assessments in a Settlement Agreement. However, a discounted assessment amount may destroy a director’s or officer’s status as a volunteer because the amount of the discount would likely be considered something more than a nominal value received for their role as a director or officer.
Conclusion
Most Board members know the need to obtain D&O insurance and are at least familiar enough with the bylaws to understand that there is a right to indemnification within the condominium bylaws. However, Board members may be unaware of the 2015 amendments to the Michigan Nonprofit Corporation Act that provided additional protections for directors and officers. And given the number of condominium associations created before 2015, many associations’ articles of incorporation likely lack the full protections for Board members that are available under Michigan law. Additionally, some condominium associations toy with the idea of reducing the amount of assessments that Board members must pay to garner more volunteers to serve on the Board, without fully understanding the potential impact this may have.
It is relatively easy to ensure that a condominium association can minimize the potential personal liability for its Board members by following these three simple steps:
- Speak with a community association attorney and the association’s insurance agent to review the association’s insurance policy to check for adequate D&O coverage.
- Review the association’s current articles of incorporation, especially if the condominium was created before 2015, to see whether there is language consistent that minimizes a director’s and officer’s personal liability to the fullest extent permitted by law. Specifically, review whether there is a provision consistent with MCL 450.2209(1)(c) to eliminate or limit personal liability and with MCL 450.2209(1)(e) to have the association assume any liability.
- Ensure that all directors and officers do not receive any compensation or reduction in their assessments to be considered a “volunteer” under the Michigan Nonprofit Corporation Act.
By working with an experienced condominium association attorney to review the current condominium documents and practices of the association, a condominium association can take positive steps to minimize the personal liability of the Board’s directors and officers.
Michael T. Pereira, Esq., is an Attorney with Hirzel Law, PLC and focuses his practice on general counsel matters and document amendments. Mr. Pereira graduated from the University of Detroit Mercy School of Law in 2018, where he graduated magna cum laude and second in his class. Following graduation from Detroit Mercy, Mr. Pereira spent nearly three years with the Michigan Court of Appeals as a research attorney and as a law clerk to Judge Patrick M. Meter and Judge Anica Letica. Best Lawyers: “Ones to Watch” recognized Mr. Pereira in 2024 for professional excellence in real estate law. He may be reached at (248) 986-2290 or mpereira@hirzellaw.com.
