What is “Fiduciary Duty”?

The directors and officers of a homeowners’ association (HOA) are said to have a “fiduciary duty” to the members of the association that they serve. What exactly does that mean, and what do those directors and officers need to be aware of?

In basic terms, a fiduciary is someone entrusted to make decisions on behalf of another, in a relationship involving a confidence of trust. In the HOA context, the directors and officers make decisions on behalf of the members of the HOA. In North Carolina, HOA boards are typically afforded the authority to make decisions as to the functioning of the HOA without a vote of the owners, except on matters for which state law or the HOA’s governing documents require a vote of the members.

The North Carolina Nonprofit Corporation Act sets forth the standard of conduct for directors: Directors shall discharge their duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and in a manner the director reasonably believes to be in the best interests of the corporation. (NCGS § 55A-8-30)

The statute goes on to state that in discharging his duties, a director is entitled to rely on information, opinions, reports, or statements from officers or employees of the corporation; attorneys, accountants, and other professionals; and committees appointed by the board – if those persons upon whom the director is relying are believed to be reliable and competent.

Potential areas of risk for directors include:

  • Failure to file a lawsuit before the statute of limitations has run;
  • Failure to supervise employees or managers properly;
  • Failure to maintain the HOA’s common area;
  • Failure to follow laws regarding the use of common areas, private property, and other facilities (g., FHA discrimination laws);
  • Failure to provide adequate safety measures for common areas;
  • Failure to adequately fund reserve accounts;
  • Failure to protect confidentiality of information and communication when required; and
  • Engaging in conduct that involves a conflict of interest.

We are often asked by our HOA clients if directors and officers can be sued by someone because of decisions or actions of the board. The answer is yes, anyone can file a lawsuit, but that doesn’t mean they have a solid case. In general, state law requires HOAs to indemnify directors and officers from liability when the director or officer was acting in good faith, believed that their conduct was in the best interests of the HOA, and had no reasonable cause to believe the conduct was unlawful.

Regardless of how pure the intentions of HOA directors and officers may be, it is imperative that the board obtain “D & O” (directors and officers) insurance coverage. Most general-liability insurance policies come with some D & O coverage, but the best coverage will be provided in a separate or “stand-alone” policy (check with your insurance professional).

This column was originally published in the Charlotte Observer on January 26, 2019. © All rights reserved.

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