Q: I am considering running for a seat on my HOA board. We are a community of about 80 homes. I am concerned about my indemnity as a board member. I tried to find a clause in my bylaws, but I can’t seem to locate wording that speaks directly to that. Our HOA property manager directed me to Chapter 47F of the North Carolina General Statutes (the NC Planned Community Act), but I still don’t see any language that would prevent a lawsuit from being directed toward me personally for action I take as a director of the HOA. Can you shed some light on this?
“Indemnity” is a term that means security or protection from liability afforded to someone for their actions taken in a certain capacity, such as in the capacity of a member of a corporate board of directors. Indemnity is obviously a very important issue for anyone serving on the board of directors of a corporation, whether the corporation is nonprofit or for-profit. This is because someone who has a claim for damages as a result of action taken by a corporation or its board can sue not only the corporation, but in some instances the individual board members as well.
HOAs would have a difficult time finding volunteers to serve on their boards if board members did not enjoy some protection from lawsuits. Thus, many HOAs have language in their bylaws or their articles of incorporation (which you did not mention) by which the HOA will indemnify the directors for any action taken by them in their role as directors.
Under this arrangement, the HOA will usually pay for an attorney to represent a director named as a defendant in a lawsuit arising out of the director’s duties on the board, and will also cover any money damages that may be awarded by a judge or jury.
You are correct in noting that there are no director-indemnification provisions in the Planned Community Act (or in the N.C. Condominium Act). However, almost all HOAs are organized as nonprofit corporations, which are governed by Chapter 55A of the North Carolina General Statutes.
The first sentence in the section on director indemnification reads: “It is the public policy of this State to enable corporations organized under this Chapter to attract and maintain responsible, qualified directors, officers, employees, and agents, and, to that end, to permit corporations organized under this Chapter to allocate the risk of personal liability of directors, officers, employees, and agents through indemnification and insurance…”
Under this provision, nonprofit corporations are authorized – but not required – to indemnify their officers and directors in certain circumstances, even if the bylaws do not speak to the issue of indemnification. In general, the corporation may, by a majority vote of the board, agree to indemnify a director if (1) he conducted himself in good faith; (2) he reasonably believed that his conduct was in the best interest of the corporation, or at least not opposed to it; and (3) for criminal charges, if he had no reasonable cause to believe his conduct was unlawful.
At the same time, the law requires the corporation to reimburse a director who successfully defends a lawsuit on his own. Further, a court may order a corporation to indemnify a director if circumstances warrant.
This same law also grants immunity to board members of nonprofit corporations in many circumstances. There are, however, many exceptions to this rule. The exceptions include, but are not limited to, when a director was not acting within the scope of his official duties or was not acting in good faith; when he has committed gross negligence or willful or wanton misconduct; and when he has derived an improper personal financial benefit from the transaction.
Because the law does not mandate indemnification or immunity in all cases, your board should consider amending the HOA’s bylaws to add an indemnification provision if the language is not already in the articles of incorporation.
Regardless of the board’s decision on this issue, every HOA should obtain directors’ and officers’ liability insurance (usually referred to as D&O coverage”). It is relatively inexpensive, and will provide a defense for any lawsuits or claims brought against board members and pay any damage awards or judgments.