5 D&O Lawsuits That The Board Never Saw Coming

Volunteer work can be some of the most gratifying hours of our week. Giving our time and sometimes our expertise to a cause that we believe in can feel wonderful-while making a positive difference to a group or cause that needs our help. Serving on your community association’s board is no different.
How can board members, work diligently to follow the rules and improve their communities, find themselves hundreds of thousands of dollars deep into lawsuits for the same volunteer work that made them feel so helpful? The following five boards likely thought they were doing all of the right things for their communities but were forced to reexamine their decisions when faced with debilitating litigation.

We Just Wanted to Replace the Siding

The board of a 50-unit condo association located just outside of San Diego decided to replace the siding, windows and shingles on six of its eight buildings. The renovation was preventative and within the budget of the reserve account, which was established to pay for upkeep such as this.  After bidding the job to several contractors, the association’s own management company was selected, and work began. Shortly thereafter, the management company realized it had underbid the job, and actually needed more labor in order to complete it. When the association refused to pay for the extra labor, the management company sued the Association and its board president for breach of contract and fraud, and took the unusual (but legal) step of filing mechanic’s liens against each unit owner, tying up their ability to sell or refinance their units. The association ended up settling the dispute for $375,000, and the management company never completed the work.

We Had Just Been Elected!

Shortly after the annual election, the association and all of its newly elected board members were sued by four former board members, alleging wrongful removal from office, and several allegations suggesting that they were mismanaging the association.  The prosecution was funded exclusively by one of the four plaintiffs, a retiree who focused all of his energy on Association politics and reportedly spent close to $1 million in fees of his own money (through his 401(k)) to prosecute the action. Demanding that he be reinstated to the board, (despite four prior, unsuccessful campaign attempts, and despite the Court telling him that even if he won, it wouldn’t appoint him,) litigation dragged on and on, costing the association over $650,000 in fees.

We Were Just Following the CC&Rs

When the resident of an upper-level unit installed hardwood floors, it was clear to the board that she was in violation of the association’s CC&Rs prohibiting such renovations. They thought it would be clear to her as well, seeing as she was a former board president, and had enforced this rule several times herself! Nonetheless, her time on the board had taught her a few tricks about getting around CC&R enforcement, and she sued the board for improperly enforcing the regulations against her. After years in court, the association paid over $450,000 in fees, and the resident still has those clickety-clackety upstairs hardwood floors.

We Thought He Was Just Helping Out

When the association fired their management company, one of the residents offered to take over management duties. He also decided to compensate himself for those duties, writing himself “payroll” checks totaling more than $117,000. When the board found that the money was missing, they submitted a claim to their fidelity carrier. When the fidelity carrier subrogated against the resident who had taken the money, he sued the board for insurance fraud and demanded that they indemnify him in the subrogation case. In the end, the D&O insurance paid $635,000 on behalf of the association in defense fees and costs.

We Won the Vote on New Driveways

After a formal vote in the association, it was decided that all driveways would be repaved by the association in a similar manner. One homeowner, however, felt that the new paving style did not compliment the style of his home, and sued the association for attempting to repave his driveway. After years in court, and a vow to spend every last dime to prevent the driveway renovation, the association prevailed; but not until they’d spend more than $300,000 in defense fees.

Maybe these boards would have proceeded differently if they’d known the difficulties and expenses that lay ahead. Or maybe not. Maybe having your motives and decisions questioned regularly is just part of the job. Either way, it appears that conflict and even expensive lawsuits are more and more becoming “part of the job,” and that having excellent legal and insurance advocates should be a top priority for anyone who gives their time to serve on their association’s board of directors.
To properly insure your board against unexpected and costly lawsuits like the ones above, visit www.distinguished.com to read about our Community Association Directors and Officers and Umbrella coverages.

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