DIRECTOR AND OFFICER IMMUNITY

MARYLAND CONDOMINIUM & HOA LAW ATTORNEYS

By Nicholas D. Cowie of Cowie Law Group, P.C.,

Maryland Condominium and HOA Law Attorneys

Statutory Immunity From Lawsuits for Condominium and HOA Directors and Officers

Question:

Are Maryland condominium and homeowner association (“HOA”) board of directors (“directors”) and officers subject to personal liability for actions they take on behalf of their association? As Maryland condominium and HOA law attorneys we are often asked this question when difficult decisions need to be made by an association board of directors.

Answer:

If someone wants to file a lawsuits as a result of the actions or decisions of a Maryland condominium association or HOA, they can not include individual directors and officers of the association in their lawsuit. Instead, the suit can only be filed against the association as a legal entity. This immunity from personal liability is not absolute. There are two layers of conditional immunity available to directors and officers. The first layer protects directors and officers from personal liability in “tort” lawsuits if directors and officers adhere to statutorily prescribed good faith standards (discussed below). The second layer applies more broadly and protects directors and officers from personal liability “in any suit”  if the association maintains statutorily prescribed insurance coverage at specified rates (discussed below).

Background – Maryland Condominium and HOA Immunity Laws

Maryland condominium associations and HOAs act through their directors and officers consisting of unpaid homeowners who have volunteered to govern the affairs of the association. They establish annual budgets, maintain common areas, and enforce rules and regulations. Actions taken by an association can result in lawsuits by disgruntled homeowners or third parties such as unpaid vendors or visitors injured on common property. Sometimes these lawsuits seek to impose personal liability upon the association’s individual directors or officers for participating in making the asscociation’s decision that has aggrieved the person filing the lawsuit.

The rationale behind the Maryland condominium and HOA laws providing legal immunity to directors and officers is to encourage homeowner to serve as unpaid volunteer directors and officers of their associations. Without this immunity, homeowners would be discouraged from volunteering for fear of being dragged into lawsuits and associations could not function.

Immunity Law for “Tort”Lawsuits Based on Good Faith Conduct

Maryland condominium and HOA law provides immunity to directors and officers against “tort” lawsuits for their “tortious” actions on behalf of the association. The legal terms “tort” and “tortious” refer to wrongful conduct that can range the spectrum from careless or negligent acts to intentional conduct deigned to harm others.

A typical example of a tort liability claim is a negligence lawsuit in which a claimant sues individual directors for their alleged carless or “tortious” decisions made on behalf of the association resulting in damages to the claimant. Another example of a tort liability claim would be a negligence lawsuit in which a visitor is injured by a dangerous condition in the common ares and sues individual directors for their alleged careless, or “tortious,” failure to to cause the association to repair the dangerous condition in a timely manner. In these examples of negligence lawsuits, the association’s individual directors and officers cannot be held personally liable for their acts or decisions on behalf of the board, and cannot even be named as defendants in a tort lawsuit, unless there is evidence to show they engaged in intentional wrongdoing or other serious misconduct, such as fraud or bad faith (e.g., dishonesty, self dealing, and egregious arbitrary decisions not supported by facts or outside their legal authority).

Maryland’s statutory tort immunity provisions applicable to condominiums and HOAs are broken into two parts:

PART ONE: first, the law provides that so long as director’s and officer’s actions meet the good faith standard of conduct described in PART TWO below, they cannot be named in a tort lawsuit. Instead, the suit must be brought “only” against the condominium association as an entity: “a person sustaining an injury as the result of a tortious act of [a association’s directors or officers] while [they are] acting within the scope of [their] duties may only recover in an action brought against the [association] for “the actual damages sustained.” Maryland Annotated Code, Real Property Article (“RP”), § 14–118(b) and Courts and Judicial Proceedings Article (“CJ”) § 5–422(b).

PART TWO: second, the law provides that in any tort lawsuit brought against a condominium association, a directors and officers “shall have immunity from liability” and “may not be held personally liable” for damages sustained by a party to the lawsuit, if the director or officer: “(1) acted within the scope of [their] duties; (2) acted in good faith; and (3) did not act in a reckless, wanton or grossly negligent manner.” RP § 14–118(c) and CJ § 5–422(c). Gross negligence is complicated term but generally it exists where one injures another deliberately or with reckless indifferent to their rights. A detailed examination of what constitutes “reckless, wanton or grossly negligent” conduct in Maryland can be found in a University of Baltimore Law Review Article. In Essence, compliance with these three standards can be summed up as acting in “good faith.”

Directors and officers should ensure their activity on behalf of the association conforms with these three (3) standards of conduct and associations should consult with a Maryland condominium and HOA law attorney to obtain an opinion if there is any question as to whether these standards will be met by any planned decisions of the board of directors.

In the event a tort lawsuit is filed against individual directors or officers, a Maryland condominium and HOA attorney can usually get the case dismissed as to the individuals rather quickly based on the statutes cited above, as long as there has been compliance with the three (3) standards of good faith conduct listed above. If, however, a lawsuit were to go forward, adherence these standards of conduct puts an association and its by its directors and officers also within the protection of the “Business Judgment Rule” under which associations and their directors cannot be held liable for their decisions if a court finds they were reasonable and made in good faith with the best interest of the association in mind, even if the decision ends up being a bad one. In such situations, a court will not second guess board member judgments in hindsight as to what is best for the association, even if the board made a mistake. In other words, even if immunity laws do not apply, association and their officers and directors have leeway to make honest mistakes under the business judgment rule.

The Business judgment rule can be used as a defense to have a suit involving individual directors dismissed. For example, in Reiner v. Ehrlich, 212 Md. App. 142 (2013), the appeals court upheld a trial court’s dismissal of lawsuit filed against an HOA and individual homeowners, including HOA board of directors. The claimants were members of the HOA who sued because the board of directors denied of their  request to install a new roof using materials not authorized by the association bylaws. The court found that the decision of the HOA was protected by the “business judgment rule” and that by naming individual homeowners in their lawsuit, the claimants had also violated Maryland tort immunity laws, RP § 14–118(c) and CJ § 5–422(c), thus justifying dismissal of the lawsuit as to the individual homeowners as a matter of law in the absence any allegations that they had “acted outside the scope of their duties, acted in bad faith, or acted in a reckless, wanton, or grossly negligent manner.”

Immunity Law for “Any Suit” Based on Maintaining Insurance Coverage

Maryland condominium and HOA law also provides immunity from personal liability to directors and officers in that they are are “not personally liable for damages in any suit” (not just tort suits) if the association maintains a policy of insurance that meets the following statutorily prescribed requirements:

• The insurance must cover liability incurred by the association or its directors and officers, or both, as a result of the acts and omissions of its directors and officers in providing services or performing duties on behalf of the association (a “D&O” insurance policy).
• The terms of the insurance policy must provide coverage for the acts or omissions, which are the subject matter of the suit (without meritorious basis for coverage denial).
• The insurance must have coverage limit of not less than (a) $200,000 per individual claim, and $500,000 per total claims that arise from the same occurrence; or (b) $750,000 per policy year, and $500,000 per total claims that arise from the same occurrence.
• If the insurance has a deductible, the deductible amount must not be greater than $10,000 per occurrence.
• If there is a coinsurance penalty, the rate of coinsurance must not be greater than 20 percent.

CJ § 5–406(b). This type of insurance is known as a “Directors and Officers Liability Insurance” policy (“D&O insurance policy”)

An additional benefit of having the statutorily prescribed insurance coverage is the imposition of a statutory cap on the association’s liability to the amount of insurance coverage. Specifically, Maryland condominium and HOA law provides that if the association has maintained the statutorily prescribed insurance (meeting the 5 listed requirements above), then any person bringing a lawsuit against the association will only be entitled to recover damages from the association “to the extent of the applicable limit of insurance coverage including any amount for which the [condominium association or HOA] is responsible as a result of any deductible or coinsurance provisions. CJ § 5–406(c).

A further benefit of having statutorily prescribed insurance coverage is that the policy may pay for all or a substantial amount of the condominium association’s legal defense and any judgment that may be entered against the association in a court of law if the case fails to settle before trial.

Finally, there is a limited exception to the immunity based on maintaining the statutorily prescribed insurance, which can render a director or officer personally liable for any damages above what is covered by the association’s statutorily prescribed insurance coverage. Specifically, Maryland condominium and HOA law provides that a director or officer “shall be liable for damages in any suit in which it is found that [they] acted with malice or gross negligence.” However, such personal liability is only to the extent that a judgment for damages exceeds the limits on liability under the statutorily prescribed D&O insurance policy maintained by the association. CJ § 5–406(d).

A condominium association or HOA that wants to attract and keep board members, and cap its liability from lawsuits, should make obtaining the statutorily prescribed insurance an integral part of its risk management plans. The statutorily prescribed insurance is a minimum standard and insurance coverages can and probably should be increased for many asociations. Condominium and HOA D&O insurance policy coverage can differ depending on the policy. Generally, D&O insurance policies will cover all board of director members, who also typically make up the officers of the condominium association. However, some policies can provide additional coverage for non-board members such as committee members, employees, and volunteers. Contact one of the Maryland condominium and HOA attorneys at Cowie Law Group, P.C. for more information about director an officer immunity.

 

Maryland Condominium and HOA Law Attorneys

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NOTE ON LEGAL ADVICE: This Article should not be relied upon as a legal advice applicable to any specific case concerning Maryland condominium and HOA directors and officers. Rather, it is a general statement of legal principles that may or may not apply to your Maryland condominium association or HOA. The individual facts of each case need to be analyzed to determine the application of law. Speak with a Maryland condominium and HOA law attorney at Cowie Law Group, P.C. for a consultation relative to your specific situation.