The law provides that a volunteer director or officer cannot be held liable for damages resulting from his/her service to the association if he/she performs his/her duties (i) in good faith, (ii) in a manner which he/she believes to be in the best interests of the association, and (iii) with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. At the risk of oversimplifying this standard, the idea is to protect honest directors and officers from liability for mistakes unless their actions are self-interested or unreasonable. Directors are entitled to rely on information and opinions provided by the association’s officers, committees, and hired experts.
To provide additional liability protection to directors and officers, most governing documents state that the association will indemnify them absent gross negligence, intentional misconduct, or fraud. Indemnity means that the association will pay the damages that are awarded against the directors or officers. Most governing documents require the association to carry director and officer (“D&O”) liability insurance for these costs, and such insurance is always a good idea.