Condo Media - September 2014 - 26

INSURANCE

Role of the Community
Association Risk Manager

Many people throw around the term
"fiduciary duty" or "duty of good
faith and ordinary care" in the exercise of their duties. At the end of the
day, the board of directors is judged
pursuant to a "business judgment
rule" to carry out their duties to
manage the association, their duties
as the "ultimate" risk manager. In
this role, the board has the duty to
manage, and they are authorized to
delegate the details of the management and to retain professionals when
the management issue or task at hand

therefore may not be covered by the association indemnification provision and
may also have cancelled any volunteer
immunity protection.
A second issue which is similar
involves the community association
manager hired by the association. It
is very common and highly recommended for a community association
to retain an independent management
company to carry out the decisions
and policies of the risk management
board of directors. However, like the
other professionals sitting as association members on the volunteer board,
the community manager is covered for

The key to community association risk management
is certainty and the ability to avoid as many
surprises as possible.
is beyond their area of general competence.
One issue that boards need to be cognizant of is that many board members
are themselves professionals with degrees
and licenses such as attorneys, insurance
professionals, engineers, accountants,
architects, and even community association managers. These "board" members
may be the top in their field and may
know more than other professionals
in the community. However, what the
board needs to keep in mind are a couple
of important factors.
First, these board members are covered in their capacity as a board member and not in their "professional role."
The insurance protecting the board will
not provide coverage for their "professional services." Accordingly, in the
slight chance that the board member is
wrong in providing professional services, the association will be self-insured,
which is taking on a liability exposure
for the association it was elected to
protect, putting the association and its
members' assets at risk. If the board
member who is giving professional
advice accepts any compensation, he
or she is no longer a volunteer and
26

Condo Media * September 2014

its community management services
pursuant to a management agreement
with the association or at the direction
of the association board. But, if they
pursue professional services for which
they are not licensed, they will not be
covered by the D&O policy where they
are covered.
More importantly, the community
association manager will not be covered
under its own errors and omissions
policy, because the other professional
services are not within the definition of
their community management professional services. The problem here is
even bigger, because the community
association may have an indemnification requirement under the terms and
conditions of the management agreement to defend, indemnify, and/or
hold harmless the manager when it
conducts business at the direction of
the board.
The theme of most associations is to
be as "lean and mean" as possible and
try to push as much into the lap of the
manager as it can. Although this may
seem expedient for all involved, the
unintended consequences can be huge
and could be a clear breach of the risk

management board's duty. This very
often involves grey areas, but as an ultraconservative risk manager, attorney, and
insurance professional, I always recommend that the association with the fiduciary duty or duty of ordinary care err
on the side of caution. If the question
arises, the professional should be hired.
In our opinion, the community association risk management team looks
as follows:
As most governing documents
provide, the community association
board is ultimately responsible for all
community association decisions. The
role of the board is to make decisions,
policies, and rules in order to protect
the community association assets and
to delegate the necessary tasks or jobs
to make those decisions and policies
get accomplished.
In the normal course, the majority of
the activities required to be accomplished
on a day-to-day basis are covered in the
management agreement and fall within
the category of "contractual duties." As
with most contracts, not everything can
be anticipated. Accordingly, there are
extra-contractual duties delegated to the
manager and these should be documented as amendments to the management agreement, especially where most
director and officer liability policies may
only provide coverage pursuant to a
written management agreement. Finally,
most management agreements provide
for the manager to have certain authority up to certain monetary limits to enter
into contracts with vendors on behalf of
the association.
The board also needs to retain "professionals" for certain decisions. Again,
the key reason for this is because the
licensed professionals have their own
professional liability coverage. This
should be an absolute requirement
before engaging a professional. The
goal is to hire the best, but even the
best make mistakes and they should
have their own professional liability to
stand behind their work. This is rarely a
concern, but it is part of the board risk
manager due diligence and it is critical
to get this in writing.

Condo Media - September 2014

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