By: Jeremy M. Tucker
Lerch, Early & Brewer's Legal Update
Serving on the board of directors of your association can be a rewarding experience, depending on whom you ask. Many people who would otherwise be willing to serve shy away because of the fear of being sued for decisions that the Board makes. Fortunately, Maryland law provides significant legal protection for directors and officers of a community association from liability when making decisions or taking action that falls within the scope of the directors’ or officers’ duties.
Under §14-118 of the Maryland Real Property Article and §5-422 of the Maryland Courts and Judicial Procedures Article, directors and officers of a community association cannot be held liable for injuries to a third-party if the director or officer:
- Acted within the scope of the director’s or officer’s duties;
- Acted in good faith; and
- Did not act in a reckless, wanton or grossly negligent manner.
This standard affords directors of community associations greater protection than that afforded directors of corporations generally. The Maryland Code provides that a director of a corporation is generally immune from liability for his or her actions if the director acted:
- In good faith;
- In a manner he or she reasonably believes to be in the best interests of the corporation; and
- With the care that an ordinarily prudent person in a like position would use under similar circumstances.
Naming a Director or Officer in a Lawsuit
Individual board members or officers of a community association, in such capacity, cannot be named as defendants in a complaint for injuries. In other words, if a member of the association sues the association over a decision of the Board, that member may not name individual directors, personally, in the lawsuit. Only the community association, as an entity, may be named in the Complaint. Specifically, MD Code, Courts and Judicial Procedures, §5-422(d)(1) provides:
- Except as provided in paragraph (2) of this subsection, a claimant shall name only the governing body as a party defendant.
- An officer or director of a governing body may be named individually only when the governing body for which the officer or director was acting cannot be determined at the time an action is instituted under this section.
- If an officer or director is named as an individual defendant under this section, the governing body for which the officer or director was acting shall be substituted as the party defendant when its identity reasonably can be determined.
In practice, however, officers and directors are routinely named in lawsuits notwithstanding the above, but generally will be dismissed from the case under section (d)(3) above.
Limitation of Recovery
Even if someone were to sue the association for tortious actions of a director (e.g. negligence or defamation), Maryland law limits the amount of damages that a person can recover. Specifically, MD Code, Real Property, §14-118(b) provides that a person who sustains damage from the tortious act of an officer or director, while the director or officer is acting within the scope of his or her duty, may only recover in an action brought against the governing body for actual damages. This limitation on recovery applies only to tort actions and not contract claims.
Additional levels of protection are provided to directors and officers through the association’s directors and officers liability insurance policy (“D & O Policy”). If the association maintains a D & O policy and the board or officers are named as defendants in a lawsuit in which monetary damages are sought, the D & O policy, in most circumstances, will cover the cost of the defense and the attorneys’ fees; the officer or director will not be personally liable for damages. Interestingly, if the complaint fails to request the award of monetary damages, most D & O policies will not cover the cost of the defense.
Maryland law further provides that when the damages are covered by insurance, the plaintiff may recover damages from the association only to the extent of the applicable limit of insurance coverage, including any amount for which the association is responsible as a result of any deductible or coinsurance provisions of such insurance coverage. (MD Code, Courts and Judicial Proceedings §5-406(c)).
In short, if a director or officer acts in good faith to comply with the governing documents of the association in making decisions, acts in a conscientious manner while performing his/her duties, and does not steal or misappropriate funds, the risk of personal liability for serving as a director or officer is minimal.