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Fourth District Court of Appeal Enunciates Two-Pronged Test to Evaluate Decisions Made by the Board of Directors of a Community Association.

The officers and directors of community associations have a fiduciary relationship to the members (owners), as stated in §718.111(1)(a) and §720.303(1), Florida Statutes.  The directors are obligated to discharge their responsibilities in good faith.  Board decisions are generally protected by the "business judgment rule".  The theory behind this rule is that Courts should not substitute their judgment for the judgment of the elected or appointed board members, so long as the members of the board acted in compliance with established standards of conduct.   Florida Statutes, Section 718.111(1)(d), provides:

 (d) As required by s. 617.0830, an officer, director, or agent shall discharge his or her duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he or she reasonably believes to be in the interests of the association. An officer, director, or agent shall be liable for monetary damages as provided in s. 617.0834 if such officer, director, or agent breached or failed to perform his or her duties and the breach of, or failure to perform, his or her duties constitutes a violation of criminal law as provided in s. 617.0834; constitutes a transaction from which the officer or director derived an improper personal benefit, either directly or indirectly; or constitutes recklessness or an act or omission that was in bad faith, with malicious purpose, or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.

The new test to determine whether the board's decision should be protected by the business judgment rule comes from a case where an owner prevented the association from extending balcony concrete repairs into her unit.   The engineer for the project said to remove the concrete four inches beyond the corrosion, which necessitated work in the unit, not just the balcony.  The owner hired her own engineer who said the extra work wasn't necessary.

The association sued to gain access to the unit to perform the repairs recommended by the project engineer.  The appellate court explained that its review of the board's decision was limited by the business judgment rule and held:

...courts must give deference to a condominium association's decision if that decision is within the scope of the association's authority and it is reasonable - that is, not arbitrary, capricious, or in bad faith [emphasis added]

The case was sent back to the trial court for analysis pursuant to the new test, to wit:

• Does the board have authority to invade the unit to perform common element repairs?
• and, if so
• Is the decision to do so reasonable or, in other words, was the board decision to invade the unit arbitrary, capricious or made in bad faith?

This case is hot off the press and therefore not final if the parties file motions for rehearing.

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I talked about the distinction between a carrier's duty to defend and the duty to indemnify early in the year in connection with the U.S. District Court's ruling that a D&O policy did not provide coverage for claims of breach of fiduciary duty, breach of contract and negligence. In Eastpointe Condominium I Asn. Inc. v. Travelers Casualty & Surety Company an owner sued the association claiming the board of directors failed to adequately maintain the roof and other portions of the property.  The carrier took the position that the "property damage" exclusion in the policy controlled.  The Court agreed.

The 11th Circuit Court of Appeal recently affirmed that decision in an unpublished opinion issued on May 20, 2010.

These types of claims are pretty typical.  A unit owner (or several unit owners) feels that the board is not "doing its job" and files suit seeking various remedies often including:

• injunctive relief (demanding that work, repairs, maintenance or improvements, be performed);
• reimbursement for costs sustained as a result of damages to property that would not otherwise exist if the board appropriately attended to the needs of the property;
• damages for the loss in property value, loss of enjoyment of the property, loss of use and the like; and
• reimbursement of attorney's fees and costs for bringing the claim.

Many of these cases involve differences in opinion as to whether maintenance/repairs were or are necessary, what products and methods to use for the repairs or maintenance, which contractor is better, etc.  In many cases the amount of money sought by the unit owner or owners is less than what it costs to defend the claims.   Defense costs can easily eat into the association's cash flow.

Isn't the association's board of directors protected against claims of negligence or breach of fiduciary duty?  If the D&O policy has a similar property damage exclusion, maybe not.

The Traveler's D&O policy excluded coverage for loss in connection with any claim "for or arising out of any damage, destruction, loss of use or deterioration of any tangible property including ... mold, toxic mold, mildew, fungus, or wet or dry rot."

The Eleventh Circuit departs from an earlier ruling that required a carrier to cover claims brought by homeowners against the association.  In Lumbermens Mutual Casualty Co. v. Dadeland Cove Section One Homeowners Asn. Inc., the District Court found that the D&O policy covered property damage losses based upon claims of breach of fiduciary duty, regardless of the tangible property exclusion.

What does your policy cover?  What does it exclude?  If you're not sure, please speak to your agent and/or have your attorney review and compare the policies before you renew because it seems coverage denials (and disputes) are becoming more prevalent.

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