If you sit on the board of a homeowners association or condominium association, you owe the association four legal duties: care, loyalty, confidentiality, and obedience. The fiduciary duties of HOA and condominium board members are the same obligations that directors of a business corporation owe their shareholders, and they apply whether you are paid or serving as a volunteer. Ignore them and you can be sued personally, forced off the board, have contracts you approved thrown out, and in the worst cases face federal criminal charges. Follow them and a well-established set of protections generally keeps you insulated from personal liability, even when a decision turns out badly.
Who You Owe the Duty To
An HOA or condo association is typically organized as a nonprofit corporation, which makes it a separate legal entity from the people who live there. Your fiduciary obligation runs to that entity, not to any individual neighbor or voting bloc. That distinction has teeth. A board member who cuts a deal favoring a vocal group of owners at the expense of the association’s long-term finances has still breached the duty, even if a majority of the room applauded the vote. The obligation covers every official act you take through your full term: votes, contract approvals, rule changes, enforcement decisions.
The Duty of Care
The duty of care requires you to act in good faith and with the attention a reasonably careful person would bring to the same situation. Courts judge the quality of your decision-making process, not whether the project worked out. A board that did its homework before approving a costly repair is on solid ground even if the contractor underperforms. A board that rubber-stamped the same project without reading a single bid is exposed.
In practice, this means showing up, staying informed, and asking questions. Read the financial statements, reserve studies, and delinquency reports before meetings. Understand how a proposed expenditure will affect cash position over the next several years. When something falls outside the board’s expertise, bring in professionals: a structural engineer before a major building repair, an attorney on a covenant enforcement dispute, a CPA to review the annual budget.
The Business Judgment Rule
Directors who follow a reasonable process get real protection. Under the business judgment rule, courts will not second-guess a board’s choices as long as the record shows the directors investigated the options, considered the financial impact, and acted without personal conflicts. Collect three bids for a roof replacement, review an engineer’s assessment, vote based on that information, and you are protected even if a cheaper option existed that the board did not pick.
The shield disappears when directors skip those steps. Failing to review the association’s insurance coverage, ignoring warnings about building code violations, or voting on a contract without reading it are the kinds of shortcuts that strip the protection away. At that point, individual directors can be held personally liable for losses the association suffers as a result.
Reserve Fund Stewardship
Few areas of the duty of care carry more weight than reserves. A reserve fund is the pool of money set aside for major repairs and replacements like roofs, elevators, parking structures, and plumbing. Underfunded reserves force boards to levy painful special assessments or take out loans when something breaks, and they can drag down property values across the community.
Industry benchmarks treat anything above 70 percent funded as a strong position and anything below 30 percent as high risk for a special assessment. Professional reserve studies, typically costing anywhere from a few thousand dollars to the mid-five figures depending on the size and complexity of the property, give the board the data it needs to set funding levels.
The 2021 Champlain Towers collapse in Surfside, Florida pushed reserve neglect into national focus. Since then, at least seven states have enacted or strengthened mandatory reserve study and structural inspection laws, and more are following. Even in states without an explicit mandate, a board that knows the roof has five years of useful life left and does nothing to fund its replacement is not exercising reasonable care, and can be sued for it.
The Duty of Loyalty
The duty of loyalty requires you to put the association’s interests ahead of any personal financial benefit. The most common violation is self-dealing. A director who owns a landscaping company bidding on the association’s maintenance contract has a conflict the law takes seriously, and it does not matter whether the bid is competitive.
Handling a conflict correctly is straightforward, but every step matters. Before any discussion of the matter begins, disclose the conflict to the other directors. The disclosure has to identify the nature and extent of the interest, not just a vague mention that “there might be an issue.” Then leave the room for the deliberation and the vote. Skip any of those steps and the entire transaction is tainted.
Courts can void contracts approved through undisclosed conflicts. Directors who go further, taking kickbacks or embezzling association funds, face civil liability for the return of every dollar plus potential criminal prosecution. Federal wire fraud charges, which come up often in HOA embezzlement cases because electronic fund transfers are almost always involved, carry a maximum sentence of 20 years in prison.1Office of the Law Revision Counsel. 18 USC 1343 – Fraud by Wire, Radio, or Television In one representative case, a property manager who embezzled over $1 million from multiple homeowners associations received a two-year federal prison sentence along with restitution orders.2United States Department of Justice. Warrenton Woman Sentenced to Two Years in Prison for Embezzling Over 1M from Homeowner Associations These are not theoretical risks.
The Duty of Confidentiality
Board members routinely handle information that has to stay private. Executive sessions exist specifically for pending litigation, contract negotiations, employee performance, and individual homeowner disciplinary hearings. Whatever is discussed there is not for the parking lot afterward.
Personal data about individual homeowners needs particular care. Delinquency records, private health information shared during a reasonable accommodation request, and financial account details all fall under the board’s duty to protect. Leaking any of it exposes the association to defamation claims and potential privacy law violations. A director who gossips about a neighbor’s overdue account is not just being rude; they are creating liability for the whole association.
The Duty of Obedience
The duty of obedience requires you to operate within the boundaries set by law and by the association’s own governing documents. Those documents follow a strict hierarchy. Federal and state statutes sit at the top, then the association’s articles of incorporation, then the declaration of covenants (CC&Rs), then the bylaws, and finally any board-adopted rules and regulations. When a lower document conflicts with a higher one, the higher document wins. A board cannot adopt a rule that violates the CC&Rs, and no CC&R provision can override state law.
This hierarchy is where many boards get into trouble. Adopting a new rule without following the notice and voting procedures in the bylaws, or raising assessments beyond what the governing documents allow without a membership vote, can result in a court invalidating the action entirely. Homeowners who successfully challenge these procedural failures often recover their attorney fees, so the association ends up paying twice: once for its own defense and again for the challenger’s legal costs.
Fair Housing Act Compliance
One area of obedience that trips up boards with surprising regularity is the federal Fair Housing Act. The law prohibits housing discrimination based on race, color, religion, sex, national origin, familial status, and disability, and it applies directly to condo and homeowners associations. Boards are required to grant reasonable accommodations in rules and policies when necessary to give a person with a disability equal opportunity to use and enjoy their home.3Office of the Law Revision Counsel. 42 USC 3604 – Discrimination in the Sale or Rental of Housing and Other Prohibited Practices Denying a request for an emotional support animal in a no-pets community, or refusing to allow a wheelchair ramp modification at a common area entrance, can trigger a federal fair housing complaint against the association and against individual board members.
Enforcement patterns matter too. Selectively enforcing parking restrictions, architectural standards, or noise complaints against owners of a particular race or national origin is textbook discrimination even if the rules themselves are facially neutral. Directors who participate in discriminatory enforcement decisions can be named personally in fair housing lawsuits.
Federal Tax Filing
A fiduciary duty many volunteer directors do not realize they carry is making sure the association files its federal tax return. Most HOAs and condo associations file Form 1120-H, which lets them be taxed under Internal Revenue Code Section 528 at a flat 30 percent rate (32 percent for timeshare associations) on non-exempt income like interest, rental revenue, and investment gains.4Internal Revenue Service. Instructions for Form 1120-H Exempt function income, which includes the dues and assessments homeowners pay, is not taxed.
To qualify for that treatment, the association must pass two tests each year. At least 60 percent of gross income has to come from membership dues, fees, or assessments, and at least 90 percent of expenditures have to go toward acquiring, managing, and maintaining common property.5Office of the Law Revision Counsel. 26 USC 528 – Certain Homeowners Associations The Section 528 election is made annually by filing Form 1120-H, due by the 15th day of the fourth month after the association’s tax year ends.4Internal Revenue Service. Instructions for Form 1120-H Some associations whose common areas serve the broader public may qualify for full tax-exempt status under IRC Section 501(c)(4), but the requirements are strict and most gated or access-restricted communities will not qualify.6Internal Revenue Service. IRC Section 501(c)(4) Homeowners Associations A board that files nothing at all risks IRS penalties and has arguably breached its fiduciary duty to manage the association’s finances competently.
What Protects You Personally
Board service is not as legally dangerous as the sections above might suggest. Several layers of protection exist for directors who act in good faith, and they generally work.
The Volunteer Protection Act
Federal law provides a baseline shield for unpaid directors. Under the Volunteer Protection Act, a volunteer of a nonprofit is not personally liable for harm caused by their actions on the organization’s behalf, as long as they were acting within the scope of their responsibilities and the harm did not result from willful misconduct, criminal conduct, gross negligence, or reckless disregard for others’ rights or safety. The statute also bars punitive damages against volunteers unless the claimant proves willful or criminal misconduct by clear and convincing evidence.7Office of the Law Revision Counsel. 42 USC 14503 – Limitation on Liability for Volunteers
Two limits matter. First, the word “volunteer.” Directors who receive compensation beyond reimbursement of expenses lose this federal protection. Second, the carve-outs for gross negligence and willful misconduct mean the same shortcuts described above, like ignoring known building code violations or refusing to maintain insurance coverage, can fall outside the statute’s shield.
Directors and Officers Insurance
D&O insurance is the most practical protection available. A typical policy covers legal defense costs and any damages or settlements from claims of mismanagement, breach of duty, or negligence in board decisions. Standard coverage limits generally run from $1 million to $5 million, with premiums varying based on the association’s size, claims history, and location.
Every D&O policy has exclusions worth knowing before you assume you are covered. Most will not cover fraud, knowing violations of the governing documents or state law, or criminal acts. A director who approves a contract knowing it violates the CC&Rs, or who deliberately conceals financial information from the membership, is likely on their own when the lawsuit arrives. Review the policy annually, confirm every current director is a named insured, and check that the coverage limits still match the association’s size and risk.
Indemnification
Many association bylaws include indemnification provisions requiring the association itself to cover legal costs and judgments incurred by directors acting in good faith. These provisions typically mirror state nonprofit corporation law and protect directors unless their conduct involved bad faith, self-dealing, or criminal activity. Indemnification and D&O insurance work together: the insurance often pays first, and indemnification covers gaps the policy does not reach. A board with neither is asking its volunteer directors to shoulder significant personal financial risk.
How Homeowners Can Enforce These Duties
Fiduciary duties matter because homeowners have real ways to enforce them, and any sitting director should know what those are.
When the association itself is harmed by a director’s breach and the current board refuses to act, any homeowner can file a derivative lawsuit on the association’s behalf, after first making a formal demand on the board. Any recovery goes to the association, not to the homeowner who filed. Separately, most bylaws and state statutes let homeowners remove directors between elections through a petition and special meeting, sometimes without cause. Courts can also remove directors for fraud, gross abuse of authority, or breach of fiduciary duty, and in some jurisdictions can bar the removed director from serving again for a set period.
Remedies for a proven breach include monetary damages, injunctions ordering the board to take or stop taking specific actions, and in self-dealing cases, orders forcing the director to return any profits or property gained. Courts can void contracts tainted by undisclosed conflicts. In many states, a homeowner who successfully challenges a board action that violated the governing documents can recover attorney fees, which gives all of this real teeth. The prospect of paying the other side’s legal bills is often enough to move a board to correct course before a case ever reaches a courtroom.