Director & Officer Liability Protection

Volunteer officers and directors of an association are required to make decisions which may have significant legal and financial implications for the association and its membership. Because they do not receive any compensation in their roles as volunteers, they are afforded certain protections against personal liability similar to those afforded to directors and officers of other types of nonprofit corporations. Those protections are necessary in order to ensure that an association will be able to recruit people to serve on its board:

“The Legislature finds and declares that the services of directors and officers of nonprofit corporations who serve without compensation are critical to the efficient conduct and management of the public service and charitable affairs of the people of California. The willingness of volunteers to offer their services has been deterred by the perception that their personal assets are at risk for these activities…It is the public policy of this state to provide incentive and protection to the individuals who perform these important functions.” (Corp. Code § 5047.5(a).)

The liability protections which are extended to directors and officers are as follows:

Directors and Officers Insurance (“D&O Insurance”)
D&O Insurance protects against errors and omissions made by officers and directors while they were serving on the board. Subject to certain criteria, Civil Code Section 5800 also protects volunteer directors and officers from personal liability in excess of the association’s insurance coverage provided that the board maintains at least the minimum levels of D&O Insurance required by Civil Code Section 5800(a)(4). The required minimum levels are contingent upon whether the common interest development consists of “100 or fewer separate interests” or “more than 100 separate interests.” (Civ. Code § 5800(a)(4)(A)-(B).)  However, the protections under Civil Code Section 5800 do not apply “to a volunteer officer or director who…is an owner of no more than two separate interests in the common interest development.” (Civ. Code § 5800(e); See also “Directors & Officers (D&O) Insurance.”)

Statutory Indemnity
California law protects volunteer directors and officers from personal liability while serving on the board subject to certain criteria. (Civ. Code § 5800; Corp. Code § 5047.5(b).)  The Corporations Code also extends additional liability protections for directors and officers under the Business Judgment Rule. Directors and offers may also be indemnified by the association if the directors and officers had no reasonable cause to believe their conduct was unlawful. (Corp. Code § 7237.)

Governing Documents
An association’s CC&Rs and/or bylaws may also contain exculpatory, hold harmless and indemnity provisions that provide liability protections for officers and directors arising from negligent acts or omissions they made while serving on the board.