In most New Jersey common interest community associations it is difficult to find qualified and interested persons to serve on the Board of Trustees. Volunteer Board Members must put in long hours for no pay and sometimes little appreciation. Now, consider for a moment if members of Boards were exposed to personal judgments for their actions while serving as a member of a Board. It is obvious that it would be nearly impossible to find anyone who would serve on a Board if they could be liable personally for reasonable decisions they make as a member of the Board. In order to protect Board Members, and to encourage people to volunteer their time, New Jersey has created a system in which Board Members are protected during their service on the Board. However, it is a common misconception that Board Members are immune from lawsuits in connection with their duties as members of a Board. There is no such statute in New Jersey that renders a Board Member completely immune to suit for his or her actions. It is a fact that a Board Member can be sued personally at any time for virtually any claim including a breach of their fiduciary duty.
This does not mean that Board Members are left without protection from lawsuits related to Association activities. Generally as an agent of the Association, Board members are indemnified by the Association for their actions, or failures to act, while on the Board. There is significant difference between immunity and indemnification and unfortunately most Board Members are not acquainted with the distinction. In short, immunity eliminates a lawsuit entirely. It prohibits a lawsuit from being filed or continuing against a certain individual. The person does not have to endure months or years of litigation or worry about their personal assets being at risk should the Judge or a jury find in favor of the Plaintiff.
Indemnification, however, allows a lawsuit against a Board Member to continue, and at the end of the case, if a judgment is entered against the individual Board Member, the common interest community association generally pays it. Pursuant to New Jersey statutes, as well as most Association By-laws, the Association has the ability to indemnify an agent of the Association when the agent acts in good faith, and does not make decisions that are adverse to the interests of the Association. Like anything else there are exceptions, and in New Jersey, the Association is not required to indemnify the Board Member in the event that the Board Member committed fraud, engaged in self-dealing, willful misconduct or in some instances acted grossly negligent. If the Board Member satisfies this standard and is found to have acted in good faith and in the best interests of the Association, the Association will generally pay the Board Member’s legal bills and pay any money necessary to satisfy any judgment entered against that Board Member. Typically, Plaintiffs sue both the Association and the individual Board Members. Often times they will all be represented by the same attorney, the cost of which is borne by the Association. This is preferable given that the Association and the Board usually have the same interests and is advisable in order to mount a successful joint defense to protect the interests and assets of the Association. Further, in some instances, a defense will be provided by an insurance carrier for both the Association and the individual board members.
Prospective Board Members should know and understand the difference between immunity and indemnification long before they throw their hat into the ring. Inevitably, legal issues arise in the course of governing a common interest community and it is best to understand your duties and responsibilities before getting involved.