Serving on Your Board? The Liability Trap No One Warned You About

Volunteering for your building's board seems like a great way to serve your community—until you realize you might be personally liable for the board's decisions. Often overlooked are indemnification clauses, says Leni Morrison Cummins, Member, Cozen O'Connor. This protection isn’t guaranteed and there are surprising "pitfalls" of indemnification clauses that leave board members vulnerable, particularly in condominiums where protection isn't built into law as it is (partially) for cooperatives. In this interview, conducted by Habitat Magazine’s Carol Ott, Cummins highlights several alarming gaps in typical indemnification language. 

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Carol Ott: Welcome to Legal Talk, a conversation about governance issues that New York's co-op and condo boards are tackling today. I'm Carol Ott with Habitat, the New York City magazine for co-op and condo board directors, and my guest today is Leni Morrison Cummins, partner at the law firm, Cozen O'Connor. Many people who decide to serve on their co-op or condo board are concerned about personal liability for any decisions the board makes.

Leni, is this a real concern or just an unfounded fear among a few? 

Leni Morrison Cummins: Carol, thanks for having me. It's a real concern. You know, board members, or prospective board members are volunteers. There's no compensation. And when folks agree to join a board, they may or may not realize that they're taking on potential liability.

And the liability can be based on contracts that are signed or in tort, for injuries or property damage. It could be for a wide host of potential liability. 

Carol Ott: When you say they're taking on liability-- if my board makes a decision, I assume I am protected? 

Leni Morrison Cummins: You're only protected if the governing documents say you're protected.

At least that's the case in the condominium context. In a co-op context, there are some protections built into the law. 

Carol Ott: So let's talk about in a condominium context. What do I need to have in the governing documents so that I am protected and where do I find this? 

Leni Morrison Cummins: So you're gonna look to the bylaws, for a provision called the indemnification provision. And the indemnification provision isn't a catchall save all in all instances. There are pitfalls and there are specific magic language and clauses to look for to make sure you're covered. 

Carol Ott: So are you telling me that if I'm a board director of a condominium today, and there is an indemnification clause, I assume that in all the governing documents, somebody has put an indemnification clause, that that clause could not be secure enough or could be flawed?

Leni Morrison Cummins: That's right, Carol. 

Carol Ott: Okay then. Tell me what the flaws are that I should be looking for. 

Leni Morrison Cummins: Sure. And these pitfalls as I call them, have been sort of found over years of cases where unassuming volunteers find themselves in hot water. So we can go through a few as examples. So the first one I sort of alluded to earlier, which is the indemnification only covers the board member for contract liability. It says something like if the board enters into a contract, that the liability of the board members would be limited to the condominium or would be covered by the condominium. It doesn't speak about what happens if there's a tort claim, such as a trip and fall where a board member could be named as a defendant in a lawsuit. For example, if a board member may have been potentially shirking obligations and duties for maintenance of a hallway, for example. That wouldn't be covered if it just has a contract indemnification.

It needs to be broader to cover situations where unit owners or shareholders might sue for breach of fiduciary duty and also for torts like trip and falls, leak, damage, et cetera. 

Carol Ott: Would you have that broad indemnification clause, would it just be one big broad clause or does it have to be in a variety of locations?

Leni Morrison Cummins: Well, one big, broad clause is good, as long as you have some specific magic language. So broad indemnifications that might cover things like gross negligence or willful misconduct or even fraudulent behavior, those are actually void against public policy. So you can't be so broad on one hand as to cover those types of potential claims, but you also shouldn't be so narrow as to only cover contracts.

So it should specifically say claims relating to contract tort and, et cetera. 

Carol Ott: How does directors and officers liability insurance factor into this? I had always thought if you had that, if somebody had a problem with you and sued you, the insurance would cover. So how does this indemnification clause work with insurance?

Leni Morrison Cummins: So they should dovetail very nicely. D&O insurance in New York, directors and officers insurance, can only cover for acts to the extent that they're not based in that willful misconduct. So any sort of insurance coverage or indemnification that goes so broad as to cover those willful acts, it's not valid anyway.

So the way these policies are written really should dovetail with the indemnification clause, and you really should have that coverage. The issue becomes, number one, there's human error involved in placing insurance. Okay? So board members or a new board member should make sure that the D&O policy is in fact there, and that it does name the individual board members as covered insureds, not just the actual board.

And the other thing is, you know, D&O for the most part in the market right now is about $1 million. You can pay for more, but not much more. So $1 million in New York isn't always sufficient. So you'll wanna make sure you have an umbrella policy that sort of sits on top of that D&O policy.

And then as a fallback, if D&O disclaims, if there's not enough coverage, then at least you have the backing of, of the full building and all of the owners, and you're not left holding the bag as an individual owner. And that's the indemnification clause. 

Carol Ott: Why don't you tell me what the pitfalls might be with a particular indemnification language that I, as a, I guess a condo board member need to know.

Leni Morrison Cummins: Sure. So the next big one that I see is that the indemnification provision only indemnifies the board members for proceedings or litigation. And if it has that language, then if there's a threat of litigation or there's some sort of out of court dispute resolution, then the indemnification won't cover all of that potential liability, but also the defense costs, and the lawyer fees sometimes can be substantial even before you get to court. 

Carol Ott: So you would have to change the language in your indemnification policies or in your indemnification clause? Is that what you're suggesting? 

Leni Morrison Cummins: You would either change it by a bylaw amendment, or, if it was me, I'm really risk averse. I might not wanna join a board that has a poorly written indemnification clause.

Carol Ott: So if I'm a new board member or if I'm a person who joins my board. Would it be your recommendation that I have, I guess, my own attorney review the indemnification clause? 

Leni Morrison Cummins: Well, if you're considering joining a board, yes, it would be your own attorney, but I very frequently get requests from new board members who ask to have a call with me to review the D&O insurance and the indemnification clause when they're coming onto the board to make sure they're covered.

Carol Ott: And if the clause is not solid enough or if it's flawed, have you had many boards who've then said you know, fix it. Give me an unflawed clause and we'll see if we can get it passed. And then what is the process? What happens? How do I get a new clause in my bylaws? 

Leni Morrison Cummins: Yes, this does happen frequently.

But usually, you know, this is an older set of governing documents. Newer governing documents of the new construction condos that are more this sort of vintage, those have pretty, tailored indemnification clauses to sort of maximize that coverage.

Carol Ott: You would need to amend the bylaws, which in most cases requires 66 and two thirds of the unit owners to approve. But in those older bylaws, there's usually other provisions that kind of need to be brought up to speed anyway, so this is often part of a revamp. When boards are looking to do a bylaw amendment to sort of update their bylaws, the indemnification clause is one of the most frequently amended clauses that I include. 

We've been talking about indemnification clauses in the condominium sense. Just talk to me a little bit about what happens in the cooperative sense. 

Leni Morrison Cummins: So, because a cooperative in New York is a corporation, there is built in coverage with the New York Business Corporation law. The problem is that relying on that in and of itself, leaves board members with a big question mark. Because the way the statute is drafted, it essentially says a co-op or a corporation may indemnify a board member and it only becomes mandatory in certain circumstances. One of the circumstances is that the actual board member is sort of cleared of any wrongdoing in court. So there could be multi-year long litigation with a question mark where there's unclear coverage of liability and defense costs.

Carol Ott: So the same advice that you gave to a condominium would be also true in a cooperative, is that correct? 

Leni Morrison Cummins: That's correct. And a co-op that has an indemnification clause that merely recites, go to the Business Corporation Law, that's your indemnity, is not good enough. You can have a very similar provision to that, that refers to the Business Corporation Law, but uses shall language that makes it mandatory to have that coverage rather than the permissible language.

When you take on a new client, is this one of the first things that you look at? 

It's really not. Because when I'm coming in, unless I'm being asked to do a revamp, there's oftentimes a whole host of issues like this that could come up. It is not one of the things that I look at. When this comes up is usually after an election, when a new board member comes in and they don't wanna be left holding the bag for what might happen in their volunteer capacity. 

Carol Ott: And let me just ask you: let's say that there was a, a board who's taken several actions , and there was some litigation and it's not concluded.

And now there's an annual election and a new person comes on. Is that new person liable for what the board did over the past number of years? 

Leni Morrison Cummins: So the answer is maybe. It's fact specific, but it's unlikely. It would have to have kind of been a continuing wrongdoing. But the way the indemnification clauses work and the way that the directors and officers insurance works, it covers sort of when the loss happens, when the bad thing happens.

So if the incident was three years ago and the board members from three years ago were the ones named in a litigation or a part of a claim, it doesn't matter if the claim wasn't really asserted until three years later. Those board members that were on the board back in 2021 will still have the coverage of the indemnification and the D&O or they should.

Carol Ott: Okay. Bottom line then. Give me your advice for any board director who feels concerned about their personal liability. 

Leni Morrison Cummins: Pull your indemnification clause. Look for the specific language. Ask board counsel to go through it with you. Make sure there is defense included. Make sure that if there's a threat, it's included.

Make sure that it doesn't go so far as to potentially cover items such as bad faith. Those will not be upheld, but ultimately ask. Ask the question. Ask your counsel. 

Carol Ott: Okay. Thank you very much. Thanks for joining us today. 

Leni Morrison Cummins: My pleasure, Carol. Thank you for having me.