You have just been elected to the board of your community association. Before you were elected, did you inquire as to your liability as a volunteer member of the board? Most associations have indemnification provisions in their bylaws and have director and officer liability (D & O) insurance. Is there anything else that the association can do to protect its directors against law suits?

The Colorado Revised Nonprofit Code contains a provision that allows associations to limit personal liability of directors to the association and to its members for monetary damages for breach of fiduciary duty as a director, except that such a provision may not limit the liability of a director to the association or its members for monetary damages from the following: (1) any breach of the director’s duty of loyalty to the association or to its members; (2) acts or omissions not in good faith that involve intentional misconduct or knowing violation of law; (3) acts involving unlawful distributions or loans to directors; or (4) any transaction from which the director receives an improper personal benefit.

How does the board take advantage of this statutory protection? The statutory protection outlined above must be incorporated in the association’s articles of incorporation. If the association’s current articles of incorporation do not limit the liability of directors, the articles of incorporation must be amended to take advantage of this provision.

The amendment procedure for articles of incorporation may vary. Some articles of incorporation do not expressly address amendment, in which case, the statutory amendment requirement is a majority of the members present and voting at a duly called meeting of the members. Some articles of incorporation may have higher amendment requirements. In any case, the limitation on the personal liability of directors will only be effective for acts taken after the date the limitation is incorporated in the articles of incorporation.

The statutory protection does not eliminate the need for associations to maintain director and officer liability insurance (also known as association professional liability insurance). The statutory protection only covers directors. Director and officer liability insurance typically also covers officers, even if they are not directors, the corporation, and in many cases, committee members or other volunteers that serve at the direction of the board. Even if directors have the statutory protection, an insurance policy that covers defense costs is recommended. The statutory protection will serve as a defense, yet the statute cannot stop someone from filing suit against the directors. Insurance may fund legal costs to provide the defense afforded by the statute.

Although insurance is recommended even if the articles of incorporation include the statutory protection of directors, for most directors, any additional protection that is available by statute is attractive. Further, this additional protection may encourage owners to serve on the board. If your association’s articles of incorporation do not include this limitation on director’s personal liability, you may consider amending your articles to take advantage of the protection available under the Colorado Revised Nonprofit Code.
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