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Fiduciary Duty

Fiduciary duty — the concept that directors must act in good faith in the best interest of the corporation, and make decisions based on a consideration of the right information — is easy to say but sometimes hard to execute. Meeting the fiduciary duty standard is good for directors; it gives them a frame for a 'safe harbor' in which to operate; and it is good for the members because its compliance assures that directors will feel the pressure to do a good job.

Fiduciary Duty, Indemnification and Insurance

The basic idea of "fiduciary duty" is that it sets a standard of behavior for those serving on the board. The standard requires directors to make decisions and to act in good faith and within the scope of their authority under their association's governing documents. This includes making decisions the director believes to be in the association's best interest (not the best interests of the director) and requires a director to ask questions (the duty of "reasonable inquiry") before reaching conclusions what should reflect judgments of an "ordinarily prudent person."

The topic of fiduciary duty is tied to "indemnification" rights - that is, the right of a director to receive a legal defense and reimbursement for claims, demands and damages arising out of a director's service to the association. The applicable rules are surprisingly complicated but generally the association must protect those who volunteer (and other agents who act) on its behalf.

The issue of insurance is also related: the way in which the association protects itself from the cost of indemnifying directors or others is by maintaining insurance. Director claims are usually covered by Comprehensive General Liability (so called "CGL" policies) when the issues relate to personal injury or property damage; or Directors and Officers insurance ("D&O") when the claims are for economic loss, breach of fiduciary duty and the like. The Association will also typically insure the buildings and the common area for fire and other casualties.

Learn more about Director's and Officer's Liability Insurance and Defense.

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