How Do Fiduciary Duties Play a Role in HOA Financial Management?

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Being the board member of a Tacoma, WA HOA is no lighthearted task. HOAs are responsible for managing the financial resources of all the members of a community, and as such, they must exercise a high degree of responsibility and accountability to ensure that resources are managed properly and efficiently.

As a result, fiduciary duties are essential to ensure that all parties involved in financial management are held accountable and responsible. After all, fiduciary duties play a critical role in HOA financial management and can make or break a Tacoma, WA community association’s success.

What Is a Fiduciary?

A fiduciary is a person or organization legally obligated to act in the best interests of another party. This means that fiduciaries must put the interests of the party they represent before their own interests. Fiduciary duties are the duties that a fiduciary owes to their beneficiaries, such as the duties of loyalty and care.

What Are the Duties of Fiduciary Responsibility?

Fiduciaries are required to exercise their powers in accordance with the duties set forth by local law. As mentioned above, there are two primary legally obligated duties when acting as a fiduciary: duty of loyalty and duty of care. 

  • Duty of Loyalty: Duty of loyalty requires the fiduciary to protect the interest of the association and not take any action that may be contrary to its interests. This includes refraining board members from taking advantage of their position and deriving personal benefits as a result of their elevated status. They cannot use their position of power to further their private interests, and they must always disclose any potential conflicts of interest. Violation of the duty of loyalty could result in liability for all resulting damages.
  • Duty of Care: Duty of care can also be referred to as the duty to perform due diligence. Simply put, this means that board members have the responsibility to perform all tasks required of them, be active participants and make informed decisions that are in the best interest of the community. Failure to carry out your responsibilities as a board member or failure to take your position seriously are considered forms of breach of the duty of care. If you accept the responsibility of becoming a board member, you’ll need to perform all associated tasks with thought, care and fairness.

How Are HOAs Protected from Fiduciary Decision-Making Liability?

Although there are risks to performing your job as a board member without proper care, there are protections in place to limit the liability of HOA board members when acting as fiduciaries. After all, most board members are volunteer residents, not community management professionals, so honest mistakes may happen, and it’s important for board members to feel protected in their roles. Here are a few ways in which your HOA can limit its liability:

  • D&O Insurance: Directors’ and officers’ coverage will protect board members against errors while serving their community.
  • Governing Documents: Most communities will have a hold harmless agreement or indemnity provision in their bylaws, which limits a board member’s personal liability while in office.
  • Statutory Protection: The Davis-Stirling Act protects volunteer board members from personal liability while serving on the board of directors, provided that they might specific criteria. Your state’s Corporations Code can also provide protection if you had no reason to believe that your action was unlawful at the time it was committed. 

With all liability protection measures, it’s important to note that these typically only apply if you’ve acted in good faith and in the best interest of the association. Willful neglect or abuse of your duties will not often be covered by these measures.

If you want to ensure that your board and all of its members are acting within the law and within your duties as a fiduciary, consulting an HOA management firm can help give you peace of mind and enable your community’s long-term success. With over 30 years in the industry and over 1,500 successfully managed communities, The Management Trust has the expertise to guide you in all aspects of community association management, including HOA financial management. To learn more about our comprehensive HOA management services in Tacoma, WA, call The Management Trust at 253-472-0825 or fill out our online contact form today. We look forward to working with you!