Are Michigan HOA Board Members Personally Liable? D&O Insurance and Fiduciary Duty Explained

The Fear That Keeps Good People Off HOA Boards

One of the most common reasons people decline to serve on an HOA or condo association board in Michigan is fear of personal liability. The concern is understandable — board members make financial decisions involving millions of dollars, enforce rules that affect neighbors' lives, and occasionally have to make unpopular calls.

The reality is more reassuring than the fear. Michigan law and a well-structured D&O insurance policy provide meaningful protection for board members who act in good faith. Understanding the protections available — and their limits — helps boards make better decisions and recruit better members.

Michigan's Business Judgment Rule: Your First Layer of Protection

Michigan courts apply the business judgment rule to HOA and condo association board decisions. Under this rule, board members who act in good faith, with the care of an ordinarily prudent person in a similar position, and in a manner they reasonably believe to be in the best interests of the association will not be held personally liable for the outcome of their decisions — even if those decisions turn out to be wrong.

The business judgment rule does not protect every decision. It specifically does not protect:

• Decisions made with a conflict of interest (where the board member had a personal financial interest in the outcome)
• Decisions made in bad faith or with intentional wrongdoing
• Decisions involving a clear violation of law
• Decisions made without reasonable investigation or due diligence

But for the vast majority of good-faith HOA board decisions — hiring a vendor, approving a budget, enforcing a rule, setting an assessment level — the business judgment rule means board members are not personally liable if the decision later proves to have been imperfect.

Fiduciary Duty: What Michigan HOA Board Members Are Actually Required to Do

Under Michigan law, HOA and condo board members owe fiduciary duties to the association. These duties have three components:

**Duty of care.** Make decisions with the care of an ordinarily prudent person. This means doing basic due diligence — getting contractor bids before a major repair, reviewing financial reports, asking questions when something doesn't look right. You don't need to be a lawyer, accountant, or engineer — you need to be reasonably careful.

**Duty of loyalty.** Put the association's interests above your own. Disclose conflicts of interest, recuse yourself from votes where you have a personal stake, and never use your position for personal financial gain. The duty of loyalty is the most commonly violated fiduciary duty in HOA governance — and it is the area where personal liability claims are most likely to succeed.

**Duty of obedience.** Act in accordance with the association's governing documents and applicable law. A board that systematically ignores its own CC&Rs or that knowingly violates state law (for example, by holding improper meetings or misappropriating funds) exposes both the association and potentially individual board members to liability.

When Can Board Members Be Personally Liable?

Personal liability for individual board members is rare but not impossible in Michigan. Situations that have resulted in personal liability claims against HOA board members include:

**Self-dealing and fraud.** A board president who steered association contracts to a company he owned without disclosing the conflict of interest — and pocketed money as a result — is not protected by the business judgment rule. This is intentional wrongdoing.

**Knowing violation of fair housing law.** A board that discriminates in the enforcement of rules against homeowners of a particular race or national origin may expose individual members to liability under federal and Michigan civil rights law.

**Misappropriation of funds.** Board members who authorize improper expenditures, fail to maintain proper financial controls, or allow another board member to misappropriate association funds without taking corrective action may be held personally liable for the resulting loss.

**Gross negligence.** A decision so obviously irresponsible that no reasonable person could justify it — for example, ignoring a structural engineer's report warning of imminent failure and taking no corrective action — may not receive business judgment rule protection.

**What does not typically result in personal liability:** Making a vendor choice that turns out poorly. Adopting a budget that proves inadequate. Failing to anticipate every consequence of a policy decision. Making mistakes that cost the association money but were made in good faith with reasonable information at the time.

Directors and Officers (D&O) Insurance: Your Second Layer of Protection

Directors and Officers insurance is separate from your association's general commercial liability policy and your property insurance. It specifically covers claims against board members alleging wrongful acts in their capacity as directors or officers of the association.

What D&O typically covers:

• Defense costs (attorney fees) even if the claim is ultimately without merit
• Settlement costs
• Judgments in covered claims
• Claims by homeowners against the board for mismanagement, breach of fiduciary duty, selective enforcement, and similar allegations

What D&O typically does not cover:

• Criminal acts
• Fraud or intentional dishonesty
• Claims arising from bodily injury or property damage (those are covered under your general liability policy)
• Claims for which the association has already been indemnified through another policy

What to look for in a Michigan HOA D&O policy:

• Coverage limits: Most Michigan HOAs should carry at least $1 million per occurrence and $2 million aggregate. Larger associations should carry higher limits.
• Defense outside limits vs. within limits: Policies that cover defense costs outside the liability limits are more valuable because a lengthy legal dispute won't erode your indemnification coverage.
• Prior acts coverage: Ensure the policy covers claims arising from acts that occurred before the current policy period began (important when a new board inherits problems from a prior board).
• Individual vs. entity coverage: D&O should cover both the association as an entity and individual board members personally.

Michigan Nonprofit Corporation Act Protections

Most Michigan HOAs are organized as nonprofit corporations under the Michigan Nonprofit Corporation Act. Under the Act, board members who are not compensated for their service receive additional statutory protection — they are not personally liable for the acts, omissions, or obligations of the corporation unless they acted with gross negligence or willful and wanton misconduct.

This statutory protection applies on top of the business judgment rule and is an important reason why serving on a volunteer Michigan HOA board carries significantly less personal risk than serving as a director of a for-profit corporation.

Practical Steps to Protect Yourself as a Board Member

**Attend meetings and stay informed.** Board members who regularly review financial reports, attend meetings, ask questions, and document their engagement are in a much stronger position than members who are absent or disengaged.

**Document your decisions.** Meeting minutes should capture the key factors the board considered, the alternatives evaluated, and the reasoning behind significant decisions. A well-documented decision is much easier to defend than one that has no written record.

**Disclose conflicts of interest.** When you have any personal financial interest in a matter before the board, disclose it in writing, recuse yourself from the vote, and ensure the minutes document your recusal.

**Rely on professional advisors appropriately.** Decisions involving legal questions should involve the association's attorney. Financial decisions of significance should involve the management company or accountant. Relying on professional advice in good faith is itself evidence of the duty of care.

**Ensure the association carries adequate D&O insurance.** Review your current D&O policy annually. If you're not sure whether your coverage is adequate, ask your management company or insurance broker for a review.

**Don't serve alone.** A board that makes all significant decisions by unanimous vote of the full board, with all members meaningfully engaged, is at far lower risk than a board where one member makes unilateral decisions. Distributed decision-making is a governance best practice and a liability protection.

Frequently Asked Questions

I'm a new board member. Am I personally liable for decisions made by the board before I joined?

Generally no — you cannot be held liable for decisions made before you became a board member. However, if you become aware of ongoing problems (for example, ongoing misappropriation of funds) and fail to take corrective action, you may develop liability going forward. When you join a board, reviewing recent financials, meeting minutes, and any pending disputes is good due diligence.

Can a homeowner sue me personally for enforcing a rule I didn't agree with?

A homeowner can file a lawsuit naming board members individually, but that doesn't mean the claim will succeed. If you enforced a validly adopted rule consistently and in good faith, the business judgment rule and your D&O insurance provide strong protection. Your D&O insurer will typically provide a defense attorney.

We're thinking about not renewing our D&O policy to save money. Is that a good idea?

No. D&O insurance is one of the most important policies an HOA carries. The cost is typically modest relative to the protection it provides, and allowing it to lapse is a significant risk to both the association and individual board members.

Does D&O cover a claim by one board member against another?

Possibly, but many D&O policies exclude "insured vs. insured" claims — claims between covered parties. Review your policy terms carefully before assuming intra-board disputes are covered.

Association Property Managers helps Michigan HOA boards maintain proper governance documentation, secure appropriate D&O insurance, and structure decision-making processes that protect board members. Contact us to discuss your community's needs.