Shore Up Your Defenses

Degrees of exposure. The business judgment rule covers two categories: contractual issues relating to governing documents like bylaws and house rules, and societal or governmental issues such as discrimination claims or violations of laws and regulations. Boards generally have more protection with the first category, while the second leaves them more exposed. Directors and officers insurance covers board members on virtually all of these types of claims, but only up to a point. That’s because the duty to defend means the insurance company almost always has to provide an attorney if you’re sued — but if you lose, it may not be writing a check.

Security measures. That’s one reason you have to make sure your bylaws have been updated to provide the broadest coverage and indemnification for directors and officers. Boards also need to adopt clear policies on sales, subletting, disabilities and so forth and then follow them religiously and consistently. Doing that will give the court something to hang its hat on, so to speak, in terms of applying the business judgment rule. And it almost goes without saying that you should rely on the advice of your attorney, accountant, managing agent, engineers and other professionals. 

Added protection. If while on the board you think a decision looks like it’s going off the rails, request a roll call vote so you and others can voice dissenting opinions. Sometimes that’s all that’s needed to make people realize, “Hey, we might be headed in the wrong direction here.” By calling for the vote, you’ll ensure that the minutes reflect that you didn’t agree, and if the board is sued collectively or individually, you will be able to remove yourself from the suit because you did not vote for the decision in question.