Members of our board and the board itself are being unfairly sued. What do we do?
“Boards and individual board members may get sued—often in the same lawsuit—but it doesn’t mean you are liable for anything or that you have done anything wrong, just because you’ve made decisions as part of your role on a co-op or condo board,” says New York City real estate attorney Steven Wagner, a partner at Adam Leitman Bailey, P.C. who represents co-op and condo boards and owners.
The business judgment rule protects co-op and condo boards and individual board members who are carrying out their duties in the usual course of business. This might include decisions made when approving a contract, deciding to change a vendor, or committing to landscaping or interior decorating.
When you are served with a summons and complaint, you need to immediately notify your managing agent, your lawyer, and your insurance company. Even though the board and any named individual in the lawsuit may have not done anything wrong, there are time periods within which to respond to a lawsuit. And the case will still need to be defended. “Being served with a lawsuit is quite different from losing a lawsuit,” Wagner says.
If the co-op has insurance, which is very likely that the insurance company will almost always provide a defense for the co-op or condo and the board members. The insurance will also cover losses within the scope of the policy.
Figuring out the insurance coverage
You have an obligation to let your insurance carrier know if a claim is made against the board. You need to give them the first notice you receive, which is often the summons and complaint.
“When a lawsuit is commenced, the insurance company will make the decision as to whether there is coverage,” Wagner says. If they believe there is no coverage or they are uncertain as to whether coverage exists, they may issue a letter denying coverage and stating the reasons why. Alternatively they may issue a reservation of rights letter.
This is where they may hire an attorney to defend the co-op and the board members but reserve their rights not to pay for damages, if it is ultimately determined the claim is not covered, “this gives the board the right to demand its own attorney to handle the case,” Wagner says.
Some policies have provisions allowing the board to choose their own attorney. Keep in mind, however, that the insurance company may not pay the rates of the law firm you are using.
“The defendants then have to supplement that cost,” Wagner says. You will need to consult with a lawyer to figure out the rule for reimbursing or paying for any individual expenses.
“If you’ve done nothing wrong your insurance company and the indemnity provisions in the co-op or condo’s bylaws mean you should not be out of pocket,” Wagner says.
Individual board member liability
If the only thing you’ve done is to act as a member of the board in accordance with the normal running of the building, and there’s nothing individually that anyone can point to, the likelihood is you will not only win the case but it may well be dismissed relatively early in the proceedings, Wagner says.
“Sometimes these cases take shape because a shareholder disagrees with how the board is running the building, but that doesn’t in itself justify a claim against the board or individual members,” he says.
Courts will not interfere with decisions made in good faith under the business judgment rules.
Your responsibility to cooperate
Regardless of the claims, you have an obligation to cooperate with the insurance company. That means you need to provide information that’s requested and be available at reasonable notice for depositions.
Attorneys working for insurance companies are often dealing with a lot of cases and you may be asked to attend a deposition or provide information at very short notice. “It’s a good idea to stay in touch with the attorneys to keep informed of the status of the case,” Wagner says.
Courts impose deadlines that should be met.
“Missing deadlines may negatively impact the case and can sometimes lead to claims you are not cooperating,” Wagner says. Insurance companies can stop providing a defense and coverage if there’s a lack of cooperation.
You can follow progression of the case online via the New York Unified Court System. The lawyers will need to periodically report on the discovery laid out in the case via what’s called preliminary conference orders. “These orders are available online so you can see the deadlines and keep track of the case,” Wagner says.
New York City real estate attorney Steven Wagner, a partner at Adam Leitman Bailey P.C., has more than 30 years of experience representing co-ops, and condos, as well as individual owners and shareholders. You can submit a question for this column via email or if you’d like to arrange a free 15-minute telephone consultation with Steve, send an email or call (212) 584-1973.