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Does Your Board of Directors Follow the Business Judgment Rule?

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By : John R Math    99 or more times read
Board of Directors in community associations are protected from liability in the course of operating and making decisions by what is known by the “Business Judgment Rule”. The Business Judgment Rule requires that the Board act within a reasonable manner and take the necessary steps to justify their decisions. If the Board did not use good business practices in their decision and something were to happen or be challenged, it could then be argued that they did not use good judgment. Generally, the burden of proof in establishing the impropriety of a Board’s decision is on those who are challenging the decision.

How does a Board of Directors ensure that they will be protected under the Business Judgment Rule? If they follow good business practices and if they are not experts in certain areas of their operations, they should use good business sense to obtain the proper information from related professionals in that field, prior to making decisions in their fiduciary responsibility to their association.

Take for instance; an association has need to repair construction defects or the need to refurbish their buildings due to spalling. Did the Board hire engineers, architects and other experts to provide reports or opinions on these jobs? Did they seek opinion from their CPA and attorney on funding and compliance with state statutes with this project? Was the association’s insurance company and agent contacted to see if current insurance policies were adequate for this work or do the policies need to be altered?

All of this type of information should be garnered and disseminated to the Board members prior to the collective Board making its decision on this project. When it is all said, and done, the Board, with confidence, can then say that they used good business practices in their decision and therefore they should be covered by the Business Judgment Rule, in case something were to be questioned after the fact.
As one of the oldest property management company specializing in community association management in Palm Beach County, Florida since 1988. Currently, APM provides management, maintenance, supervision, bookkeeping and administrative services for more than 130 community associations. Our Website Our weekly newsletter

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