Are Co-op Board Members At Risk of Being Sued?

It’s common for angry shareholders to file lawsuits that name individual members of the co-op board – often as a bullying tactic. 

“Board members get sued on a regular basis as an act of extortion by a plaintiff wanting to get the board to act in a particular way,” attorney Stuart Saft, the chairman of the Council of New York Cooperatives and Condominiums and a partner at Holland & Knight, tells the New York Times. 

The good news for co-op boards: the tactic usually backfires. Most boards are covered by liability insurance as part of their Directors and Officers (D&O) policy, which usually covers the legal costs of the board and the individual directors. The plaintiffs, however, are left paying their own mounting legal costs, winning mostly the enmity of their neighbors. “The plaintiffs think, ‘We’ll sue the individuals, they will panic, and we will have them in our grasp!’” says Saft. “But that’s not what happens.” 

“Mostly, no one is suing for money,” says Kevin Davis, president of Kevin Davis Insurance Services. “They are fighting over every little detail, and particularly rules on pets. The more money and the more time people have, the more lawsuits you are going to get. In New York City, you have a lot of money, so it’s more intense. Lawsuits are usually filed by the people who live there who don’t want to follow the rules.” 

Under the Business Judgment Rule, New York courts have tended to protect individual directors of co-ops and condominiums as long as they were acting legally, in good faith and using honest business judgment. 

The big exception, of course, is willful legal wrongdoing such as discrimination and self-dealing. Not surprisingly, D&O liability insurance is not likely to cover damages in those types of claims. If a board discriminates, it’s on its own.