Willful and Malicious behavior - D&O duty to defend?

Four questions
1. Who determines and how does one determine behavior to be willful and malicious.
2. Does a Board have the obligation to give their D&O insurance provider of a notice of circumstance.
3. Has anyone ever refunded surplus funds - do you go back to every owner of each unit and provide refunds to them for the portion they paid in?
4. What would you do in my situation?

For the past 8 months, I have had a working knowledge of this board. The continual unprofessionally and abusive comments by one homeowner (former board member) have continued to impact the productivity of the current board. There has been a general agreement to not engage the disruptive former board member. To this person, she has continually stated, “What you won’t answer me, well I take that as your admission of guilt and I don’t care what you say, everything you say is a lie anyway.” The minutes graciously understate the malicious intonation of her comments, toward this person and other members of the current board.

This board has worked to resolve a number of issues which this former board member created. As a board member there is no record of her attending any educational classes offered for homeowner volunteers of a board. As a board member, she failed in her fiduciary duties to appropriately review the Reserve Study and without discussion in an open meeting, removed, or allowed to be removed, common elements which were generally felt by the membership to be “common elements”. As a board member she failed to notify homeowners of the decision to abdicate responsibility for common areas as the result of the Reserve Study adopted. As a result she has pronounced that the Reserve Account is over funded by 367% and declared that such surplus must be refunded, which is in accordance with Nevada law. This board is taking all appropriate steps to investigate the assertion.

My perception is that her behavior, is willful, and perhaps malicious, and this board may have to ask a higher authority to determine if the actions being thus, would preclude that former board member from the indemnification of her actions, and the benefits of the Director’s and Officer’s Insurance duty to defend. A great deal of money and time has had to be expended to resolve the reserve component identification through legal recourse. If over funded, the former board member has stated each current homeowner would get a specific dollar amount. This self promoting action is very irresponsible and may not comply with the law as the law states any prepayment of the reserves must be paid to the units owners in proportion to their liabilities. The interpretation and procedural process to refund any surplus will again take legal counsel time to investigate and advise.
NRS 116.3114 Surplus funds. Unless otherwise provided in the declaration, any surplus funds of the association remaining after payment of or provision for common expenses and any prepayment of reserves must be paid to the units’ owners in proportion to their liabilities for common expenses or credited to them to reduce their future assessments for common expenses.
(Added to NRS by 1991, 567)
Additionally as a board member she failed to notify homeowners of actions regarding the construction defect litigation suit. As a result of the board’s failure to notify homeowners independent of the CD attorney’s to notify members of decertification of the class has place the board once again under scrutiny and the need for additional legal counsel.

This board has taken steps to reduce the time limit for homeowner comments to five minutes and then three minutes because the disruptive party has taken up to 27 minutes of continuous diatribe to cause disruption and maliciously contrived controversy. Homeowners have stopped coming to meetings because they tire of her.

With director terms of only one year - I am sure she will use her contrived controversies to try and be elected again. Can we disclose that all of our legal expenses this year have been because of her?

"she has pronounced that the Reserve Account is over funded by 367%" Is she a certified reserve specialist?

JS1 asked: " 1. Who determines and how does one determine behavior to be willful and malicious. "

I would hazard a guess here: a jury or judge in a court of law?

Sorry for your HOA's problems with the former board member.

You would think people would have better things to do with their time.

JS1,
Just an opinion, but I don't see where you (as the Board) have to make any decisions about what this person is contending. You seem to understand your confusion, are taking steps to set things right and that is your mandate. The Boards interest is to conduct the business of the association. Is this person wrong or whatever? At this point, who cares?
She seems capable of making her own conclusions and acting on them, at a called meeting of the Board, she or any other member, board or other wise, can be remover from the meeting by authorites, for disruptive conduct. She has a right to speak, the Board can set time limits. I don't believe the Board should take her to court or any other member, except for crimional conduct or non payment os fees. The board should operate in a fashion that their conduct does not allow for any member to substaniate a charge against them, so if she wants to sue, you can't stop her but the association is in a better position being sued than suing, in circumstances like this. Let her prove her accusations. A judge also can understand what is happening.
Act on your knowledge and good will and run the business.

Additionally,

3. Has anyone ever refunded surplus funds - do you go back to every owner of each unit and provide refunds to them for the portion they paid in?

Susan and all

We are taking the steps to curb the disruptive behavior, as indicated we limit the homeowner forum time. The President is unlikely to do more, we have a good manager who helps to maintain order. The former boardmember is not the issue.... Everyone who lives in an HOA has run across the type at one time or another. This board is resolving the messes the former board member created, legally and with appropriate disclosure.

That is all basic HOA stuff, this query is in ADVANCED BOARD EDUCATION territory....

Who determines and how does one determine behavior to be willful and malicious. (Is it the responsibility of this board? - I don't think so as it would be too likely this board's opinion would be considered a conflict of interest.)

I think we have a duty to PRESERVE the rights to a defense by the D&O insurance even if her actions have proven to be costly; therefore maybe it's not our call to pass judgment on willful and malicious behavior, which would preclude her from the benefits of indemnification.

Which brings the second question: Does a Board have the obligation to give their D&O insurance provider of a notice of circumstance. (I think yes, as it will preserve the duty to defend, I am conflicted as it may also raise our rates - I am as a fiduciary under the obligation to consider those actions which affect the community as a whole, not just one former boardmember. The moment action is filed, yes we must inform the insurance company, but do we give them a notice of circumstance, as the situation is heating up, and then withdraw the notice if nothing develops.) I'm just seeking your opinion, if I'm wrong, I appreciate the teaching and any personal insight.

You are going to have a hard time "proving" that a former Board member - who makes verbal attacks against the current Board - is committing "willful and malicious" behavior. What are the "damages"? There is no way the D&O insurance will pick up this "case."

Let her take the first step. She can file a lawsuit against the Association if she feels it is keeping money illegally. The burden of proof will be hers. Then the Board's attorney can respond.

The actions, when she was a board member, were not done alone. There MUST have been votes on the actions that you claim she committed by herself. She was one of many board members.

I think there are other issues going on here. Remove her from the meeting if she gets disruptive. Re-do your Reserve fund numbers. Report to the general membership, at a Special Meeting, if necessary.

Susan - "There MUST have been votes on the actions that you claim she committed by herself. She was one of many board members." No at the time there were only two Board Members, and no minutes of action regarding CD law suit, they did not appoint a replacement director to the board until pressured to do so,after concerns about the lack of information. Other board member involved equally concerned, just not vocal, and cooperating.

Still comes down to the indemnification and preserving the duty to defend.

I would say you should not pre-contact your insurance if you have no lawsuit or claim against you. Just because you notify them doesn't mean they will defend, in most cases they seem to settle if they can get what they believe to be a reasonable settlement and get out of it. Let your attorney tell you when to submit to insurance.

Sorry about the situation, what an aggravation for volunteering!

ShawnaF - You bring up an interesting scenario - Doesn't this forum constitute the same level, if not more of a public forum? Then I would be equally at fault?