Tuesday, February 5, 2013

Indemnify, Indemnify, Indemnify!

A standard item in most management contracts is that the Association guarantees to protect the manager against most claims.  These apply to third party claims, not those between the Association and the management company.   It also does not cover willful misconduct, gross negligence or criminal actions.

This concept is known, more commonly, as indemnification. This principle has been accepted by Homeowner Associations’ legal counsel for the last several decades. Association insurers often automatically name the management company as an additional insured, usually at no additional cost, due to the agency relationship between the management company and the Association.  Without the financial resources provided by insurance, it is unlikely an Association would have sufficient funds to legally defend a manager, defeating the whole notion of a Board hiring an agent, rather than itself handling all the daily minutia.

Insurance carriers depend on the indemnification language within the management contract in order to underwrite the management firm. Departing from this standard would immediately drive up management fees charged to Associations, and create pressure for management companies to consolidate or close, reducing choice for Homeowner Associations.

Management and Association must work seamlessly, jointly pursuing a defense with both parties in the same boat, rather than having an adversarial relationship.  It would be difficult to manage the Association’s affairs if attorneys and insurance carriers for each side were constantly angling to shift blame between the two.

A management company’s indemnification provisions differ from what would apply to standard third party vendors engaged by the Association. Unlike other third parties, managers are acting not at their own discretion - but at the Board’s discretion. The manager steps into the shoes of the Board to implement Board directives.  The management company is rarely, if ever, solely negligent.  In most instances a homeowner’s lawsuit names the manager, because the manager performed or implemented a board directive or policy and the owner dealt with the manager, not the Board. 

Similar indemnification requirements govern employer / employee relationships (for the employee’s negligence in the course and scope of his work) and in corporate relationships (such as the Board of Directors are indemnified by the Association).

The current approach works. Attorneys and insurers are hard pressed to find an example of a situation in which the management company's indemnity paragraph left the Association with significant legal or financial challenges.

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