Monday, June 18, 2018

Know what you are getting into before your Board agrees to an Indemnification Clause

Many boards focus on only a few provisions of the contracts they sign. What service or materials are they getting? What are they paying? When will the contract commence? Far too many other crucial provisions are overlooked as boilerplate.

Indemnification clauses are often seen as part of the standard boilerplate provisions in most contracts and have become commonplace in all types of association contracts. To indemnify someone means to compensate him or her for a loss, sometimes even for a loss caused by the person being indemnified.  The first question to ask is why the association should be indemnifying another party.  The second question is to inquire about the extent of the indemnity obligation.

Let's look at how these indemnification provisions are treated in a variety of contracts your board might sign.


MANAGEMENT AGREEMENTS:

With your manager, the first question is easy to answer. Your manager is on the front lines daily, takes direction from the board and acts as the agent for the association.  It would be foolhardy for any manager or management company to serve in that capacity without an adequate indemnification clause.  However, even easy solutions can become complicated when you are faced with an overly broad indemnification clause.  For instance, some indemnification clauses in management contracts have the association agreeing to indemnify the management company even for their own gross negligence or willful misconduct. Other clauses are drafted to require the manager or management company to be found 100% liable before their reciprocal obligation to indemnify the association kicks in.  In a wrongful death case, personal injury or premises liability case, that means your manager or management company could be found 99% liable for the damages and your association would still be indemnifying them.

Fairness would dictate that each party (the Association and Management Company/Manager) agree to indemnify the other.  Since the manager is typically an additional insured on the association's liability policy, the manager and management company are typically indemnified for their negligence but should not be indemnified for gross negligence, criminal acts or willful misconduct or for damages attributable to a direct breach of the management contract.  The management company should indemnify the association for its gross negligence, criminal acts, willful misconduct or for its breach of the management contract.

SECURITY CONTRACTS:

Agreements with vendors who provide security services to your community require close scrutiny of the indemnification provisions given the potential for something to go awry.  If your guards are armed, the potential for liability increases even more.  If your security company requires an indemnification from the Association, that indemnification should be very limited because the security company should be responsible for the conduct of its employees on your property.  Moreover, if you are relying on security services to avoid a negligent security claim, be sure to have your security company provide recommendations of what is needed to properly secure your community.  Security companies often attempt to limit their liability to not exceed the contract sum; naturally, such limitation often does not come close to covering the damage they might actually cause.


ELEVATOR, LAUNDRY AND OTHER SERVICE CONTRACTS:

Similar to security contracts, there are other service contracts where the contractor is independent from the association and the association has little to no impact on the services or products being provided.

It is very important that these contractors carry their own insurance, name the association as an additional insured and indemnify the association for claims brought against the association because of the actions of these service providers.  Do not count on the association's insurance to protect the association in the event of an indemnity claim by one of your vendors or contractors. If you sign  the agreement with an indemnity clause, you have taken on a contractual liability and your insurance will likely not provide coverage. It is important to verify coverage or the lack thereof before you sign contracts requiring the association to provide an indemnification to another party.

Lastly, you must remember that your vendors' insurance policies cover not only your potential claim but the potential claims of all other associations with whom they have contracted. In a wrongful death or personal injury cause of action, awards or settlements can quickly exceed a $1 million coverage limit.  As such, sufficient umbrella coverage is needed.









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