Q: I am a property manager and have been asked by a small condominium association to represent them. During our negotiations over terms and conditions, I was advised that my contract would have to contain a “hold harmless” clause. Exactly what does this mean?

A: First, I assume that you are qualified as a property manager, and that you are appropriately licensed in the jurisdiction where the association is located. Second, I recommend that if you do not already have legal counsel, that you retain one.

It is always important – especially in today’s litigious society – to carefully read and understand every word in any contract which you sign. While our legal system is usually fair and equitable, judges will nevertheless strictly enforce terms in a contract which has been entered into by two or more people who clearly are competent to understand the legal document which they have signed.

A “hold harmless” clause – also commonly referred to as an “indemnity provision” is a very important part of any contract – especially one in which services are rendered by one party for the benefit of another.

To indemnify simply means that one party to a contract will repay another party for any loss, injury or damage which the latter may suffer or incur. Your potential client – the condominium association – is asking that your contract contain a clause which looks like this:

Property manager shall indemnify and hold harmless association (including, attorney’s fees and costs) against all liability or loss, and against all claims or actions based upon or arising out of damages or injury (including death) to persons or property caused by or sustained in connection with the performance of the contract or by conditions created thereby.

Let’s look at this example. After you are hired by the association, you arrange for the Board of Directors of the association to hire a painting company to paint the halls of the association. During the course of its work, the painters accidentally cause damage to the Association’s only elevator, causing the occupants of the building to have to walk up and down stairs for several weeks. One owner is handicapped, and is unable to walk the stairs. As a result, that owner is forced to temporarily reside in a hotel.

It is subsequently discovered that the painting company was not only unlicenced, but had been cited by government agencies on several occasions for improper practices. Furthermore, the painting company has no insurance.

The association’s attorney sends you a letter, demanding that you – as property manager who arranged for this incompetent painting company – pick up the hotel bill for the handicapped person. Under the terms of your indemnity contract, you have agreed to “indemnify and hold harmless” the association from “ any loss ..arising out of damages ... to persons ...caused by or sustained in connection with the performance of the contract...”

Under the terms of your contract, you would be responsible for picking up the hotel tab, since the loss was caused by the “performance of” your contract. According to a recent insurance company publication, “when hiring independent contractors, it has always been important for community associations to obtain hold harmless clauses in contracts. These clauses can protect the association’s interests against allegations that the contractor failed to properly provide services.” (Insurance Focus, August, 2002; for additional information, check out the Website at www.usicondo.com).

However, you do not want to agree to open-ended, unlimited exposure. Accordingly, while you should agree to include the hold-harmless clause in your management contract, you should also place some limitations on that clause. Typically, you do not want to indemnify the association for matters caused by the negligence of the association itself; for example, the Board President demanded that this particular painting company be used.

Additionally, you may want to cap your potential liability to the extent of your own insurance coverage. Thus, if you carry one million dollars worth of liability insurance, that would be the extent of any recovery which the association would get in the event it successfully files a claim against you and your company. Finally, you should also consider requesting parallel language in your management contract. The association should indemnify and hold you harmless for any actions which may be brought against your company, where the only reason you are involved is because you are the property manager, and not because of something which you did or did not do.

Once again, while the association may be prepared to give you this hold-harmless agreement, they should not indemnify you for any negligence or willful acts on your part.

A property manager owes a duty of loyalty, good faith and fair dealing to the community association. Once the property manager is on board, it is – or should be – part of the team. But until the contract has been signed between the parties, there is a potential adversarial relationship. And both parties must clearly understand the full impact of the contractual relationship in which they are about to embark.

Once the contract has been signed, it may be too late.

Published: November 18, 2002

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Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts. Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.