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This Old House - Do-it-Yourself

Indemnify the HOA Manager

Written by Posted On Tuesday, 20 March 2007 17:00

"Indemnify" is an insurance and legal term that means "to protect against loss or damage." Just about all homeowner association management contracts have a provision which states that the HOA shall indemnify the manager under certain circumstances since it is likely that the manager will be named as a defendant in any lawsuit relating to the management of the property. For example, if somebody slips and falls on the property most attorneys representing the injured person would sue the manager as well as the HOA.

There are several ways the indemnification clause can be drafted and both management and HOA must take into account what protects each the best:

Negligence versus Gross Negligence or Willful Neglect. The HOA usually wants an indemnification clause which states the HOA shall indemnify the manager from any actions except for negligence. That makes the manager responsible for negligent acts. The manager usually wants to increase that standard to gross negligence or willful neglect. So, mere negligence would not be enough to trigger an obligation of management to defendant itself.

Sometimes the management contract states that management is liable for gross negligence and willful neglect only if a court decides that the manager is guilty of it. So, the HOA is obligated to provide the manager's defense until a court determines that the manager is guilty. Since most cases are settled, this clause gives the manager an additional layer of protection.

One compromise provision states if the insurance carrier provides negligence or gross negligence coverage, the HOA will indemnify the manager to the extent of the insurance protection. Because the manager is named as an insured under the general liability policy this is a fair way of dealing with the indemnification issue.

Be wary of a management contract which states that the homeowner association indemnifies the manager in all cases (without regard to negligence, gross negligence or wrongful conduct). This kind of clause is not reasonable and the HOA gives up too many rights.

In addition to indemnification there are other issues:

  1. Manager Acting as Employer. For ease of administration, the manager may sometimes act as the employer for employees that, in fact, work for the HOA. Under the Americans With Disabilities Act, if an HOA has over fifteen employees, this may cause a problem for both the manager and the HOA. In this case, the HOA should be the designated employer for its employees.

  2. Board Signs Contracts. Managers should have the board sign all contracts. That way, the board is always aware of the contracts and the manager is not subject to questioning whether there was authority to enter into the contract.

  3. Use HOA Letterhead. Managers using HOA letterhead instead of management company letterhead for HOA correspondence will avoid confusion as to who the true party in authority is. For example, in a contract dispute, the contractor should be clear that the contract is with the homeowner association and not with the manager.

  4. The Management Agreement. This document should clearly explain the full scope and responsibility of the manager's duties. It should explain that the manager works under the supervision and authority of the board of directors, not independently as members sometimes believe. The Management Agreement should detail issues that require special authority from the board.

Typically, the manager is authorized to transact normal and routine business that is in keeping with the governing documents, rules, regulations and approved budget. When a special case arises that falls outside these parameters, the manager should get written approval from the board or the board president. An exception to this rule is an emergency like a fire or flood that must be dealt with immediately to reduce damage to property or injury.

The Management Agreement is the basis for whether the manager makes money or not. If written too broadly, the manager will be expected to perform certain work without additional compensation. If the scope of work covered by the base management fee is limited to "routine" issues which are predictable and quantifiable, the manager is likely to be profitable.

The Management Agreement controls the manager's liability by giving and limiting authority. As long as the manager is careful to follow the guidelines, the HOA's responsibility to indemnify the manager will not be called into question.

For reasons stated, the Management Agreement needs to be carefully crafted to ensure manager profitability and to limit liability. For a sample Management Agreement, see Regenesis.net Manager Issues.

Like other professionals, homeowner association managers must be as diligent in protecting themselves as they are in protecting their clients. Review the Management Contract for indemnification language and modify it as necessary to protect the manager from reasonable scenarios.

Excerpts from an article by Marcus, Errico, Emmer & Brooks. For more on HOA management, see Regenesis.net .

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Richard Thompson

Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues.

Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at rich@regenesis.net.

www.regenesis.net

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