Indemnity clauses; What your board needs to know
The Cooperator
By W.B. King
August 2017
Whether a small service contract for something like snow removal, or a
larger initiative like replacing all the windows in a building or HOA,
boards and property managers have to exercise extreme due diligence
before signing on the dotted line. This approach ensures that biased
indemnity clauses aren’t leaving boards – and the unit owners they
represent – vulnerable to potentially costly liabilities.
“Indemnification means you are responsible for the liabilities of
another,” says attorney David Byrne of Ansell Grimm & Aaron PC,
which has offices in New Jersey, New York, and Pennsylvania. “If you
need a walkway shoveled or salted after a snowstorm, you hire a
contractor. You should try to get the contractor to indemnify you from
any damages that result from his actions or inactions.”
Byrne, who limits his practice to the representation of condominiums,
community associations, cooperatives, and homeowners’ associations,
relates that in many cases indemnification issues occur on smaller
contracts, such as the aforementioned snow and ice removal jobs.
“A lot of clients just sign the contract that is given to them by the
vendor, which is usually a mistake,” says Byrne. “The vendor creates a
contract that is to his or her best advantage, which makes sense from
their perspective.” However, Byrne continues, “The general rule is that
just because a contract is for a small amount of money, it doesn’t mean
it shouldn’t be revised to include provisions that protect the co-op or
condo boards and who they represent.”
Insurance clause
Marc Schneider, managing partner with the New York City-based law firm
Schneider Buchel LLP, says an indemnification provision is as important
as contractual terms and payments. Indemnification, he says, is not
necessarily “insurance” against liability, and that an “insurance
indemnification provision” should be included in the contract language.
For example, if a contracted roofing company drops a piece of equipment
and in so doing damages the building or a unit owner’s personal
property, without an insurance indemnity clause, the building’s
insurance provider would likely have to fight the claim.
“You want the contractor whose work or presence on your property that
caused the damage to occur to be the responsible for handling it – not
the board’s insurance company,” says Schneider. “You want the indemnity
clause, but also an insurance provision in the contract that requires
that the contractor has insurance in place, as well as making sure that
the managing agent or the board is listed as an additional insured on
the contractor’s policy.”
Over the years, Schneider has successfully added insurance clauses to
vendor contracts that have saved his co-op and condo clients the
headache and substantial cost of having to fight a claim via its
existing insurance policy.
“If you don’t have these insurance provisions, and even if you think
the contractor is at fault, without the indemnification provision, the
contractor may have insurance but no duty to defend the claim,” he
says. “The co-op or condo’s insurance policy would have to take up the
claim, defend it, and bring the claim against the contractor. This
invariably will increase insurance premiums.”
Since it is likely that the vendor also has a diligent attorney
drafting the contract to protect his or her client’s interests,
Schneider says both sides of the fence normally start off broad in an
attempt to protect respective clients against any possible scenario.
“There are instances where contractor’s attorneys have tried to limit
their liability and modify the indemnification provision,” says
Schneider. “We represent the board who is hiring the contractor to come
on to its property, and who are paying the contractor for a service. We
don’t want to have to pick up a claim because someone got hurt as a
result of something the contractor did.”
The Washington, D.C.-based architectural firm AIA Trust recently
released a white paper entitled “If You Build It, They Will Sue.” The
report offered advice from the contractor and subcontractor
perspective. The paper recommends that architects use “competent
general contractors and subcontractors, with appropriate third-party
observation and inspection (especially of the building
envelope/waterproofing).”
The white paper also states that “Having a client that will be there at
the time of a claim is no guaranty, so past performance and litigation
history are worth investigating. Both you and your client should
explore all of the various insurance products. Consult your insurance
broker. Both you and your client should be united in making sure that
HOA and unit owner maintenance requirements are mandated in the project
CC&Rs, declarations and manuals.”
“Lastly,” the report concludes, “if defect and deficiency issues do
arise, a well-drafted protocol to address the same may lead to a more
efficient and economical resolution of the same. The money may be good
and the projects plentiful but the risks are real.”
Best practices
For seasoned managing agents and board members, reviewing contract
“language” may be second nature, but more times than not, an
attorney’s legal-eagle eye will catch abstruse wording that could leave
a board vulnerable, explains attorney Stella Goldstein with the White
Plains firm Steinvurzel & Levy Law Group.
“Board-management teams should make sure that there is language within
the contract that indemnifies the board, shareholders, lenders, the
building, and the managing agent against any personal injury claims, or
other lawsuits arising out of the vendor’s, contractor’s or service
provider’s negligence, recklessness, willful misconduct, material
breaches of contract or violations of any law, sanitation code, or
building codes,” says Goldstein. “Ideally, the contract should also
expressly include that the indemnification provision survives the
termination or expiration of the agreement.”
With respect to indemnification provisions, Schneider says there is no
difference between co-op and condo boards. Both entities, he adds,
should engage with their respective attorney to draft and/or review
vendor contracts so the language protects against liability or related
claims.
“Many co-op, condominiums boards and managing agents will receive the
insurance certificate from the contractor, but they don’t realize that
the insurance certificate is almost worthless without a contract
between the two parties that requires that contractor indemnify the
board,” says Schneider. He adds that a board that recently held
elections and welcomed new members is bound by any contract the prior
board signed.
Along with ensuring that contract language includes insurance
indemnification, Goldstein explains that there are “red flags” in most
contracts. To this end, board-management teams should make sure that
their indemnification clauses expressly exclude liability for the co-op
or condo’s own negligence. “The failure to incorporate this carve-out
may render the entire clause unenforceable, exposing them to
unnecessary risk,” says Goldstein. “Detailed insurance provisions are
also required to avoid any gaps in coverage, whether policy-related, or
a function of statutory effect.”
Schneider adds that the number-one “red flag” is a contractor who
refuses to sign a contract that includes an indemnification provision.
“If a contractor signs a contract drafted by a good attorney, you
generally are not going to have any problems, because they respect the
contract and the provisions and they are going to comply with it.”
Whether due to poor oversight or budgetary concerns, many boards fail
to vet a contract with an attorney or their management company. As a
result, the board is forced to seek legal help after a contract is
signed and indemnification issues result, notes Schneider. In some
cases, boards can also unwilling violate its own insurance policy.
“I find that most management companies will recommend that a board have
a contract prepared by an attorney, since most management companies
understand the significance of the issue,” says Schneider. “Boards also
have to carefully look over their insurance contracts, because many of
these policies require indemnification agreements with contractors. So
it is important that a board isn’t violating its own insurance
contract. ”
Legal ramifications
Once a contract is signed, the board is bound to the agreement. If
liabilities arise (and they often do), possibly ramifications of not
properly vetting, or neglecting to demand indemnification language can
result in financial loss. Goldstein explains that examples of
“unscrupulous contractors” are myriad, ranging from gross delays and
no-shows to wholly negligent performances, to fraudulent activities
such as the collection of a down payment and then refusing to perform
any work whatsoever.
“Board-management teams must ensure not only that the contract contains
an indemnification provision, but also that the indemnification
provision is narrowly crafted. In recent years, courts have been quick
to determine overly-broad indemnification clauses unenforceable,
leaving the co-op or condominium on the hook,” says Goldstein.
“Unfortunately, the construction industry often enjoys a poor
reputation when it comes to responsibility and accountability.”
Proactive, forward-looking boards are not afraid to invest time and
money into indemnification provisions, says Schneider. And since not
all attorneys have the same area of expertise or knowledge, he
encourages boards and managing agents to seek out those firms who
construct and review HOA vendor contracts daily.
“If you have a heart condition, you don’t go see a podiatrist; you see
a cardiologist,” says Schneider. “In the same way, not every attorney
understands the nuances involved with representing community
associations.”
W.B. King is a freelance writer and longtime contributor to The Cooperator.
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