The Management Agreement between an association and a management agent outlines the contractual obligations and expectations between the association and the management agent. These contractual obligations define the duties and responsibilities of the management agent for the management and operation of the association. They also provide for the duties and responsibilities of the association, as effectuated through its Board of Directors. Equally as important to the management duties and operational provisions in the Management Agreement, so too are the insurance and indemnification provisions.
Get your Association Attorney Involved:
Often times, the insurance and indemnification language are categorized as boilerplate industry language, meaning standard and generic. However, that is not always the case. Insurance requirements of the parties and the indemnification provisions are extremely important, and should always be reviewed by the association attorney prior to finalizing and signing a Management Agreement. Additionally, it is also necessary for the association’s attorney to review the association’s insurance policies and limits to be sure that the insurance policies and limits comport with any insurance requirements in the Management Agreement. Such review is vital because at times, indemnification provisions within a Management Agreement may require the association to indemnify the management agent, but the association may not have the proper insurance in place. Other times, there may be gaps within the association’s current policy. Associations should want to avoid these situations because they can lead the association to reach into its own pockets to satisfy an indemnification provision when current insurance policies do not provide adequate coverages, should the occasion of a claim on an association’s policy be made.
Insurance:
Within the insurance provision of Management Agreements are the required levels of insurance coverage, limits and policies that the association is required to obtain and maintain throughout the term of the Management Agreement. A well-drafted Management Agreement will provide for the respective insurance policies and limits that the management agent is to maintain. Such policies include: commercial general liability in amounts satisfactory to the association, statutory workers compensation coverage, and fidelity bond / crime coverage. It is vital that the association be named as an additional insured on the management agent’s general liability insurance. Doing so provides the association greater coverage and protection. The association should also be named on the management agent’s commercial general liability policy. While it is very important to have contractual indemnification, if an association does not have the necessary insurance coverage in adequate amounts to pay for such indemnification if claim arises, then the association may be faced with financial restraints as it will be subjected to pay for such loss out of its own pocket.
Indemnification:
The indemnification language in and of itself can be filled with legalese and nuances. Sometimes the indemnification language can be difficult to interpret, but the verbiage is extremely important. However, when your association attorney dissects the indemnification language and breaks it down for you, it can be quite simple.
In association Management Agreements, it is typical to find mutual indemnification language between the association and the management agent. In these provisions, the association agrees to indemnify the management agent in instances where the management agent is sued by a third party based on the conduct, actions, omissions or alleged wrongdoings of the association and the management agent agrees to indemnify the association when the association is sued by a third party based on the conduct, actions, omissions or alleged wrongdoings of the management agent. Of course, taking this one step further, there must be exceptions that are carved out for the protection of the association as it pertains to the association’s indemnification of the management agent. For example, the association should never agree to indemnify its management agent in instances of the management agent’s own breach of the Management Agreement, or for the management agent’s violation of any law, or for the management agent’s gross negligence or willful misconduct.
Problem Areas with Indemnification Provisions:
Sometimes we have seen indemnification provisions that provide for the management agent’s indemnification of the association, but only for the management’s agents gross negligence or willful misconduct. Sometimes there are even monetary caps on such indemnification. Such language should always be reviewed by the association attorney, as such language is not customary in association Management Agreement’s. The reason that such language is not customary is that the management agent is only agreeing to step into the association’s shoes when the association is sued by a third party for the management agent’s acts of gross negligence or willful misconduct.
The problem here is that the threshold for the management agent to step in and defend the association must arise due to gross negligence or willful misconduct, which is a very high standard to meet. With this language, ordinary negligence is not included. Such language places an unreasonable risk on the association. Having such one-sided language to the detriment of the association, undermines one of the most salient purposes of the Management Agreement. Of note, management agents may also carry Errors and Omissions insurance coverage relative to ordinary negligence. Again, the association’s attorney should look at all policies to ensure appropriate and adequate coverage levels needed to protect the association.
Remember the Purpose of the Management Agreement:
The insurance and indemnification language also ought not to be so one sided. It should be fair and commercially reasonable. Often times, the essence of the Management Agreement can be lost during tough negotiations, especially with respect to the insurance and indemnification provisions. The goal of such negotiations is not to see who is the last party standing. Rather, the goal of the Management Agreement is to lay out the foundational relationship between the parties as well as outline the management agent’s duties and responsibilities for the operation and management of the association. The relationship between the association and its management agent is vital to a symbiotic relationship where the Management Agent and association work together for the association to operationally flourish.
Shifting of the Risk:
Just as the Management Agreement’s managerial and operational terms must fit the needs to the association, so do the insurance and indemnification provisions. An association should not scramble at the eleventh hour with its association attorney and its insurance professionals to find new coverage just to fit the needs of a Management Agreement’s insurance and indemnification language. The Management Agreement must be tailored to the association’s needs, not solely to the benefit of the management agent, but fair and reasonable. An association should not have to conduct a shifting of the risk analysis while negotiating a Management Agreement.
The association’s Board of Directors must remember, especially when it comes to the unnecessary shifting of risk in a management agreement, that all Director’s and Officer’s policies, and the exclusions provided therein, are not “one size fits all.” Each policy is different, as well are its exclusions. Worst case scenario here is that the board members could make an insurance decision for which they believe they are covered, but after closer review of the director’s and officer’s policy, it turns out that the board members are not covered for such an insurance decision.
The Takeaway:
Insurance and indemnification provisions are equally as important as the rest of the provisions of the Management Agreement. The negotiations of these provisions ought to not become a risk shifting exercise as it is customary and commercially reasonable for mutual indemnification. Remember, it is absolutely vital that your association attorney review the proposed Management Agreement, as well as the association’s insurance policies, to be sure that the association is fully protected with minimal exposure.
Written by: Alyssa Gunsorek, Esq.
Attorney at the Law Offices of Pentiuk, Couvreur & Kobiljak, P.C.