The Management Agreement between a cooperative and a management agent outlines the contractual obligations and expectations between the cooperative and the management agent. These contractual obligations define the duties and responsibilities of the management agent for the management and operation of the cooperative. It also provides for the duties and responsibilities of the cooperative corporation, 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 Cooperative 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. The insurance requirements of the parties and the indemnification provisions are extremely important, and should always be reviewed by the cooperative attorney prior to any effectuation of a Management Agreement. Additionally it is also quite necessary for the cooperative’s attorney review the cooperative’s insurance policies and limits to be sure that the insurance policies and limits are in line with what is being proposed in the Management Agreement. Such review is vital, as sometimes the indemnification portion of the Management Agreement will require the cooperative to indemnify the management agent, but the cooperative may not have the proper insurance in place, or there are gaps within the current policy. This will only lead the cooperative to look into its own pockets to satisfy such indemnification provision, should the occasion of claim arise.
Insurance:
Within the insurance provision of a Management Agreement one will find the required insurance coverage limits and policies that the cooperative is required to obtain and maintain throughout the life of the Management Agreement. A properly written Management Agreement will also 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 cooperative, statutory workers compensation coverage, and fidelity bond / crime coverage. It is vital that the cooperative be named as an additional insured on the management agent’s general liability insurance to provide even more adequate coverage for protection. The cooperative should also be named on the management agent’s commercial general liability policy. While it is very important to have contractual indemnification, not having the insurance to pay for such indemnification puts the party agreeing to provide such indemnification in financial restraints as it will be subjected to pay for such loss out of its own pocket should coverage be inadequate
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 cooperative attorney dissects such indemnification language and breaks it down for you, it can be quite simple.
In cooperative Management Agreement’s, it is typical and expected to find mutual indemnification language between the cooperative and the management agent. The cooperative agrees to indemnify the management agent for when the management agent is sued by a third party for the cooperative’s potential or alleged wrongdoings and the management agent agrees to indemnify the cooperative for when the cooperative is sued by a third party for the management agent’s potential or alleged wrongdoings. Of course, taking this one step further, there must be exceptions that are carved out for the protection of the cooperative as it pertains to the cooperative’s indemnification of the management agent. The cooperative should in no way agree to indemnify its management agent for the management agent’s breach of the Management Agreement, for 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 cooperative, 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 cooperative attorney, as such language is not customary in cooperative Management Agreement’s. The reason that such language is not customary is that the management agent is only agreeing to step into the cooperative shoes when the cooperative is sued by a third party for the management agent’s acts of gross negligence or willful misconduct.
The problem here is that and the threshold for the management agent to step in and defend the Cooperative must arise due to gross negligence or willful misconduct, which is a very high standard to meet. With such language as this, ordinary negligence is not included. Such language places an unreasonable risk on the Cooperative. Having such strong language to the detriment of the Cooperative again 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 cooperative’s attorney should look to all policies for coverage to protect the cooperative.
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. The goal of the Management Agreement is to lay the foundational relationship between the parties as well as outline the management agent’s duties and responsibilities for the operation and management of the Cooperative. The relationship between the cooperative and its management agent is vital as such relationship has to work in order for the cooperative to operationally flourish.
Shifting of the Risk:
Just as the Management Agreement’s managerial and operational terms must fit the needs to the Cooperative, so do the insurance and indemnification provisions. A cooperative should not scramble at the last hour with its cooperative attorney and its insurance professionals to bind new coverage just to fit the needs of a Management Agreement’s insurance and indemnification language. The Management Agreement must be tailored to the cooperative’s needs, and not to the management agent, but fair and reasonable. A cooperative should not have to conduct a shifting of the risk analysis while negotiating a Management Agreement.
The cooperative’s board 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 such director’s and officer’s policy, it turns out that the board members are not covered for such an insurance decision.
The Takeaway:
In sum, the insurance and indemnification provisions are equally as important as the rest of the provisions of the Management Agreement. The negotiations of such 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 cooperative attorney review the proposed Management Agreement, as well as the cooperative’s insurance policies, to be sure that the cooperative is fully protected with minimal exposure.