Hold Harmless Clauses in Management Agreements
A common provision in management agreements is the “hold harmless” clause. This clause generally provides that the manager would be indemnified and held harmless from claims he/she did not cause or were forced to participate in by virtue of their subservient roles as agent of the association. Sometimes the clauses are reciprocal and require that the manager hold the association harmless for claims resulting from unauthorized and/or wrongful actions of the manager. For many years these clauses have not been invoked or challenged. However, more and more of these clauses are being expanded to require the association to hold the manager harmless and indemnify the manager in the event of any wrongdoing by the manager with the exception of gross negligence, willful wrongdoing or criminal conduct. Accordingly, an association may be indemnifying managers in instances where the managers negligently perform their duties. This could lead to manager’s carte blanche inattentiveness to responsibilities.
There is a conflict between the desires of the typical association and the desires of the typical management company for protection from alleged wrongs committed by the other. Initially, indemnification clauses were drafted to protect in limited situations and were mutual - managers and associations were both covered against those concerns. Now, whether through over zealousness or otherwise, some management contracts have done away with indemnification and hold harmless agreements in favor of associations and have broadened the protection afforded to managers to even include indemnifications of the manager from his or her own wrongdoing, usually with the exception of gross negligence, willful wrongdoing or criminality. From a manager’s point of view, if you can get such protection, why not? However, some more experienced or sophisticated board members and legal counsel are challenging such language more frequently. Sometimes these provisions can be negotiated, sometimes not.
Based on the foregoing, it is very important that a board is aware of the language used in the hold harmless clause of the association’s management agreement. Although it may be too late to rewrite this clause in your current agreement, this provision may yet be negotiated prior to renewal of the agreement or upon entering into a new agreement.
The key to resolving this issue is good contract drafting and good insurance coverage. Ideally, if an association has good insurance coverage, it will be covered for most claims arising out of an action by the manager (except claims arising out of contracts and/or willful or criminal wrongdoing). Accordingly, the board should review its insurance policy in conjunction with the indemnification and hold harmless clauses in its management agreement, and determine if there is adequate coverage for the manager. Additionally, the association should review the manager’s insurance policy to ensure it is adequately insured as well. Your insurance agent or legal counsel can assist you with this review.
If the manager is named as an additional insured on the association’s insurance policy, and the insurance policy contains appropriate coverage, the association should be adequately protected from negligent acts of the manager whether or not the management agreement contains broadly drafted hold harmless clause. Furthermore, if the association is named as an additional insured on the manager’s policy, and that policy contains appropriate coverage, the manager should be adequately protected as well.
With indemnification insurance, the following are examples of “hold harmless” language that may be used by associations and management companies in their management agreements:
The association agrees to indemnify and hold harmless manager of and from all claims, actions, causes of action and losses, including reasonable attorney fees and court costs, arising out of or in any way related to any matter and/or endeavor undertaken by the manager under and/or pursuant to the terms of this agreement and/or in accordance with the direction of the board of directors to the extent such claims, actions, causes of action and losses are not otherwise covered by a policy of insurance which actually defends and pays therefor and so long as such claims, actions causes of action and losses are not occasioned by the manager’s willful wrongdoing or criminal wrongdoing.
and:
Manager agrees to indemnify and hold association harmless of and from all claims, actions, causes of action and losses, including reasonable attorney fees and court costs, arising out of or in conjunction with any matter and/or endeavor undertaken by the manager outside the scope and authority of the terms of this agreement and/or in violation of the direction of the Board of Directors to the extent that such claims, actions, causes of action and losses are not otherwise covered by a policy of insurance which actually defends and pays therefor and so long as such claims, actions, causes of action and losses are not occasioned by the association’s willful wrongdoing or criminal wrongdoing.
In conclusion, prior to entering into a management agreement, it is important for the board to be aware of the following factors: 1) What are the terms of the indemnification and hold harmless clauses in the management agreement? 2) Is the manager adequately covered by the association’s insurance policy? 3) Is the association adequately covered by the manager’s insurance policy?
Knowing the answers to these questions and ensuring adequate insurance coverage, will significantly reduce any risk to the association of exposure to liability for the wrongdoing of its manager.
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