Managers - Do You Think Being "Indemnified" Delivers You From All Evil? Think Again!

I hear it all the time from Boards the manager did this or the manager did that and should have to pay instead of [us], the HOA. Sometimes the complaints are justified, sometimes not. And then we as legal practitioners have to explain to Boards the protection the manager [allegedly] gets from the "indemnification" provision in the contract. Sometimes, suing your manager is like "suing yourself" since your insurance company has to pay the costs of defense in some cases. Pursuing the recalcitrant manager for mistakes that result in the association losing money or having to pay court-assessed damages (a judgment) can be a futile waste of time and costs. Sometimes, the HOA ends up defending or repaying legal expenses of the very party it wants to sue (the manager). However, sometimes a persistent Board of an HOA can make the manager pay in spite of having forced to accept a one sided indemnity protection. [The contracts for managers in California are heavily influenced by models of the most influential industry group(s) for managers and are, as most contracts presented by vendors, often quite one sided with a bias for the managers]. That can be frustrating for Boards but can also be damaging to managers as the courts "wise up" and realize that some managers are receiving protection they should not have (see below). Contractual protections are hard to negotiate when managers will not budge on the protective clauses like the ones that "indemnify" the manager. It's understandable to want these protections, of course, but this lack of "choice" can ultimately work against the side of "power" in negotiating contracts. That is what happened in the case of QUEEN VILLAS HOMEOWNERS ASSOCIATION v. TCB PROPERTY MANAGEMENT, 149 Cal.App.4th 1, 56 Cal.Rptr.3d 528, 07 Cal. Daily Op. Serv. 3391, 2007 Daily Journal D.A.R. 4248. According to the Queen Villas Court: "The terms 'indemnify' and 'hold harmless' are not synonymous; 'indemnify' is an offensive right (sword) allowing an indemnitee to seek indemnification, and 'hold harmless' is defensive (the shield), the right not to be bothered by the other party itself seeking indemnification."

An explanation of what happened in the case might help you understand why the message of this E-news is (1) get and keep errors and omissions insurance that is all your own and (2) do not breach your contract with an HOA because you can be sued!

What Happened? In the case the manager paid out $134,000 to one board member who was [allegedly] "helping" the HOA (whether it was beneficial help was not disclosed) with some construction defect litigation and related issues. Management apparently wrote the checks, without authority and without providing any clear accounting of these expenditures to the Board.

The HOA "brought a breach of contract action against property manager that had paid association's board member from association's funds for her services helping homeowners with their construction defect cases, thereby allegedly allowing board member to embezzle."

The Court of Appeal, Sills, P.J., held that "the contractual indemnity provision did not constitute exculpatory clause barring association's breach of contract action."

What does this legal mumbo-jumbo mean? It means that certain timeless legal premises weave their way through cases even in changing times. It means that any clause that purports to exculpate (this can mean protect or relieve from liability) a party to a contract even when there is a breach of it will be construed against the drafter as that is the party generally seeking the protection. If the clause is at all unclear or the court can find loopholes, it will not be likely to protect.

Hence, the manager's protection in the Queens Hill case turned out to be like a condom with a hole in it. (Excuse my French! I could have said a faulty prophylactic premise but you might have been thrown by the legal terminology. - But you get the picture I hope - it failed.)

Why Did It Fail? There are a few reasons.

1. The Indemnification clauses in the HOA-Management contract in this case (there were two and they were common indemnification provisions seen all the time in HOA contracts), arguably well written and comprehensive, protect the manager from third party liability claims, and not from a breach of contract claim by the HOA. ("Third party" claims are those made by someone that is not a party to the contract such as an owner who has suffered losses from bad financial decisions or been injured falling in the common area.) A Breach of Contract claim is a two party case of an HOA and Management Company contract. [Note: This was not a tort case meaning the Board was not suing the manager for negligence, it was based on properly carrying out its duties under the contract.]

2. Exculpatory clauses are as a rule construed against the party that produced the contract, i.e., the "released" party. (Bennett v. United States Cycling Federation (1987) 193 Cal.App.3d 1485, 1490, 239 Cal.Rptr. 55 [" 'courts have strictly construed the terms of exculpatory clauses against the defendant who is usually the draftsman' "]; Philippine Airlines, Inc. v. McDonnell Douglas Corp. (1987) 189 Cal.App.3d 234, 237, 234 Cal.Rptr. 423 ["The law generally looks with disfavor on attempts to avoid liability or to secure exemption for one's own negligence.... The law requires exculpatory clauses to be strictly construed against the party relying on them."]

The court did not like the fact that management was asserting that it had complete protection with the indemnification provision. The judges said this:

"On top of all of this, there is the reductio ad absurdum of the property management company's position vis--vis the association's contract claims (as distinct from negligence claims). Under the property management company's interpretation, it could just outright plain fail to do any work at all for the association, such as hiring a gardening company or arranging for insurance or the typical things that property managers do, and the clause would protect it even from a breach of contract action by the association for having paid for services never performed." It does sound absurd, doesn't it, that a manager would never have to answer for failure to perform under a contract with an HOA?

The point of this E-News is not to provide a legal opinion as to any given situation, but - Managers, do not get a false sense of security just because you have "indemnification" and "hold harmless" protection in your contract. You still need to perform under the contract. And your ability to protect yourself could be jeopardized by board members that do not allow you to perform properly, and boards that do not follow the law. If your contract says that you will assist the board in following and/or keeping up with the laws, or words to that effect, and you know the board is ignoring what is right, and sometimes even what is right there in black and white, it could spell disaster for you.

If you as a manager or a board member think that money spent on general liability insurance, errors and omissions insurance, directors and officers liability insurance, and/or workers compensation insurance (yes, even when there are no employees) is not money well spent, let's hope you do not make a serious "little" mistake that leads to big damages. If you think that following the law or the association-manager contract is not important, get it out, dust it off, and read it! Watch for the next E-News where I will discuss a recent case where a management company that thought it was free and clear because it was only an agent for an HOA, was held equally responsible with an Employer (vendor chosen by manager doing work for HOA) and the HOA for paying workers compensation benefits to a fully disabled worker on a mere $1050 gutter cleaning contract).

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Beth A. Grimm is an HOA attorney and represents homeowners associations and homeowners who live in them. She is a mediator, author, speaker and problem solver. She has written two books and several other publications to help everyone including those who otherwise might have to spend hundreds or thousands of dollars on attorney fees to find out basic information about HOA living and how the law affects those living in HOAs, and those serving HOAs as vendors and professionals, and those selling HOA properties to the general public. She hosts a website at www.californiacondoguru.com that provides an incredible amount of helpful information and also low cost publications covering a myriad of topics HOA-related. And, she is an avid blogger, utilizing that means of communication to answer the public's basic questions about HOAs.

Copyright 2008 Beth A. Grimm, All Rights Reserved

By Beth A. Grimm, Attorney. A "service oriented" attorney and member of ECHO and CAI and various other industry organizations in California and nationally, host of the website www.californiacondoguru.com; two Blogs: California Condominium & HOA Law Blog, and Condolawguru.com Blog, and author of many helpful community association publications which can be found in the webstore on her site.