Property Management Q & A


Property Management Q&A — Summer 2015

PropertyManagement-QnA

Question:

We are in the process of bringing on a new client to our management company. Our form management agreement contains a lot of references to them indemnifying us from claims and holding us harmless. The potential client says that this seems totally backwards to her. She argues that since we are the ones managing the property, that we should commit to follow the law and indemnify them if we do anything wrong. Can you give me some ammunition to bolster our position?

Answer:

It is great to bring on new business, but that means it has to be both profitable to you as the manager and also, fairly balance the risks being taken on. The fact is that property management is a risky business and sometimes, awful things happen like fires and tenant injuries. As a property manager, you are being paid to manage the property and handle the accounting. Do you want to be the "insurer of last resort" too? For most property managers, the answer is "No."

There is a recent case in Washington’s court of appeals that illustrates this (although the fact pattern may be of no solace to your potential client). In that case, the employee of a management company sexually assaulted a tenant. The employee was charged criminally and found guilty. The question in the case was whether the "indemnity" and "duty to defend" clauses set forth in the management agreement operated to release the management company from liability (even when they were clearly the ones at fault).

The management agreement in that case contained a clause which provided, "except in cases of negligence or Agent’s intentional misconduct, Owner shall release, indemnify, defend and save Agent harmless…" and "regardless of Agent’s conduct, Agent shall be indemnified to the extent of available insurance."

What the court held was that there were two independent obligations here. There was a general indemnity clause, but that one was limited and did not apply where the Agent was negligent. The second, however, provided there was an indemnity (even in the case of Agent’s negligence) to the extent that insurance exists to cover and defend the claim.

Ultimately, during the course of the lawsuit brought by the tenant against both the property owner and the management company, the question ultimately turned on whose insurance (that of the owner or the manager) was on the hook first.

The court took great pains to go through the rules that govern interpretation of contracts, as well as the special rules which govern indemnity clauses. In general, indemnity clauses that serve to release a party from their own negligence are disfavored (the legal term is "strictly construed"). But even in light of that higher level of scrutiny, the court ultimately held that the indemnity provision of the management agreement was not ambiguous and that served to cover the acts of the agent, even in case of the agent’s negligence. The court wrote, "it is our duty is to declare the meaning of what is written, not what was intended to be written." In other words, the contract says what it says, and even though that may not be the "fairest" outcome, it was in fact what the parties agreed to.

What does this mean to you and your potential client? First, that sometimes the worst does happen and if that occurs, there will be a lawsuit, and (usually) both the owner and manager will be named as defendants. Second, should that come to pass, the owner and manager (and their respective insurers) will be pointing fingers at each other. Lastly, what the parties signed regarding indemnities and insurance provisions will be critically important.

 


 

Christopher T. Benis

Christopher T. Benis is an attorney with Harrison-Benis, LLP with offices in Seattle. The information contained herein is not legal advice. You are encouraged to consult with your attorney before relying on anything contained herein.

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