While it is necessary and common practice for an association to hire outside contractors for services such as landscaping and pool maintenance, this brings potential exposure to third-party litigation resulting from work performed by the contractor.
The association is at risk if a contractor’s act or omission causes injury or loss to a third party; this includes not only homeowners, but their tenants and guests.
In many cases, the legal basis for these suits includes allegations of faulty workmanship or failure to provide required services. Any damages incurred can wind up costing the association greatly.
The good news is that there are risk transfer techniques that can help association board members recognize and minimize potential liability exposures.
Types of Risk Transfer Techniques
There are various risk transfer techniques that association boards can take to proactively limit potential liability exposures. With the assistance of legal counsel, an association can protect assets, limit liability, and develop and administer standardized contracts with vendors.
It is important to understand that language provided in a contract by the contractor is meant to benefit the contractor – it may not provide adequate protection to the association.
Legal counsel can review contracts for specific verbiage pertaining to Indemnification, Hold Harmless, and Insurance Clauses.
An indemnification clause is a contractual provision that agrees for one party to bear the financial responsibility for losses that the other party may incur. While state laws vary on the enforceability and interpretation of these clauses, the association’s legal counsel should be familiar with writing indemnification clauses in accordance with the legal interpretations in your state.
An indemnification clause should:
- call for the contractor to defend the association in any third-party litigation related to the contract, including costs and related expenses of independent legal counsel
- require contractors to indemnify the association with respect to contractor negligence, including vendors, subcontractors, and employees of said contractor
Hold Harmless Clause
A hold harmless clause is a contractual provision in which one party assumes the liability of another inherent in a situation, relieving the party of responsibility. (In essence, a hold harmless clause is an indemnification clause.)
Standard contracts developed for use by an association should require the contractor to hold the association harmless using language that is advantageous to the association. Contractual language should always be reviewed by the association’s legal counsel prior to the signing of any contract.
Another contractual provision that requires contractors to obtain adequate insurance and provide proof of coverage is the insurance clause. The homeowner association’s insurance clause should require that every contractor provide a valid certificate of insurance.
While it is common for the contractor to name the association as an additional insured with limits that equal or exceed the limits carried by the association itself, doing so could limit the amount of available coverage to the association or cause the association’s policy to act as the primary policy should a loss occur.
To avoid this, the association’s legal counsel can construct contract language to specify that the contractor’s insurance will act as primary in respect to any other insurance available to the association.
A Note About General Liability
A contractor’s general liability (GL) policy should include contractually assumed liability coverage. This places the contractor’s GL policy behind the indemnity and hold harmless provisions. The contract should provide evidence that such coverage is provided. Most liability policies written for a contractor exclude this coverage and require additional premiums. It is important to verify that the contractor is covered for property damage as well as bodily injury. This can be verified by reviewing the contractor’s liability policy and declarations.
There are certain actions your association can take to limit risk exposure:
- Use only qualified contractors.
- Retain legal counsel to assist your association in developing standard service contracts prior to hiring.
- Consult with legal counsel to review all current business contracts and assess risk.
- Do not sign a contract without review by the association’s legal counsel.
- Do not assume that a contractor has adequate insurance coverages. Your association’s service contract should specify minimum limits and coverage requirements.
- Always require a Certificate of Insurance with a minimum $1,000,000 limit from each contractor.