If you have ever signed a property management agreement – either as a property owner or property management company – then there exists a good chance you agreed to “hold harmless” and “indemnity” provisions. You may not have paid attention to them or, even if you did, may not have been fully able to parse their “legalese.” I would venture to guess, without any serious fear of contradiction, that these provisions are among the most critical – but under-appreciated and least understood – contract provisions in property management agreements (and many other contracts). My goal in this article is to demystify them.
Hold Harmless
In a “hold-harmless” provision, one party to a contract relieves the other party of liability for situations that could arise under the contract. I will explain this with a simple example. Let’s say Don hires Kam to manage Don’s property. Don could agree in a “hold-harmless” provision that Kam will not be responsible for any mishaps or claims that flow from her management – even if she was negligent. It’s basically a never-get-in-trouble pass for Kam. Of course, there exist variations of this provision, including one in which Don agrees to absolve Kam from harm flowing from her management of the property unless that harm is found to have resulted from Kam’s negligence. Or, perhaps, unless the harm resulted from Kam’s “gross negligence” – gross negligence being a higher degree of negligence.
Indemnity Provisions
Now, let’s move on to indemnity provisions. In a typical indemnity provision, one party to a contract agrees to “defend” and “indemnify” the other if a third party makes a claim. So, using our example above, let’s say a tenant, Vance, sues Kam and claims that Kam wrongfully discriminated against him. If Kam’s property management agreement with Don contained an indemnity provision running in favor of Kam – meaning that Don agreed to defend and indemnify her – then Kam will “tender” the claim to Don, and demand that he retain a lawyer to defend her against Vance’s claims (or pay for the lawyer she retains). That’s the “defend” part. She also will demand that Don “indemnify” her, i.e., pay any judgment against her arising from Vance’s claim. That’s the indemnity part (you probably already figured that out).
Like hold-harmless provisions discussed above, indemnity provisions come in different shapes and sizes. For example, the indemnity provision between Don and Kam could require Don to defend Kam against third party claims unless those claims arose from Kam’s negligence or breach of their contract. Many variations exist, either expanding or reducing the rights of the indemnified party (Kam, in this case).
Indemnity provisions in property management companies can run in favor of either the property owner or the property management company, and they also can run both ways within the same contract. For example, just as Don might agree to defend and indemnify Kam from third-party claims made against her that do not arise from her negligence, Kam could also agree to defend and indemnify Don from third-party claims made against him that do result from her negligence. In that situation, were Vance to sue Don and claim that, while managing Don’s property, Kam discriminated against him (Vance), Don may tender the claim to Kam to defend and indemnify him, asserting that Vance’s claim arose from Kam’s negligence.
Of course, in the real world, Vance likely will sue both Kam and Don, and they will both make demands of each other to defend and indemnify – requests they both will deny. The result will be that Don and Kam will have to sort out in a subsequent lawsuit who owed a defense and indemnity to whom.
Insurance Disputes
As you can probably imagine, these disputes between indemnitor (the person from whom the indemnity demand is made) and indemnitee (the person demanding indemnity) can be pretty high stakes, because defending the third-party’s claim can be expensive and significant exposure may exist from the third-party’s claims. But now let me raise the ante further and explain the real danger in not understanding the import of indemnity provisions.
Contracts, including property management contracts, often require one party to add the other to the first party’s insurance policy as an “additional” insured. So, for example, if Don added Kam to Don’s insurance policy as an additional insured, then Don’s insurance company might provide coverage to Kam for Vance’s claim against her, and all would be good. Don’s insurance company would hire a lawyer to defend Kam and would indemnify her for any covered liability to Vance.
But frequently, especially in the property management context, there exists no insurance coverage for the claims being asserted. For example, very few policies provide coverage for wage and hour claims. So, if an on-site manager at Don’s property claims that Kam improperly paid him, Don’s insurance policy will not cover Kam for those claims – even if Kam is identified as an additional insured on Don’s policy. As a result, when Kam tenders the on-site manager’s lawsuit to Don to defend and indemnify her, Don is in a world of hurt if the indemnity provision in his contract requires him to do so. Furthermore, if Don fails to fulfill his contractual obligation to defend and indemnify Kam and, as a result, Kam sues Don, then Don’s insurance policy likely will not cover Don for that lawsuit by Kam, since policies typically do not cover obligations undertaken via contract (like Don’s contractual promise to indemnify Kam).
Conclusion
In a perfect world, no party to a property management contract would ever need to use or care about the hold-harmless and indemnity provisions in the contract. But because we do not live in a perfect world, now would be a good time to start paying greater attention to these provisions and making sure they are equitable and not one-sided.
Gary Ganchrow Chairs the Litigation Department of the prestigious 111-year-old downtown Los Angeles law firm of Parker Milliken. He has served as an Adjunct Professor at the USC School of Law and is a frequent contributor to AOA Magazine. He regularly advises on, litigates, writes and lectures about resident manager issues and a variety of other employment, property management and business matters. He can be reached at 213-683-6535 and gganchrow@pmcos.com.