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Feldsott Lee Pagano & Canfield
Orange County Homeowners Association Law Firm

Management Companies and Liability Concerns

(1) Contractual Liability
The management company/community manager acts as the agent for the association/board of directors. Under general laws of agency, the association/board of directors is the principal and the management company/community manager is the agent. So long as this agency relationship is disclosed to the third party (i.e. contractor), it is only the principal and not the agent that has any contractual liability to that third party.

In entering into contacts for maintenance with respect to the common area, it is absolutely essential that the contact clearly indicate that it is the association that is contracting with the third party and the management company and/or community manager is signing that contract as an agent for the association. All proposals should be directed to the association in care of the management company. Additionally, the proposal should clearly indicate that the association is a corporation. If the community manager is going to sign the contract or proposal on behalf of the association (this is not usually a good idea), the signature line should include the community manager's name and immediately following such "authorized agent and community manager."

If a proposal is submitted in the name of the management company regarding the association, the contractor should be requested to resubmit the proposal or alternatively the proposal should be modified to make clear that it is being submitted to the association in care of the management company. Keep in mind that once a proposal is accepted it becomes a contract. If the proposal is to the management company, even if it is signed by an officer of the association, the management company can find itself named in a breach of contract lawsuit.

(2) Tort Liability Arising Out of Common Area Maintenance
"Torts" is the legal profession's word for private wrongs. The existence of an agency relationship does not shield the agent or the principal from tort liability. Tort law covers a number of different claims, including negligence, assault, battery, trespass, libel, slander, and so on. Most tort claims involve acts of intention. For example, if the community manager uses a baseball bat on a homeowner, a claim by a homeowner based on battery could be brought against the community manager, the property management company, and the association/board of directors, assuming the act occurred during the course and scope of the community manager's employment. Course and scope of employment is always a factual issue. Keep in mind that torts of intention are not covered by any insurance.

The largest number of common area claims that are asserted against the management company, the community manager, the association and members of the board of directors will be based upon negligence. The scope of volunteer directors' liability has, if certain criteria are met, been greatly circumscribed. The general rules of negligence, however, apply to the association itself, the property management company and the community manager. In general, in order for a plaintiff to prevail on a claim of negligence, the plaintiff must prove duty, breach of duty, cause in fact, proximate cause and damages.

The duty owed is often referred to as "the reasonable man or prudent businessman standard", i.e. a person owes a duty to exercise that degree of care that the average reasonable man would under the same or similar circumstances recognize, that the failure to exercise would pose a foreseeable risk of harm to a foreseeable plaintiff. So, for example, permitting green slippery slime to remain on a common area sidewalk that members of the association frequently walk on could easily satisfy the elements of duty and breach of duty. A homeowner takes an evening stroll on that sidewalk unaware of the existence of the slime, falls and breaks his leg. This scenario is very likely to provide for the assertion of a successful claim for negligence.

(3) Management Company Protection
One of the problems with lawsuits based on negligence grounded in a failure to properly maintain the common area is that what "the average reasonable person would have done" is always determined after the fact. It is therefore extremely important that a management company not only carry its own insurance, but makes certain that it is also named as an additional insured on the association's insurance policy. Deductibles and coverage are often slightly different on the two policies. Coverage and policy limits are thus maximized for the management company.

The second line of defense for the management company is to have a well worded indemnity clause with the association providing for both indemnification and defense in connection with any claims asserted against the management company related to the activities or conduct of the management company carried on in the course and scope of its employment. This indemnification should typically include both contract and tort liability. Issues often arise between the association and the management relative to the breadth and scope of the indemnity clause. In one sense, the real issue is whose insurance company (the association or the management company) is going to pay for the defense and indemnification. In today's insurance market, with ever increasing deductibles and exclusions, the language contained in the indemnification clause takes on greater significance.

The first line of defense for community managers and directors is, of course, to act prudently, cautiously and exercise sound business judgment. No doubt the vast majority of the field already possesses and acts in accordance with these traits. What may be helpful is to understand the importance of carrying adequate insurance. The difference in cost between an insurance policy with a $1,000,000 policy limit and a $2,000,000 policy limit is generally not that great. Do not limit yourself to minimum insurance requirements.

As a community manager, make certain that all contracts are executed properly, with the association clearly identified as a corporation and as the contracting party. Have your attorney review the "indemnity clause" in the management contract. If your association bylaws permit a non-owner who is not a tenant of a separate interest to serve on the board of directors or if you own more than two units within the development, be aware of the fact the Civil Code ยง5800 does not shield you from personal liability; i.e., liability in excess of required type and amount of insurance. Major decisions involving the nature and extent of common area maintenance or its deferral should always (oh, how lawyers hate the word always) be made after seeking competent professional advice

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