Indemnification provisions.

One of the most critical and contentious issues in a property management agreement is deciding who will be responsible for damage and injury claims and under what circumstances. Should the manager indemnify the owner for all acts at the property, for only the manager's negligence, for acts outside the scope of its authority, or none of the above?

Unfortunately, resolution of these issues is too often based on concepts of control and fault and completely ignores the purpose and benefits of insurance. Indemnification provisions should be designed to maximize the benefits of insurance, reduce insurance premiums, and minimize disputes among the parties and their insurance carriers.

Double Property Insurance?

Owners typically feel that because the manager is in charge of the property and controls the day-to-day operations, the manager should indemnify the owner for damage to the property caused by the manager's negligence. While this concept is understandable, it ignores the fact that it is the owner, not the manager, who typically obtains the property insurance for the property. Forgetting which party is protected by property insurance can have disastrous results. For example, if the manager is made liable for all damage it causes to the property, any substantial damage could easily exceed the amount of the manager's liability insurance (This insurance will cover damage to property of others up to the amount of the liability policy.), forcing the manager to pay the extra cost of repair or file bankruptcy.

To avoid this catastrophe, the manager will have to either increase its liability insurance coverage to a high enough level to cover any foreseeable damage to the property or obtain its own property, insurance (assuming it can do so by establishing an insurable interest in the property). Either option imposes extra premium costs on the manager to obtain the additional, unnecessary insurance coverage. The manager will have to recover the extra costs either through higher fees or by charging the property. It would he a lot more efficient and less expensive to use the owner's property insurance to pay for all damage to the property regardless of who caused the damage or whether the manager was negligent. Having double property insurance just doesn't make sense.

Your Fault, You Pay

Owners and managers should also ignore fault and instead focus on insurance in the personal injury area. When it comes to these types of tort claims, owners are often very insistent that managers be liable for their own negligence. Because both parties almost always carry their own liability insurance to cover these types of claims, the manager cannot argue that it shouldn't be forced to carry duplicate, unnecessary insurance as in the property insurance context. However, there are several very good reasons to make the owner liable for all tort claims at the property, regardless of whose fault caused the injury or damage: