In today’s overly litigious world, more and more, when a community association is sued for everything from slip and falls, maintenance and repair obligations, to failure to provide official records, so too is the management company. Thus, there is no need to wonder why community association management companies require their community association clients to indemnify them for their company’s and managers’ acts of ordinary negligence. In other words, if the manager is sued by a member, guest, or even a third-party vendor, then the purpose of including the contractual duty for the association to indemnify the management company and its managers is designed to ensure that all the fees and costs of the litigation, as well as any resulting monetary damage judgment entered against the manager and/or their management company, would be paid for, in full, by the association. As you will read below, for one management company, it did not quite work out that way.
The indemnification provision set out in a management contract can be a contentious part of a management agreement negotiation, most especially between the association’s lawyer and the lawyer representing the management company. Upon legal review, some management contracts already have fair indemnification provisions as a part of their contract and need no further negotiation. Other management contract indemnification provisions require re-drafting and negotiation of their boilerplate indemnification provision. If the management company is not willing to do so, then that is something that must be seriously considered by the board. Either way, the board should fully understand the implications of the indemnity provision set out in their management contract. While contract terms requiring a community association to indemnify their management company are likely as old as some of the very first management contracts, in 2014, the Florida Statutes were amended for the first time to address management company indemnification. The 2014 creation of section 468.4334, Florida Statutes, provides that,
“a contract between a community association and a community association manager or management company may provide that the association will indemnify and hold harmless the manager and management company for ordinary negligence by the manager or management company that is the result of an instruction or at the direction of the association.”
Notwithstanding, section 468.4334, Florida Statutes, also prohibits indemnification of a manager or management company for anything which,
“violates a criminal law; derives an improper personal benefit, either directly or indirectly; is grossly negligent; or is reckless, is in bad faith, is with malicious purpose, or is in a manner exhibiting wanton and willful disregard of human rights, safety, or property.”
In plain English, when read as a whole, section 469.4334, Florida Statutes, provides that the management company contract might require association indemnification of the management company for its ordinary negligence, but prohibits any term in the contract that would require the association indemnify the management company for its intentional bad acts and seriously reckless behavior.
Because your community association management contract will most likely have an indemnification provision to one degree or another, the question arises as to when and to what degree the obligation of the association to indemnify the management company takes effect. This was a topic of discussion in a recent Third District Court of Appeal case, MVW Management, LLC v. Regalia Beach Developers, LLC, Case No. 3D16-2198.
In this case, Regalia, the developer of a condominium project, sued MVW Management, the condominium’s manager, for mismanagement of the condominium under Regalia’s management contract with MVW Management. As Regalia is a party to the management contract with MVW Management, this action is deemed a first-party action, as compared against a third-party action in which, for example, a guest or vendor sues the management company. The management contract between Regalia and MVW Management provided for indemnity of MVW Management. MVW Management made a claim under the indemnity provision of its contract for advancement of its litigation expenses.
The indemnity provisions in the management contract provided that “[e]xpenses including attorneys’ fees, court costs, judgments, fines, amounts paid in settlement and other payments incurred by [MVW Management]… shall be paid by [Regalia] in advance of the final disposition of such action, suit or proceeding.” Notwithstanding this provision, the Appellate Court agreed with the trial court’s decision and determined that MVW Management was not entitled to advancement of its litigation expenses because the provision does not apply to a first-party litigation, such as the present case.
The Appellate Court explained that the right to be indemnified and the right to advancement of litigation expenses are different:
• “indemnification” is the right to be paid at the end of the lawsuit so long as certain conditions are met.
• “advancement of litigation expenses” is like a loan in which one party pays for the litigation expenses of the party holding the right as they are incurred with the understanding that the amounts must be paid back in the event the case is lost.
Although this distinction exists, both terms were intertwined in the case at hand. The Appellate Court explained that indemnification provisions in Florida only apply to third-party claims unless the language of the indemnification “clearly and unambiguously shows an intent to extend indemnity to first-party claims.” Because the management agreement in this case did not “clearly and unambiguously shows an intent to extend indemnity to first-party claims,” MVW Management was not entitled to advancement of its litigation expenses under the indemnification provisions of its management agreement with Regalia.