contracts | Rembaum's Association Roundup

Requiring Workers' Compensation

Why it is so very Important To Consider Its Inclusion In Every Contract and More

It is surprising to hear from so many community association board members and managers looking to protect their community association that, when asked if they require all vendors to have workers’ compensation insurance as a required term in all of their contracts, it can be like looking at a deer in the headlights. In addition, for reasons explained below, if your community association provides services on a regular basis, such as valet, concierge, fitness programs, etc., then you may also want to consider amending the declaration of covenants or declaration of condominium to include a requirement that the association is contractually obligated to provide such services to its owners because this can help provide liability protection in favor of the association. However, this approach can lead to other problems if the association does not actually provide the required services.

According to the Florida Office of Insurance Regulation, workers’ compensation insurance is coverage purchased by the employer/business that provides benefits for job-related employee injuries, with a few exceptions. Florida law requires most employers to purchase workers’ compensation coverage. Under a workers’ compensation policy, employees are compensated for occupationally incurred injuries regardless of fault. This coverage makes employers immune from some injury lawsuits by employees, as the workers’ compensation policy will limit the type of recovery available to the employee.

However, there are many exceptions afforded to employers in which the employer is not required by statute to have workers’ compensation coverage. For example, a construction-related company is allowed up to three exemptions, and a non-construction-related company is allowed up to ten exemptions. If the employer is exempt from having to provide workers’ compensation coverage, then should an employee be injured on the association’s property, the association could bear the financial brunt of the liability for the injury.

Why is requiring workers’ compensation so very important? Because it helps protect the association from liability claims when an employee of a vendor is hurt on the association’s property. While Florida’s workers’ compensation laws do not guarantee protection, they sure go a very long way in helping to protect the association from claims by employees of vendors when they get hurt in your community.

Why is it a good idea to consider including regularly provided services as a requirement within the declaration of condominium or declaration of covenants? Because, under certain circumstances, the association can be considered a “statutory employer” under the workers’ compensation rules, meaning that the association is entitled to the same immunity protection that the injured employee’s employer is afforded.

In a recent case, Bal Harbor Towers Condominium Association, Inc. v. Martin Bellorin, 351 So.3d 96 (Fla. 3d DCA Oct. 19, 2022), the employee, Martin Bellorin, was injured while delivering luggage when a plastic panel fell from the ceiling of the elevator and hit his head. Subsequently, he filed a lawsuit against the association, alleging negligence based on a premises liability theory, and sought damages for his injury. During the trial court proceedings, the association sought to defend the case by arguing during its motion for summary judgment that it was entitled to workers’ compensation immunity because it was a “statutory employer.” The trial court disagreed and held that the workers’ compensation immunity did not apply to the association because, in this case, the declaration of condominium and bylaws were not a contract and, therefore, did not impose a contractual obligation upon the association to provide the valet services. However, the association appealed the trial court decision and prevailed.

On appeal, the association argued that its declaration of condominium was a contract and, in fact, provided a contractual obligation to provide the valet services to the unit owners at the condominium, and therefore it was entitled to the workers’ compensation immunity as a “statutory employer.” Pursuant to §440.10(1)(b), Florida Statutes,

in cases where a contractor sublets any part or parts of his or her contract work to a subcontractor or subcontractors, all of the employees of such contractor and subcontractor or subcontractors engaged on such contract work shall be deemed to be employed in one and the same business or establishment, and the contractor shall be liable for, and shall secure, the payment of compensation to all such employees, except to employees of a subcontractor who has secured such payment.

Stated differently, a “statutory employer” is entitled to vertical immunity. A vertical relationship exists when a contractor (in this case, the association) sublets any part(s) of its contracted work to a subcontractor (in this case, the valet company). Thus, in the Bal Harbor Towers Condominium Association case, the association argued it should be deemed the “statutory employer” of the employees of the valet company.

As pointed out by the Appellate Court, for the Association to be a contractor under §440.10, it must show that it has a contractual obligation to provide the services to the unit owners, and that it sublet any part of the contract work to a subcontractor… to be considered a contractor under §440.10 the association’s primary obligation in performing a job or providing a service, must arise out of a contract… well-established Florida law provides that a declaration of condominium operates as a contract, thus the trial court erred in finding that the Association did not have a contractual obligation to provide valet services to unit owners under its declaration of condominium, thereby determining that the Association was not entitled to worker’s compensation immunity as a statutory employer.

Therefore, the Appellate Court reversed the trial court’s non-final order denying the association’s motion for final sum-mary judgment and remanded the case back to the trial court for further proceedings.

The takeaway from the Bal Harbor Towers Condominium Association case is if the association is going to provide serv-ices on a regular basis to its members, then amending the declaration to require providing such services will further help shield the association from liability claims from the association’s vendor’s employees. In addition, the association should consider requiring all vendors servicing the association and its members to have workers’ compensation insurance and provide proof of coverage prior to commencing work. Remember, the fact that a vendor may tell you they are exempt from workers’ compensation only means that if they or their employees are hurt on the association’s property, then the association is exposed to liability for damages. Be sure to talk about these important issues with the association’s legal counsel, and always, no matter the value of the contract, strongly consider asking association counsel to prepare the appropriate addendum to help better protect the interests of the association.

(Written by Jeffrey Rembaum and reprinted with permission from the May 2023 edition of the “Florida Community Association Journal”.)

If your community association has engaged the services of a contractor, engineer, architect, or other construction or design professional to perform a maintenance, repair, replacement, or capital improvement project, you know the process can be overwhelming. No matter the mad rush to execute the contract as soon as possible, when beginning such projects, no matter how big or small, the board needs to ensure the contract adequately protects the association. Even the smallest of projects can have unexpected, disastrous consequences. A few of the more common provisions which every board member should understand follow.

The Indemnity Provision

In today’s extremely litigious world, it is important that your association does what it can to protect itself against unforeseen claims that can arise out of the contractor’s performance of the work. For example, assume a crane fell on the building being repaired, the contractor accidentally damaged the elevator shaft, or worse still, a life is lost. An indemnity provision provides that the contractor will indemnify, defend, and hold harmless the association from and against claims arising out of or resulting from the performance of the work by the contractor or any of its employees, subcontractors, suppliers, etc.

Indemnification provisions can be tricky to understand. The general contractor, engineer, and design professionals (aka the architect) may seek to avoid and/or cap their overall liability. Even a small contract can have significant consequences if the negligence of the contractor causes significant damage or injury.

Rarely does the inclusion of a single word have disastrous consequences; however, a recent trend we have seen in many contracts is the contractor requiring the indemnity obligation to be limited only to damage caused by the contractor’s “sole” negligence. As events which cause loss or damage rarely occur by the “sole” actions of an individual, this provision significantly diminishes the contractor’s responsibility to indemnify the association. The association should look out for any indemnity provision which provides that the contractor is only responsible to indemnify for its “sole” negligence. Without getting into too much complexity, Florida is a “contributory negligence” state. This means each party is responsible to satisfy a judgment against them in proportion to their responsibility for the blame. So, if the contractor is found to be 33 percent responsible for an accident, then it pays 33 percent of the final judgment award. But, if the contract indemnity provision required sole negligence, the contractor would pay nothing at all because the accident was not “solely” caused by the contractor. Youch!

Another trend we see is the contractor limiting its liability to damage caused by its “gross negligence,” which by definition excludes “simple negligence.” As a brief explanation, simple negligence is when a person fails to take reasonable precautions that any prudent person would take in similar circumstances and their actions cause harm (for example, a driver who runs a stop sign and causes an accident). Gross negligence is extreme indifference or reckless disregard for the safety of others (for example, driving 100 mph in a parking lot and injuring a pedestrian). As any claims arising out of the work are likely to result from the contractor’s simple negligence, this heightened standard is not favorable to the association.

If the contractor is insistent on limiting its liability, the association may consider limiting the contractor’s indemnification obligation to the maximum payable under the contractor’s insurance policy. This way, the contractor is not on the hook for unlimited liability, but the association has some decent protection as claims can be covered up to the maximum amount payable under the insurance policy. However, in the event of a catastrophic loss or casualty event, even the amount payable under the insurance policy may not be enough to protect the association.

In addition to these limitations, “design professionals” have the added benefit of statutory authority to further limit their liability in a contract (they must have better lobbyists). Section 558.0035, Florida Statutes, provides a procedure by which a design professional can exclude any “individual liability” for damages resulting from negligence occurring within the course and scope of a professional services contract. In other words, the design professional will not be personally liable to the association for any negligence in its design if the contract includes a provision that excludes such personally liability. Section 558.002(7), Florida Statutes, defines a “design professional” as a person who is licensed in the state of Florida as an architect, landscape architect, engineer, surveyor, geologist, or a registered interior designer. Therefore, if your association is contracting with any of the foregoing design professionals, you will likely need to negotiate this provision.

You should also be aware that disputes over the enforceability of the indemnification clause do not automatically include prevailing party attorneys’ fees unless the indemnification provision specifically provides that, in the event of a dispute concerning the applicability of the indemnification, the prevailing party must be indemnified for their attorneys’ fees, costs, and expenses incurred in enforcing their right to be indemnified.

Insurance Provisions

To ensure there are sufficient funds to satisfy an indemnity judgment in favor of the association, it is important that the association require the contractor to carry certain minimum insurance. Therefore, the contract should contain a clause which provides that the contractor will maintain such general liability insurance as will protect the contractor and the association from claims that may arise out of or result from the contractor’s operations under the contract documents in the amounts set out in the contract. Additionally, the association should ensure that the contractor obtains sufficient workers’ compensation coverage.

There are a couple of terms with which you should be familiar:

Certificate Holder: The certificate holder is merely entitled to the proof of insurance, nothing more. When the policy holders have their insurance agents issue a certificate of insurance to the entity that hired the contractor to do the work, that entity becomes a certificate holder. It is simply the contractor’s way of saying, “I have insurance.” Certificates show that the contract has the insurance policies in the limits shown on such certificate. It also provides that the certificate holder is entitled to know if the policy lapses.
Additional Insured: An additional insured is provided the same coverage and rights under the policy as the named insured. In other words, when you become an additional insured, you are entitled to the same insurance protections as the original policy holder. Therefore, in the event of loss, the association may file a claim on the contractor’s policy through its status as an additional insured.

Thus, the contract should not only require that the contractor carry insurance but also provide that the contractor is obligated to provide a certificate of insurance evidencing the insurance coverage and containing an endorsement listing the association as an “additional insured.”

In addition to the insurance requirements for the contractor, your association may consider purchasing builder’s risk insurance for the project. Builder’s risk insurance is designed to protect the owner of a construction site from loss and damage. This should be further discussed with the association’s insurance agent.

Paying the Contractor

During a major construction project, the association’s contractor will likely be working with several subcontractors to complete the work. The process for payments in such projects is set out in §713.13, Florida Statutes. (For a more detailed discussion on the construction payment process, you can read my prior article, “Construction Progress Payments: The Hidden Trap,” at rembaumsassociationroundup.com, originally published in the Florida Community Association Journal, February 2020 edition.)

By way of brief explanation, when the project commences, the association records a “Notice of Commencement” identifying the contractor and the legal description of where the work is being performed. The purpose of the Notice of Commencement is to inform all subcontractors and suppliers that if they intend to provide goods and/or services to the property, and if they want to have proper legal standing to record a lien against the property in the event they are not paid, the subcontractor and/or supplier must serve a “Notice to Owner” to the association. The Notice to Owner informs the association of all subcontractors working under the general contractor and all suppliers who provide suppliers and materials to the job site.

In exchange for payments to the general contractor, the general contractor provides the association with “partial payment affidavits” for each payment and a “final payment affidavit” upon conclusion of the work at hand. The subcontractors and suppliers provide the association “partial releases” for the payment received from the general contractor using the general contractor as the delivery conduit to deliver the partial release to the association. This method ensures that subcontractors and suppliers cannot later claim that they were not paid. However, in order to ensure this protection, it is important that the contract requires the contractor to provide the subcontractors’ and suppliers’ partial releases contemporaneously with the association’s progress payment. With the partial releases in hand, in the event the contractor does not pay the subcontractors and suppliers, the association is fully protected.

Some general contractors insist on providing the association with the partial releases from the subcontractors and suppliers one payment behind. This should be a red flag to your association because it means if the contractor fails to pay the subcontractors and suppliers after receiving payment from the association, the association will still have to pay the subcontractors and suppliers. In such event, the association will end up having to pay twice for all or part of the same work.

Prevailing Attorney’s Fees

Another important consideration is the prevailing party attorneys’ fees provision of the contract. An attorneys’ fee provision generally provides that in the event of litigation to enforce the terms of the contract, the prevailing party is entitled to recover their attorneys’ fees. However, this provision must be carefully worded to ensure that your association will be able to recover its attorneys’ fees.

Termination

Most contracts provide that the association may terminate the contract for cause. The termination for cause provision should include examples of conduct by the contractor which would entitle the association to terminate the contract for cause. In addition to termination for cause, we recommend the inclusion of a “without cause” termination provision. This provision gives the association an out in the event the contractor is not working out, but the contractor’s conduct does not rise to the level which would allow dismissal for cause.

Generally, if an association terminated an agreement without good cause, and unless otherwise spelled out in the contract, the contractor would likely be entitled to approximately 15 to 22 percent of the contract price for its anticipated lost profit and overhead.

Payment and Performance Bonds

Another way the association can protect itself is by requiring the contractor to obtain “payment and performance bonds,” which are most often purchased together as a set. While doing so typically adds three to five percent to the total contract price, it is well worth it. In addition, if the contractor is not able to provide such a bond because the bonding companies will not bond the contractor, it is very telling because not every contractor is bondable.

A “performance bond” is a surety bond issued by a bonding company or bank to guarantee the satisfactory completion of the work by the contractor. It acts to protect the association in the event the contractor fails to complete its contractual obligations.

A “payment bond” guarantees the contractor will pay all laborers, material suppliers, and subcontractors engaged by the contractor for the work. In the event the association pays the contractor, but the contractor fails to pay the laborers, material suppliers, and/or subcontractors, the surety will step in to pay same.

Force Majeure

Many contracts contain force majeure language which provides that the parties will not be responsible to the other if they are unable to fulfil the terms of the contract due to events beyond the control of the parties. Most often, a force majeure event adds delay to the targeted project completion date and avoids claims for breach of contract due to the delay. Such events may be acts of God, flood, fire, hurricanes, war, invasion, terrorist acts, government order or law, actions, embargoes, or blockades, etc. Of late, for reasons that need no explanation, pandemics are added to this list, too.

The above discussion is not meant to be all inclusive. There are so many other important provisions to consider, but space is limited. To ensure your association is protected, the association should always rely on its legal counsel to review the association’s contracts and make the necessary revisions to assist in the protection of the association.

(Reprinted with permission from the December 2021 edition of the Florida Community Association Journal)

Tag: contracts

Requiring Workers’ Compensation | Why it is So Very Important to Consider Its Inclusion in Every Contract and More