Liability & Indemnity Coverage Insurance & Collective Responsibility

Fountain pen pointing to the word 'insurance' on the page of a generic dictionary.

Whether your community is a condo, HOA, or co-op, if you take on the responsibility of serving on the board, you also take on a portion of collective responsibility—and with the assumption of that responsibility comes a measure of liability that non-board residents don’t typically have to think about. That reality can seem pretty daunting—indeed, it’s why many communities struggle to attract residents willing to serve on their board—but luckily there are contractual points of law and insurances available to mitigate these liabilities and protect board members and residents alike.

What Is Indemnity?

Simply put, indemnity is security against hurt, loss, or damage, as well as “exemption from incurred penalties or liabilities,” according to Webster’s. Webster’s New World Law Dictionary goes a little farther. It defines indemnity as “protection from damage, injury, financial loss, or legal liability.” The word ‘indemnity’ itself stems from the Latin root indemnis, meaning unhurt. Legal aspects of indemnity and liability also extend to the term ‘hold harmless,’ which “protects against losses and liability, while ‘indemnify’ protects against losses alone.” That may all sound very technical, but the fundamental concept of indemnity is pretty straightforward—and is of great importance to the boards of directors doing their best to govern and guide the communities they call home. 

It Cuts Both Ways

Indemnity and liability run in more than one direction in the world of multifamily residential living. Owners indemnify board members against possible liabilities, boards indemnify managing agents against the same, and managing agents indemnify boards. It’s more than a two-way street—it’s actually more like a five-corner intersection.

From a Massachusetts board’s perspective, the primary indemnity protection for acting as a board comes from the declaration bylaws. Ellen Shapiro, partner at the law firm of Allcock & Marcus in Braintree, Massachusetts, represents many condominium associations and HOAs. “Indemnity is in the governing documents to the extent the governing documents are held to be a contract,” she says. Typically, an indemnification clause in the classic sense relates to a claim. The way it works is, if the board has to pay somebody as a result of a third-party claim, the unit owners collectively as an association agree that the board can ‘dip’ into common funds to settle the claim, rather than be held individually responsible. The provision may be called liability, indemnification, or exculpation. These clauses essentially state that the board is not liable to the unit owners for a mistake in judgment or any acts or omissions they’ve made as directors—as long as those acts or omissions are made in good faith. Usually that excludes acts of gross negligence or fraud, or criminal acts.  

An example of typical indemnity clause language in condominium documents might read as follows: “Neither the board nor any person exercising the powers of the board nor the association, shall be liable to the unit owners for any mistake of judgment or any acts of omissions made in good faith. The unit owners shall indemnify and hold harmless each of the persons described above against all contractual liability to others arising out of contracts made by them on behalf of the unit owners or the association unless the contract is made in bad faith or contrary to the prohibitions of the declaration.” The intent is to protect the board members from unit owners’ claims while board members are acting (in good faith!) on behalf of the corporation or association. Shapiro notes that in the state of Massachusetts, indemnification is not statutory but rather contractual in legal terms.

Marc Schneider, managing partner with the New York City-based law firm Schneider Buchel LLP, says an indemnification provision is as important as contractual terms and payments. Indemnification, he says, is not necessarily “insurance” against liability, and that an “insurance indemnification provision” should be included in the contract language. For example, if a contracted roofing company drops a piece of equipment and in so doing damages the building or a unit owner’s personal property, without an insurance indemnity clause, the building’s insurance provider would likely have to fight the claim. 

“You want the contractor whose work or presence on your property that caused the damage to occur to be the responsible for handling it—not the board’s insurance company,” says Schneider. “You want the indemnity clause, but also an insurance provision in the contract that requires that the contractor has insurance in place, as well as making sure that the managing agent or the board is listed as an additional insured on the contractor’s policy.”

Double Indemnity

Indemnification clauses are also an integral part of contracts between boards of directors and their managing agents. In this case the indemnity runs both ways, indemnifying the managing agent against liabilities caused by the board, and the board against liabilities resulting from the actions of the managing agent. Shapiro says, “The association and the management company enter into a contract, and there’s an indemnification clause where the management company is indemnified by the association.” The management company will also indemnify the association.  “Each party indemnifies the other,” Shapiro stresses. “If a third party who is not a party to the contract sues, and the management company has to pay that third party who is outside the contract, the other contracting party, in this case the association, would reimburse the management company.” This principle works in reverse as well. If there were a claim against the association resulting from the management company’s actions and the association had to pay a third party, the management company would have to reimburse them.

The intent in indemnity clauses between associations and managing agents is to protect the board and association, as long as the managing agent has acted in good faith, and vice versa. The intent is always about protecting the actions of a surrogate from the anger and wrath of those who authorized the surrogate to act on their behalf.  

Shapiro points out that “it’s frowned upon to have an indemnification clause that indemnifies one or both of the parties to commit an act of discrimination and for the other to reimburse for that discrimination claim.” She doubts that a court would even uphold such a clause. “That’s void against public policy. If it’s an act that’s prohibited by statute and the contract says, ‘If you violate I’m giving you permission to violate because I’ll pay you back,’ that’s not something a court is likely to uphold.”  She also notes that “gross negligence and intentional torts are also excluded from indemnity clauses.”

Directors and Officers Insurance

Can a board or its members still be sued even if they are indemnified? “Of course,” says Shapiro. “This is America. Anyone can sue anyone. Whether the board member would be liable if they used their best judgment, did not have an improper motive, presumably did their research and due diligence? I believe the board member would be indemnified. But board members are allowed to make mistakes.” That’s where directors’ and officers’ insurance comes in. It protects board members from liability even further.  

Insurance in Action

Dennis F. Murphy III has spent 25 years in the insurance industry. His firm, the Murphy Insurance Agency, has several offices in Massachusetts, and is licensed to sell policies in all six New England states. Murphy recommends the following: “Clearly, you want to have general liability and excess liability policies. Condominium associations should also carry directors’ and officers’ insurance. D&O liability is very important. The other frequently overlooked policy for condominium associations is hired and non-owned auto.” Hired and non-owned auto covers liabilities incurred by employees, board members, or others who might have an accident resulting in a claim while using a car on association business. “It’s very cheap and very valuable in the event of a claim,” says Murphy.

While he does not believe there are any particular policies that are required by the state of Massachusetts for condominium associations, he points out that associations must carry insurance. He also recommends to boards that not only should they carry insurance, but that they should insist that their managing agents carry insurance as well. Both need to be adequately covered in the event of a claim or liability. “We don’t normally receive a lot of requests from managing agents for insurance,” he says, “but if we did, we would recommend they carry fidelity coverage if they are managing the money for the condo association. They would be fiduciary in that case, managing the money to pay the bills for the association.”

Fidelity insurance is not the same as a fidelity bond, but it is similar. “A fidelity bond,” explains Murphy, “is where someone is responsible for the funds of another and if something happens to those funds the surety company comes in and replaces those funds. We sell these to condominium associations regularly. It’s generally sold as part of the directors’ and officers’ liability policy.” 

Liability is a serious issue for condominium associations, co-op corporations, and HOAs.  Boards need protection from both individual unit owners and potential problems caused by management. As with most issues pertaining to the operation of your association, defer to the professionals—your attorney, and in this case, your insurance agent. And remember, liability and indemnity run in multiple directions. You’re not on a one-way street.        

 A.J. Sidransky is a staff writer and reporter for New England Condominium, and a published novelist. He may be reached at 

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