Ernest Martin, partner with Haynes Boone, and Scott Woodward, risk management director with Trammell Crow Residential, led a session on “What’s Next for Risk Management?” at the 2014 NMHC OpTech. The discussion outlined some of the ways that multifamily owners and operators can better manage risk.
The first issue they discussed was indemnification clauses in legal contracts. Typically, these must specify that a company is being covered and detail the full limits of coverage, including, for example:
- The type of insurance you are requiring the vendor to have, naming you as being insured;
- Limits of coverage; and
- The entities to be covered.
emphasized that there are different types of indemnity clauses. To indemnify
means to hold a party harmless or to compensate or reimburse that party for
losses that occur under a contract through paying for legal fees and/or
These clauses allow a company to seek reimbursement for damages incurred as a result of an injury-physical or monetary-when caused by the party under contract.
Specifically, the three types of indemnity clause agreements include:
- Broad Form Indemnity Clause. Under this clause, the indemnitor is responsible for its own negligence and the negligence of a third party. So this means that they may be liable for the sole negligence of the indemnitee.
- Intermediate Form Clause. This puts the indemnitor as assuming all the risks associated, but not if the risk is the indemnitee’s responsibility. It could hold the owner harmless from any and all claims caused by negligent acts or omissions of the owner. It requires all-or-nothing indemnification.
- Comparative Form Clause. Requires a comparison of negligence. Under this clause, the indemnitor will be held responsible for the loss caused by the indemnitor. This is based on common law principals often recognized in the U.S. The indemnitor is not liable for direct negligence committed by the indemnitee.
emphasized that there are certain types of indemnity clauses that may not
recognize state law. Some state legislatures have enacted anti-indemnity
legislation to address what has been perceived as an imbalance in bargaining
Prior to state activity in this area, contractors would have no choice but to accept indemnity clauses in their contracts. If operating in one of these states, multifamily owners and operators can still include indemnity clauses in contracts, but they must comply within the limits of the law; otherwise, they will be void.
The majority of states prohibit broad indemnity clauses. Some states do not have any anti-indemnity laws. As a result, companies need to know the legal requirements in their state and to revise standard-form contracts accordingly.
Woodward also outlined the risks associated with certain new types of development and equipment. These include:
- Green Roofs. Incorporating a green roof into a multifamily building is essentially putting a forest at the top of a skyscraper. “If you approach an insurance provider and tell them, ‘I’m going to put trees, grass and ponds on the roof, they are not going to be pleased,’” said Woodward.
- Car Charging Stations. These stations present added exposure. For example, accidents like vehicle strikes, vandalism, catastrophic events, flooding or other weather-related issues puts residents, employees and visitors at serious risk of injury such as electrocution. It does not take much for an accident to happen.
- Clubhouse Bars. Many multifamily developers are putting bars in their properties, which can bring up risks such as residents and guests who drive under the influence.
- Video Surveillance. To protect property and residents, multifamily owners and operators sometimes turn to video surveillance, which poses unique risks, including privacy issues.
Whenever possible, emphasized Woodward, consider if there are any alternatives that meet your objective but also can minimize the associated risks. For example, alternatives to installing video surveillance include:
- Enhanced lighting throughout the property;
- Controlled pedestrian access to the property;
- Trimmed landscaping; and
- Increased security or police officer patrols.
Ultimately, the best strategy for minimizing risk, however, is to consult with experts in these areas and seek legal counsel to ensure appropriate and lawful legal contracts are in use. Multifamily owners and operators also need to fully understand the federal and state laws that regulate these activities.