Magazine article Journal of Property Management

Transferring Management Risks

Magazine article Journal of Property Management

Transferring Management Risks

Article excerpt

Liability insurance for the third-party fee property manager has taken on an even more critical role in recent years as liability claims have increased. In past years, it was always assumed that the property owner would indemnify the third-party manager in liability cases unless it was proven that the property manager was negligent. The owner's insurance company would generally conduct the investigation and defend both the owner and the manager if the need arose.

Today, insurance companies for property owners frequently try to pass liability along to the third-party property manager and/or to any contractors involved in the action. Often, one of the first steps taken by an insurance adjuster is to question the property manager about his or her knowledge of the situation and about what was and could have been done to prevent the incident. In many cases, the third-party property manager must now rely on his or her own insurer to defend against a suit.

Insure against risk

All property managers must carry adequate liability and errors and omissions insurance commensurate with the size of their portfolios and the potential liability they may face. A minimum of $1 million in coverage is probably a must, and most larger property management companies carry much more. Some institutional clients insist on a minimum of $5 million.

Errors and omissions coverage is not easily available, but there is a plan available through the Institute of Real Estate Management. These policies generally have deductibles in the range of $10,000, including the defense costs. They are frequently written on a "claims-made" basis, so that any claims filed after the policy's expiration are not covered. Purchasing a "tail" policy, which will cover the insured for an additional one or two years after the initial expiration offers added protection. But cost is high--in some cases higher than the policy's annual premium.

Contract against risk

Although errors and omissions insurance is essential for doing business today, the main protection from liability risks for the fee property manager is still a well-written management agreement. In the contract, the owner and manager should both agree to buy liability coverage and name the other as "additional insured," on the policy. The contract should also stipulate that the owner's insurance company will look to the owners' policy as the primary source of all coverage and will waive all rights to recover from the manager.

To ensure that such coverage is in place, the manager should ask for a certificate of insurance naming the manager as an additional insured. Keep a tickler filer to make certain a new certificate is received annually.

It is critical to have an effective "hold harmless" clause in the agreement. The hold harmless clause should provide that if the manager (as agent) "...enters into contracts or obligations which are reasonable and properly incurred pursuant to the terms of this agreement, owner shall indemnify agent against, and hold it harmless from, all claims, damages, and loss resulting therefrom and shall pay and discharge said contracts and obligations in the event agent shall be discharged by owner..." (Note: Consult with legal counsel on the appropriate wording of a hold harmless clause in your jurisdiction. …

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