The Art of Self-Defense: A Primer on Risk Management from the Claim Manager for the Institute's Professional Liability Insurer
Clair, James, Journal of Property Management
Property managers are increasingly targets of professional liability lawsuits, often by disgruntled clients. There are, however, several basic risk management steps a manager can take in self-defense.
Careful client acceptance and engagement screening practices can help control professional liability risk. Clients who exhibit certain types of problems present significant potential liability. For instance, the risk of a property manager being sued by a client or their lender is heightened when operating results do not meet client expectations or when the client exhibits or encounters serious financial difficulties.
An example of a financial risk factor to carefully evaluate is problematic operating results, e.g., a property has been marginally profitable or incurred losses for a period of time. Unfulfilled occupancy forecasts by the property manager, and actual or perceived expectations of the client may lead to claims of misleading communications and deficient management, financial reporting and disclosures. For instance, a nonprofit organization without a generous membership or donor base may undertake various community projects, purchase new office equipment and hire additional staff based on the property manager's occupancy and income stream forecast. If the forecast is overly optimistic, this client would be in an awkward position after extending itself financially and could consider itself sufficiently aggrieved to justify making a claim against the property manager for resulting losses.
Another example of a problematic financial condition would be a client with significant negative cash flow and liquidity constraints, negative retained earnings and onerous debt or other contract covenants. These merit attention and evaluation, as they are often red flags signaling increased risk for all involved, including the property manager. Also, clients facing significant uncertainties and contingencies (e.g., pending litigation or dramatically reduced rental demand) warrant close examination. Further, while price or service issues may trigger a client to switch from one property management firm to another, a client seeking to change may be doing so due to disagreements with its existing manager regarding matters of extreme deferred maintenance, client interference with rental decisions or other issues concerning the scope or details of the manager's work.
Some client services present elevated liability risk simply because there is an increased level of reliance on the property manager's work product, or the service is being requested in connection with a planned or proposed client transaction. What was once a low-risk and long-term client relationship can become a high-risk situation simply as a result of a change in the services provided. For instance, the client may be planning to sell a property, and the prospective buyer may require the client either to establish a reserve for the buyer to catch up on deferred maintenance after the sale or adjust the purchase price accordingly. If there are some problems with the accuracy of the estimated cost to catch up with deferred maintenance, its importance could be magnified by the involvement of a prospective buyer or lender. Therefore, the manager must determine who the intended users of its work product are and their additional potential exposure.
A management agreement has several legal and practical purposes. First, it makes progress predictable by describing how the engagement will go if it proceeds well, or if it does not. Because both parties benefit from a contract that defines and supports the day-to-day management of the property, the client should welcome such an agreement as much as the manager. Second, an agreement affords both parties the opportunity to set realistic expectations of the other. In addition to strategic objectives, negotiation of the agreement is a time to work out many details including scope, budget, roles, quality, quantities and timing, and to discuss and understand the implications of what they can and cannot do, as well as the procedures they will use to work together. …