Reducing Association Risk & Exposure

By Senior Partners, Ken Clayton & Neal McCulloh

In today’s world, Community Associations are exposed to all sorts of risk and potential liability.   Furthermore, the days when inexpensive insurance was available to Associations are long past.  Today,  Associations typically work very hard to avoid filing claim(s) with their insurance carriers as such claim(s) can have the devastating effect of significantly, if not massively, escalating future premiums, or worse, having their insurance coverage canceled.  This status of the insurance industry today, as well as the fact that, in this litigious society we live in, Associations are more often being forced to submit claims, is causing more Associations to seek insurance from specialized providers (e.g., Lloyds of London) which may charge a much higher premium or have astronomical deductibles.  In fact, at least one of our Association clients was dropped by its carrier, forced to obtain insurance from a specialized provider and now has a $30,000 deductible.  Unfortunately, due to the additional claims having been subsequently filed against that particular Association, its deductible and/or premium may continue to escalate.

Given the above, Associations should endeavor to adopt policies and practices designed to curtail their risk and their exposure.  Unfortunately, this Article cannot possibly go into all the numerous areas of potential risk and liability facing Associations today, much less all of the policies and procedures which could be implemented to reduce such risk and liability.  As such, this Article will try to focus on reducing an Association’s risk and exposure arising from an Association temporarily allowing a unit owner exclusive use of portions of the Association’s common areas or common elements (e.g., the clubhouse, pool area, parks, etc.).  As an adjunct to the discussion that follows, this Article will likewise address Associations that permit owners to consume or serve alcohol on such common areas or common elements.

Please understand that Clayton & McCulloh generally will advise our clients to practice risk avoidance.  Therefore, Clayton & McCulloh generally recommends that our Association clients prohibit owners from consuming and/or serving alcohol on the Association’s common areas and common elements.  Of course, prohibiting the consumption and/or serving of alcohol on common areas or common elements may entail adopting amendments to the Association’s governing documents or, at least, adopting new more stringent rules and regulations.  Of course, such prohibitions may not be practical or feasible in some communities.  As such, what other mechanisms may the Association employ to try to reduce its risk and potential liability, or to more appropriately shift substantial risk or liability from the Association onto the member(s) [i.e., owner(s)] who are engaging in and/or hosting such activity? 

Before addressing this question, it is important to first recognize that it is extremely common for members of an Association to host parties and other social gatherings and events (e.g., birthday parties, anniversaries, card parties, etc.) and often the best and most affordable venue will be the Association’s common areas or common elements.  Often, the Association’s representative(s) (e.g., the manager) generally will not be present when the event transpires.  The Association will not be in a position to timely stop improper, unauthorized and/or dangerous activities from occurring. 

Unfortunately, on many occasions, we have been called upon to intervene on behalf of our clients to stop problematic activities from occurring on the common elements and/or common areas.  By way of example, when individuals consume excessive quantities of alcohol, there is accelerated risk of persons getting drunk and/or engage in fights on common areas and/or common elements.  These activities can easily result in injuries to persons and damage to property.  Unfortunately, it is impossible to predict when such occurrences may happen.  Accordingly, Associations should consider requiring owners and even attendees at the event to execute Release, Hold Harmless and Indemnity Agreement(s) as a condition of being allowed to exclusively use the Association’s common areas and/or common elements (e.g., the clubhouse).  Unfortunately, even the best crafted Hold Harmless and Indemnity Agreement will not eliminate all of the Association’s risk and liability.  Nevertheless, such document may be able to transfer at least some of the risk and liability onto the individual(s) [e.g., the owner(s)] who are not only hosting the event, but are present and need to monitor, regulate and control what transpires.    

Please understand that having owners and attendees to sign this Hold Harmless and Indemnity Agreement can accomplish several worthwhile objectives and establish the basis for various legal defenses in favor of the Association, including, but not limited to, the following:

  1. Having the signers of the Agreement release the Association from any claim such person(s) may acquire associated with the event;
  2. Having such signer(s) agree to defend (and/or pay for the defense of) the Association in any claim or litigation that arises out of and/or in relation to the event;
  3. Having such individual(s) agree to hold the Association harmless from any damages or expenses it may incur from any claim or litigation brought as a result of the event;
  4. Having such individual(s) agree to indemnify the Association for any damages or expenses that the Association incurs that are associated with the event;
  5. Contractually, making the owner(s) responsible for all of his guests and invitees while at and in conjunction with the event;
  6. Contractually, requiring the owner(s) to be responsible for prohibiting the consumption of alcohol at the event (provided alcohol is prohibited) or assigning legal responsibility to  the owner(s) for any and all occurrences that transpire as a result of the consumption of alcohol at the event;  and
  7. Requiring the owner(s) to be responsible for compliance by all attendees with all laws associated with the event (e.g., precluding underage drinking).

In addition to the added protections created by items 1 through 7 above, we hope such an Agreement will cause the owner(s) to not only consider and reflect on their responsibility, but take appropriate precautions for the event.  For example, an experienced caterer or bartending operation should understand their legal responsibility to take adequate precautions to assure that any person being served alcohol is legally of age to do so.  They also should be empowered to not serve minors or persons who have had too much to drink.  Similarly, we hope such an Agreement will motivate the owner(s) to take appropriate action to intervene in any argument or altercation at the event in case the need arises.    Another practical benefit of such an Agreement is that the individuals who are asked to execute such an Agreement may simply refrain or be dissuaded from pursuing any claim against the Association. 

Given the above, Clayton & McCulloh generally recommends that our Association clients employ and utilize such Agreements to reduce their risk.  Additionally, Clayton & McCulloh recommends that the Association may also want to consider implementing amendments and/or Board-adopted rules and regulations to complement such Agreement(s) and/or to otherwise prohibit objectionable and/or risky activities from occurring on or within the Association’s common areas or common elements.

In addition to the inherent risks associated with events hosted by owners, many Associations host their own events or allow other outside persons or entities to host events on the Association’s common areas or common elements.  In these instances, the Association may, likewise, want to have both the hosting party and the attendees at such event(s) execute Release, Hold Harmless and Indemnity Agreement(s).  The Association may also want to require that such outside persons or entities hosting the even be required to provide proof of liability insurance in adequate amounts and have the Association identified as an Additional Insured. 

Additionally, the Association will want to consider whether the Association wants such Agreement(s) to reflect that the sponsoring owner should likewise be personally required to sign the Agreement to confirm that such person(s) are  responsible for the participation of others at such event (e.g., responsible for their family, guests, invitees and/or other attendees).  Please remember that the objective is to reduce the Association’s risk and liability as well as to endeavor to have such individuals and/or entities take responsibility for their own actions or failure to act and for their guests’ actions or at least their improper actions.