“Indemnity” is a legal term of art which stands for the right of a party to claim reimbursement for its loss, damage, or liability from another party who has such a duty. Ordinarily, the duty to indemnify arises through express contractual agreement. The 2014 adoption of section 468.4334, Florida Statutes, has brought a spotlight to the concept of indemnity in the community association world. The new statutory provision provides guidelines regarding acceptable indemnity provisions in contracts between a community association manager (or management firm) and community associations. The purpose of this article is to discuss appropriate and inappropriate scopes of indemnification clauses in contracts entered by your association.
At its most fundamental level a contract is nothing more than assignments of obligations and allocations of risks. Indemnification address both obligation and risk by stating that Party A is obligated to pay for any loss, damage, or liability suffered by Party B due to Party B’s actions (or inactions) covered in the indemnification clause. Indemnity is not inherently a “bad” thing and serves very important purposes. For instance, many community associations’ governing documents provide indemnity to officers and directors acting in their official capacity. This is good because it encourages volunteer owners to participate as directors of the association by assigning the association, as a corporate entity, the legal obligation to pay for any damage caused to the directors by acting in their official capacity. Another area where indemnity clauses are routinely contained is construction contracts. This is so because often dangerous activities are taking place and the parties involved with the contract want to make sure prior to such activities occurring that the allocation of risk involved is clearly delineated.
When evaluating an indemnity clause, it is important to understand whether the obligation to indemnify arises even if the damage incurred was due to the negligent or otherwise wrongful act of the party who is to be indemnified. As the Florida Supreme Court has explained, indemnity provisions which create an obligation to indemnify even in the instances of wrongful conduct are disfavored. See Charles Poe Masonry, Inc. v. Spring Lock Scaffolding Rental Equipment Co., 374 So.2d 487 (Fla. 1979) (“With respect to the possibility of contractual indemnity, we take note that contracts of indemnification which attempt to indemnify a party against its own wrongful acts are viewed with disfavor in Florida.”). That said, these types of indemnity clauses will be upheld if the contract expresses “an intent to indemnify against the indemnitee’s own wrongful acts in clear and unequivocal terms.” University Plaza Shopping Center, Inc. v. Stewart, 272 So.2d 507 (Fla.1973).
Indemnification clauses can be useful in many contractual relationships, but community association boards considering contracts which discuss indemnity issues need to be cognizant of scope of the indemnification sought and be wary of any indemnity clause which seeks to force the association to be obligated to indemnify for the negligent or otherwise wrongful acts of the other party to the contract. As always, your association should consult with its attorney before signing any contract.