Management Company Won’t Shield the Homeowners

Question: We are a small complex of only nine homes with no amenities, elevators, saunas, pools or hot tubs. The board has reacted to the threat of lawsuits by hiring a management company, telling homeowners that we are safer with a management company because it acts as a “shield” for the association.

The board said that the management company will save us money because if we are sued, the management company shares in the liability.

The homeowners believe the board, but I have seen the management company contract. It has a condition that says our association agrees to indemnify the company and all of its employees of “all” wrongdoing and liability.

What does this mean, and are we shielded because we hired a management company?

Answer: If your homeowners association, or HOA, is sued, the management company will likely claim that it is only the “agent” and therefore not responsible. When it comes to paying for your board’s defense or paying out on a judgment, it will likely be the association’s insurance company, not the management company, that pays. Should the amount of the judgment exceed the amount of your insurance coverage, every homeowner will have to contribute to make up the total of the judgment.

Management companies and attorneys who work closely with them, or with HOA boards, make their living from your dependence.

The longer you are dependent, the more they get paid.

Boards should spend more time responding to homeowner complaints, replacing burned out light bulbs, fixing concrete and correcting other conditions affecting the condition of a complex or presenting the real risk of liability for all homeowners rather than worrying about possible lawsuits.

By indemnifying the management company, your board has added a layer of potential expense each homeowner may ultimately have to pay. The indemnification flows in one direction, toward the management company.

The contract guarantees that if the management company does anything wrong, and the HOA is sued because of that wrong, the HOA pays any damages awarded and the management company pays nothing.

Imagine having the capability to act in any way you want and not worry about being sued. That is what indemnification means.

You don’t know who the management company’s employees are, what their qualifications are or what they will do, yet you are agreeing to pay for their mistakes--even if they steal from you. They can slander and libel your homeowners, and if they are sued, you pay.

A management company does nothing to make your HOA safer with regard to lawsuits and in fact may make it worse. But often these firms convince those signing the contract that the one big advantage they can offer is to “keep the HOA abreast of all the laws and ensure that you remain in compliance.”

If they hire attorneys to provide that information, they charge the association for a service the volunteers on the board could provide: finding and hiring an attorney to give them the same advice.

Some companies have computer programs or specialists they want you to pay for to ensure you are in “compliance” with changes in the Davis-Stirling Act.

If someone tells you to be afraid but for a fee will protect you from that fear, get a second opinion. Tell them you want all the homeowners to vote on it, but do not sign the contract.

If your HOA has ever functioned without a management company and only hired an attorney when it had a specific project requiring legal help, then your association does not need to change its operating procedures now.

Allaying your fears is why you have insurance, and a board that uses sound judgment and common sense can function without a management company.

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Stephen Glassman is a writer and an attorney in private practice specializing in corporate and business law. Donie Vanitzian is a writer and arbitrator and manages commercial property. Both live in common interest developments and have served on various association boards. They are the authors of “Villa Appalling! Destroying the Myth of Affordable Community Living” (Villa Appalling Publishing Inc., 2002). Please send questions to Common Interest Living, P.O. Box 451278, Los Angeles, CA 90045 or e-mail your queries to CIDCommonSense@aol.com.