Hold harmless and indemnity provisions are used to shift risk from one party to another. They can be beneficial or harmful to an association depending on how they are used. They are commonly found in:
1. Governing Documents. CC&Rs and bylaws commonly contain language shifting liability for negligent acts from volunteers to the association. Without such provisions, it would be difficult or impossible to find volunteers.
2. Contracts. When used in contracts, they can be harmful to associations if improperly drafted.
3. Covenants. Recorded maintenance covenants between the association and a homeowner who modifies common area elements often contain hold harmless and indemnity provisions from injury or damage caused by the alterations.
4. Facility Rental Agreements. Common area rental agreements by members to use the clubhouse, pool, open space area, etc. for private events normally contain hold harmless and indemnity provisions protecting the association from liability in the event someone is injured.
Hold Harmless. A "hold harmless" or "liability waiver" provision in a contract is an agreement between the parties whereby one or both parties agree not to hold the other party responsible for any loss, damage, or legal liability that may arise under the agreement. In other words, the two parties cannot sue each other for any damage they may suffer due to the negligence of the other party. Hold harmless provisions are often combined with indemnity language. Following is an example:
Contractor shall indemnify, defend (by counsel reasonably acceptable to Association) and hold harmless the Association and its officers, directors, agents and employees from and against claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from the negligence or misconduct of Contractor in connection with performance of the work described in this Agreement.
Indemnify. To "indemnify" is to protect against or reimburse for damage, injury or loss. Typically, an association's governing documents will indemnify officers and directors against expenses, judgments, fines, settlements and attorneys' fees reasonably incurred in connection with any threatened or actual civil or criminal proceedings. In civil proceedings, officers and directors may be indemnified if they acted in good faith and in a manner reasonably believed to be in the best interests of the association. In the case of criminal proceedings, they may be indemnified if they had no reasonable cause to believe their conduct was unlawful. (Corp. Code § 7237.)
Are the words “indemnify” and “hold harmless” synonymous? No. One is offensive and the other is defensive—even though both contemplate third-party liability situations. “Indemnify” is an offensive right—a sword—allowing harmless” is defensive: The right not to be bothered by the other party itself seeking indemnification. (Queen Villas Homeowners Assn, v TCB Property Management, (2007) 149 Cal.App.4th 1, 9.)
Indeminfying Directors. Section 317 of the Corporations Code gives a corporation the power to indemnify any person who is or was a director, officer, employee, or other agent of the corporation. This is repeated in Section 7237(c):
A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders.
In subsection (c) of Corporations Code 5047.5, the legislature stated the purpose of these protections:
The Legislature finds and declares that the services of directors and officers of nonprofit corporations who serve without compensation are critical to the efficient conduct and management of the public service and charitable affairs of the people of California. The willingness of volunteers to offer their services has been deterred by a perception that their personal assets are at risk for these activities. The unavailability and unaffordability of appropriate liability insurance makes it difficult for these corporations to protect the personal assets of their volunteer decisionmakers with adequate insurance. It is the public policy of this state to provide incentive and protection to the individuals who perform these important functions.
Additional Protections. Additional protections are provided under the Davis-Stirling Act wherein volunteer directors and officers of community associations have no personal liability in excess of the insurance coverage requirements imposed by Section 5800 of the Civil Code. See Protections Against Volunteer Liability. Also see Business Judgment Rule.
Recommendation: Depending on how they are written, hold harmless, indemnity and exculpatory clauses can help reduce an association's exposure to risk. Mistakes involving these provisions can, on the other hand, be quite costly. Accordingly, all contracts entered into should be reviewed by the association's legal counsel before they are signed by the board.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.