Property Management Agreements – Insurance and Indemnity

Scott Bedingfield, AAI, CRIS, Principal/Commercial Department

With reference from IRMI (International Risk Management Institute)

The traditional approach for providing insurance in Commercial Property Management Agreements requires the owner to purchase and maintain Commercial General Liability (CGL) insurance applicable to the managed property and to include the property manager as an insured under that policy.

This approach is supported by the fact that the standard CGL policy provides automatic insured status to the named insured’s real estate manager (See CGL Policy Wording in red below), without the need for any endorsement.

Insured status for the insured’s real estate manager is a long-standing general liability coverage feature. When the “traditional” method of allocating the risk of property management is adopted—with the property owner agreeing to indemnify and provide insured status for the property manager—then standard insurance coverage forms and endorsements are available to put that allocation into effect. As already noted, the standard commercial general liability coverage form makes the named insured property owner’s “real estate manager” an insured automatically.

As a result of the changing relationships between real estate owners and managers, it is becoming more difficult to generalize about the typical allocation of risk between the two parties to a commercial real estate management contract. In most cases, the parties are sticking to the traditional approach of covering the property manager under the owner’s CGL. Most risk management and insurance professionals strongly favor this approach, because they view it as a more efficient means of insuring and pricing the loss exposures, since standard CGL policies automatically include the property manager as an insured and standard CGL rating rules provide premium credits to property management firms whose policies are endorsed to provide excess coverage only over other insurance available to the property manager.

ISO Commercial General Liability (CGL) 00 01
SECTION II – WHO IS AN INSURED

1.     The declarations lists different types of entities. Who is an insured is based on the type(s) of entities selected.

a)     If the named insured is an individual, the named insured and his or her spouse are insureds. They are insureds only with respect to operations of the business the named insured solely owns.

b)       If the named insured is a partnership or joint venture, that named insured is an insured. The named insured’s members and partners and their spouses are also insureds. Their status as insureds is limited to operations of the named insured’s business.

c)     If the named insured is a limited liability company, the named insured is an insured. Members of the company are insureds but only when conducting the named insured’s business. The named insured’s managers are also insureds but only when performing specific duties as managers.

d)     If the named insured is any other organization, the named insured is an insured. The executive officers and directors are insureds while performing their duties as such. Stockholders are insureds but only in their very limited capacity as stockholders.

e)     If the named insured is a trust, the named insured is an insured. The trustees are insureds but only while performing duties the trust requires.

2.     Each of the following is also an insured:

a)     Volunteer workers but only when performing duties related to the named insured’s business. Employees, excluding executive officers or corporations and managers of a Limited Liability Company (LLC), are insureds within the narrow range of activities within the scope of their employment or while conducting the named insured’s business.

(1)   Volunteers and employees are not insureds for bodily injury or personal and advertising injury:

  • To the named insured, its partners, or members of a LLC
  • To other employees. This restriction applies only when at the time of loss those co-employees are acting within their employment boundaries or while they are conducting the named insured’s business.
  • To the named insured’s volunteer workers. This restriction applies only when those workers are conducting the named insured’s business.
  • To consequential loss a relative of any co-employee or volunteer sustains because of injuries to a co-employee or volunteer described in the prior two bulleted items
  • Where an obligation exists to share damages with or repay others for damages because of injury described in any of the preceding bullet items
  • When an employee or volunteer provides or fails to provide professional health care services

(2)   Volunteers and employees are not insureds for property damage to property owned, occupied, used by, rented to, or in the named insured’s physical custody.

b)     Any party, other than an employee or volunteer, who acts as the named insured’s real estate manager

c)     Any party that has proper temporary legal custody of a deceased named insured’s property but only with respect to liability that arises out of or is caused by maintaining or using that property. However, this status applies only until a legal representative is appointed.

d)       A properly appointed legal representative for a deceased named insured but only while carrying out its duties as the legal representative. The legal representative assumes all of the deceased named insured’s rights and duties. This goes beyond the standard insured status and extends to rights to cancellation, conditions, and other elements assigned to only named insureds.

3.     Any newly formed or acquired organization qualifies as a named insured if no other similar coverage is available to it. This applies only if the named insured either owns or has a majority interest in the organization. The newly formed or acquired organization cannot be a partnership, joint venture, or limited liability company. This provision is limited to not more than 90 days after the organization is formed or acquired, or until the end of the policy period, whichever comes first. Coverage A does not apply to bodily injury or property damage that occurred before the organization was acquired or formed. Coverage B does not apply to personal and advertising injury that arises out of an offense committed before the organization was acquired or formed.

No party is an insured with respect to conduct of any current or previous partnership, joint venture, or limited liability company that is not on the declarations as an insured.

Traditional Approach Insurance Verbiage

Owner shall obtain and maintain throughout the duration of this agreement: commercial general liability insurance, written on an occurrence form, with not less than $5,000,000 combined limit bodily injury and property damage per location; broad perils direct damage property insurance, including, where appropriate, boiler and machinery insurance, at 100% replacement value; and broad perils rental income insurance for not less than one year’s rental value. Property Manager shall be included as an insured under the Owner’s liability insurance, and such insurance shall be primary and shall not seek contribution from any insurance of Property Manager, as noted below. Owner’s property and rental income insurers shall waive all rights of subrogation against Property Manager. Owner may, if it is adequately capitalized, self-insure portions of the above noted risks, provided all such deductibles or self-insured retentions (retentions) shall be entirely for the account of Owner. Owner shall cover Property Manager’s interests under such retentions as if no retention applied and coverage was insured on first-dollar terms. All such policies shall provide not less than thirty (30) day’s written notice to Property Manager of the insurers’ intention to cancel, unless cancellation is prompted by non-payment of premium, in which case, written notice to Property Manager may be ten (10) days.

Property Manager shall obtain and maintain, at its own expense, throughout the duration of this agreement, the following insurance:

  • Commercial general liability insurance on an occurrence form with not less than $5,000,000 combined limit bodily injury and property damage, including Owner as additional insured to the extent of Property Manager’s indemnity obligations excess of the coverage afforded by Owner.
  • Business Auto Liability insurance with not less than $5,000,000 combined limit, covering any auto, including employer’s non-owned auto liability. Policy will include protection for Owner, to the extent a covered loss may be imputed to the Owner.
  • Workers’ Compensation insurance covering all Property Manager employees in accordance with the statutory requirements of the State or States where operations are conducted, including Employer’s Liability insurance with limits of not less than $1,000,000 each accident and $1,000,000 in the aggregate as applicable.
  • Professional errors and omissions insurance covering the professional real estate services rendered by Property Manager in an amount of $5,000,000 any one claim, provided such coverage is available in the insurance marketplace on economically reasonable terms. Such coverage may be written on a claims-made basis with defense included in limits.
  • Employee dishonesty insurance of not less than $1,000,000 covering Owner for loss arising from theft, fraud or embezzlement by Property Manager’s employees.

All such insurance provided by Property Manager shall include insurer’s waivers of subrogation against Owner, and provide not less than thirty (30) day’s written notice to Owner of the insurers’ intention to cancel, unless cancellation is prompted by non-payment of premium, in which case, written notice to Owner shall be ten (10) days.

Indemnification by Property Manager

Property Manager agrees to indemnify and hold harmless Owner from and against (i) any loss, liability, or damage suffered or incurred by Owner arising from or in connection with the operation, management, repair, or maintenance of the Property to the extent of the negligence or willful misconduct of Manager or any acts of Manager outside the scope of this Agreement or the performance or non-performance of the terms of this Agreement to be performed by Property Manager; (ii) any loss, liability, or damage suffered or incurred by Owner on account of injury to person or property or from loss of life sustained in, on, or about the Property resulting from willful misconduct or negligent act or omission of Property Manager or of its employees or from any act or omission of Property Manager or of its employees which is contrary to applicable laws or regulations; and (iii) all actions, suits, proceedings, demands, assessments, judgments, costs, and expenses (including reasonable attorneys’ fees) directly relating to the foregoing. Property Manager’s obligations to Owner as set forth in this sub-section shall not extend to any liability against which Owner shall be effectively protected by insurance, but if any such liability shall exceed the amount of the effective and collectible insurance in question, Property Manager’s obligations shall apply to such excess. All provisions of this section shall survive the termination of this Agreement. Property Manager shall procure contractual liability insurance in an amount and place with companies acceptable to Owner. Such insurance shall not be cancelable without thirty (30) days’ prior written notice to Owner, and Property Manager shall deliver certificates thereof to Owner annually or as otherwise necessary to evidence coverage for the entire term of this Agreement.

Indemnification by Owner

Owner agrees to indemnify and hold harmless Property Manager from and against (i) any loss, liability, or damage suffered or incurred by Property Manager arising from or in connection with the performance of or failure to perform any services, covenants, or agreements in this Agreement to be performed by Owner to the extent of the negligence or willful misconduct of Owner; (ii) any loss, liability, or damage suffered or incurred by Property Manager on account of injury to person or property or from loss of life sustained in, on, or about the Property resulting from willful misconduct or negligence or omission of the Owner or of its employees, or from any act or omission of the Owner or of its employees which is contrary to applicable laws or regulations; and (iii) all actions, suits, proceedings, demands, assessments, judgments, costs, and expenses (including reasonable attorneys’ fees) directly relating to the foregoing.