When Sorry Just Won’t Cut It …

Indemnification – that’s a big word, and a lot of people, quite frankly, don’t know what it means. It is a Latin word, and it comes from two parts, “in” and “damnum,” which means damages. It relates to how a person collects damages, and what happens with that. It really means two things. One, Person A can be required to compensate another person for damage or loss, and it also can mean that Person A is actually required to secure Person B against legal responsibility.

Normally in New York State, a person needs a statute, a contract, or another common law mechanism to be indemnified by someone else – to have that second person pay for the damage that has arisen to the first person.

There are lots of different ways this can happen. In New York State, we have five separate sections in the Business Corporation Law that speak to indemnification of directors and officers in a co-op.

In addition to statutory indemnification, the most common type of indemnification for co-ops and condos is indemnification under contract law, and that is a very tricky area. There are basic contractual requirements to be complied with, but even assuming you have a valid contract, there is a statutory wrinkle regarding indemnification clauses in leases that should be considered.

This wrinkle relates to landlord-tenant matters, so co-ops are included. The relevant statute provides that an indemnification clause in a landlord/tenant matter is void when it does not exclude a situation involving the negligence of the landlord, its agents, or employees. In practice, what this means is that the tenant will not have to indemnify the landlord if the contract does not take into account the landlord’s negligence.

In fact, courts have held that broad indemnification such as those normally found in a proprietary lease, which are not limited to the tenant’s acts or omissions, and which fail to make exceptions for the landlord’s own negligence, are unenforceable under the General Obligations Law. Courts have expressed that this is especially so where the alteration agreement is not negotiated at arm’s length by two sophisticated business entities.

This issue is very important for coops, because most proprietary leases were drafted a long time ago, and they don’t include an exemption for the coop’s negligence. Instead of providing for that exclusion, they’re usually very broad, and they just specify that the tenant agrees to indemnify the co-op for anything that happens.

When a shareholder wants to do an alteration project in his or her apartment, the indemnification clause in an alteration agreement is of key importance. A contractor hired by the tenant may slip and fall, or get hurt in some other way in the apartment, and could drag the co-op into litigation.

A co-op doesn’t want to have to pay for any damage to a contractor, especially since the co-op had nothing to do with that accident. So how does a co-op protect itself? By adding a simple phrase to all indemnification clauses in alteration agreements that the indemnification provision protects the co-op “except in cases where the co-op is negligent.”

Have your lawyer make sure your alteration agreement contains this type of vital language so your co-op will be able to rely on the indemnification clause and require the shareholder to cover losses that he or she is responsible for.

There’s one more important issue relating to indemnification. Under New York State statutory law, individual board members and officers can ask the corporation to cover a claim if they’re sued relating to their corporate duties. But this is not a limitless duty on the part of the corporation. Because of another statutory provision, a co-op can deny a board member’s request to be indemnified – if that board member committed acts of bad faith. So, if the co-op and the individual officers are sued, the co-op would indemnify an officer or director, but not a person who is proven to have acted in bad faith.