Who Should Guarantee What?

An ounce of prevention. The indemnification clause and the insurance and subrogation provisions of a contract are by far the most important from a lawyer’s perspective. When a client gives me a contract, I always home in on those indemnification insurance provisions — because those are going to be the clauses that are going to protect the board in the event of any claims. It does that by making sure that the party the board is contracting with — whether it’s a shareholder doing an alteration or a contractor under a construction contract — bears the liability in the event of a loss, injury or damage.

A courtroom is where you don’t want to be. If you don’t have those provisions in place, you’re limited to the common law indemnification rights. And generally speaking, under common law, you’re only entitled to indemnification if the loss, claim or damage arises as a result of a breach of contract or negligence. And that most likely means a long trial, with attorney’s fees and court costs.

Blame it on the Scaffold Law. Sections 240 and 241 of the state’s Labor Law impose a strict liability on the owners of the property, even if they’re not overseeing or coordinating the work, or not even the one who even contracted for the work. So if you don’t have adequate indemnification provisions in the contract and a worker injures himself there is no common law indemnification for the board.

A case goes to court. In a case called Y. Chung v. 48 Tenants Corp., a shareholder hired a contractor to perform some work in his unit. One of the workers fell from a ladder inside the apartment and injured himself. The co-op had no involvement in this work whatsoever. Nevertheless, under Section 240, this injured worker submitted a claim and brought suit against the co-op as the owner of the property, seeking additional damages.

The co-op board said, “Our proprietary lease has a clause that says this shareholder has to indemnify us for claims arising from that work.” The first part of the court’s decision said that the record did not conclusively establish that this indemnification provision of the proprietary lease had ever been affixed to the original proprietary lease as agreed to by the shareholders. Specifically, the indemnification clause was added via an amendment to the proprietary lease in 2009, which was some time after the original boilerplate proprietary lease.

So it’s important to work with legal counsel to make sure that when you adopt these indemnification provisions, they are in fact a part of the proprietary lease and are enforceable. The court also found that the indemnity clause, even if it had been appropriately incorporated into the proprietary lease, did not unambiguously apply before there was any finding of negligence on the part of the shareholder. And it also didn’t require defense of the claim.

This means that the co-op is going to have to proceed with the trial on its own dime. And even if it is determined that this indemnification clause was appropriately incorporated into the lease, it could very well be held later that it will cover defense costs only if there was negligence on the part of the shareholder. So even if it does provide for indemnification and even if the shareholder does ultimately have to pay any damages awarded to the contractor, the co-op would still be out all its attorney’s fees and court costs.

The lesson. Always work closely with your legal counsel and your managing agent to make sure that in your alteration agreements and your construction contracts, the indemnification language is thorough, that it’s going to cover against defense with or without a showing of negligence. And then, by extension, make sure that the shareholders signing the alteration agreements have adequate insurance to cover those potential losses that they’re responsible for under those indemnification claims.