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Reduce Your Risk

Property management
Reduce Your Risk
Proactive Property Managers Can Protect Themselves by Limiting Liability.
by Joseph W. DeCarlo, CCIM, CPM, CRE

As the intermediary between property owners and tenants, property managers have a duty to be fair to both.

However, property managers also have certain responsibilities to owners by nature of their management contract. One such responsibility is to diminish the risk of lawsuits against the owner. To avoid lawsuits, property managers must recognize where risks exist and manage those risks.

At the same time, property managers should take steps to limit and control their own liability. This includes selecting the right insurance and insisting on a comprehensive management agreement. Property managers who are proactive about liability can protect themselves and owners.

Liability Defined
Property owners and managers are liable for accidents that occur on their properties if the injured person can prove that the owner or manager was negligent. According to tort law, negligence is conduct that violates an obligation to exercise reasonable care to prevent harm or injury to another person. Negligence typically is determined by comparing the behavior in question with the behavior of a hypothetical "reasonable, prudent person" in the same circumstances. If a reasonably prudent person would have detected unsafe conditions at a property and taken steps to correct them, a property owner or manager who did not do the same would be held liable for any resulting injuries.

To avoid charges of negligence, owners and managers should take reasonable steps to provide safe premises. The steps depend on the dangers that the public could be expected to encounter. For example, elevators and escalators must be maintained properly and common areas must be clean and free of hazards.

For public safety, the definition of premises may be extended to include nearby areas that tenants and the public assume to be under the owner’s control. This may mean that the property owner is responsible for the sidewalk in front of the property.

Property owners and managers also can be held responsible for tenants’ negligence. Commercial tenants have a considerable amount of control over leased premises. They can perform alterations to the property; construct entrances, stairways, or ramps; and even install elevators or escalators. If accidents occur as a result of a tenant’s negligence, owners or managers may be held responsible for damages.

One way property managers can avoid this risk is to include clauses relating to this type of liability in their commercial leases. For example, for a retail property with a single tenant and no common areas, the property manager may wish to assign responsibility for sidewalk safety to the tenant. A clause in the lease detailing those responsibilities would transfer risk to the tenant.

Another way to avoid being held responsible for a tenant’s negligence is to include an indemnification clause in the lease. Such a clause states that the tenant agrees to hold the property manager harmless in situations resulting from the tenant’s own negligence.

Risk Areas
In some instances, only the property owner may be held liable for accidents that occur on the property. These cases include dangerous situations such as construction or demolition work. Instances where property managers can avoid, control, or transfer risk include crime, discrimination, and environmental risks.

Crime. Property managers have a duty to protect the public, employees, and tenants from injury, including harm resulting from crimes on or near the property. Failure to take appropriate precautions against crime can raise significant legal liability.

For example, an employee of the owner or manager commits a crime that results in harm to a tenant, co-worker, or visitor. The owner may be held responsible if the employee committed the crime in the scope of employment — when an employee represents the employer or seems to represent the employer — or if the property owner or manager was negligent in hiring or supervising the employee.

In general, employers are held responsible for the actions that their employees commit in the scope of employment. This rule holds true when the employee’s actions are criminal, or when the actions are unauthorized or strictly forbidden by the employer due to express or implied warranty.

For example, a maintenance worker appears to have the authority to enter units in a multifamily building, even though such authority may not be granted in all cases. If the worker commits a crime while in a unit, the property owner and manager may be held liable because the worker was acting in the scope of employment. Owners and managers can show reasonable care through strict employee screening and hiring policies and procedures.

If an employee commits a violent crime at the workplace, property owners or managers can be held liable if the employee is a repeat offender and the employer either was negligent in hiring the employee or in supervising employees.

The costs of negligent hiring can be high; in some cases, plaintiffs have been awarded more than $1 million in damages for injuries sustained at commercial properties. In effect, the employer is responsible for exposing the public to a dangerous person if the employer knew, or should have known, that having the employee on the payroll created an unreasonable risk of predictable harm to other people.

To avoid liability, owners and managers carefully should screen prospective employees and check for criminal backgrounds. This is especially important if the employee will have access to people’s homes or property. Generally, the more sensitive a position is, the more important it is to perform an adequate background check.

Discrimination. Property managers also must comply with two federal laws: the Fair Housing Act and the Americans with Disabilities Act. These laws prohibit discrimination and address construction standards in commercial properties. Under the FHA, property owners cannot discriminate against tenants based on race, religion, color, gender, national origin, familial status, or disability. Property managers must obey these laws even if the owner gives written instructions to the contrary. Possible violations can occur in property advertisements and tenant screenings.

The ADA states that the owner and/or his agent must make reasonable modifications and accommodations to properties for the disabled. Modifications could include installing ramps and widening doors, while accommodations include designating handicapped parking spaces and using Braille signage.

The penalties for violating these laws — which include stiff fines and actual and punitive damages — can apply to property managers as well as owners (see "Understanding Equal-Access Requirements," CIRE, July/August 1999).

Environmental Risks. Property managers also should be aware of the risks related to environmentally impaired properties.

The Environmental Protection Agency has a program that makes individuals and companies take responsibility for the cleanup costs of contaminated sites. The program is governed by a legal theory known as absolute liability. Under this theory, a party is liable regardless of whether it is at fault; liability is based on a party’s past or present relationship to the contaminated site.

To protect themselves, property managers should put in writing a request that the owner conduct an environmental audit to include at least a phase 1 site assessment. If this assessment is conducted and no contamination is found, the owner may be considered an innocent purchaser and not be held liable if contamination is found later. The innocent-purchaser defense cannot be used unless reasonable diligence is exercised. Mere ignorance of toxic materials does not constitute a defense. Insurance is available, but expensive, for this type of exposure.

Insuring the Property
Insurance coverage transfers risk from the owner and manager to a third party. Property managers should review a property’s insurance policy when they come on board and at least annually thereafter. Managers also should establish a relationship with an experienced insurance broker who reviews the policy annually.

Many factors are important in the coverage. For instance, does the policy offer sufficient coverage? Should additional liability coverage be added? Is the deductible too high or low? Is coverage for loss of rent included?

Several different types of coverage are available to property owners.

Liability Insurance. Commercial general-liability insurance is third-party coverage. It reimburses property owners if they are responsible for compensating another’s losses.

However, the policy will not cover certain situations in which the property owner or manager asks someone else to take over liability — such as placing uninsured armed guards on the property — or in which the property owner voluntarily assumed responsibility before liability is established. Make sure that vendors offering services to the property have adequate insurance.

Liability insurance does not cover intentional wrongdoing such as arson or assault, but it usually covers negligence and strict liability issues.

If an incident occurs that might become the subject of a liability insurance claim, property owners and managers should not pay anyone without consulting their liability insurance company. Liability insurers have no duty to reimburse for voluntary payments made before liability is established.

Liability insurance is available in two versions: occurrence and claims made. The two policies differ in determining whether or not a potentially insurable event happened during the time period the policy was in force.

An occurrence policy covers events happening during a specific policy period, such as a calendar year. It does not matter when the claim is made. Most liability policies for properties are in the occurrence form.

A claims-made policy covers claims that are made during the policy term, no matter when the actual incident occurred. A "tail" or extended reporting period can be added to a claims-made policy at an extra cost. The tail covers claims that arose during the regular policy period but were not reported to the insurer or asserted against the insured party until the extension.

Claims-made policies are cheaper but less desirable due to coverage problems. In fact, some state insurance commissions have not approved the sale of claims-made commercial general-liability insurance in their state.

Liability insurance usually is included in a business package policy. These policies may offer other types of coverage, including the following.

All Peril, Special Form. This insurance includes fire and extended coverage, but certain losses usually are excluded, including floods, earthquakes, war, and wear and tear.

Package. A package policy covers two or more separate risks, such as property and liability, in the same policy.

Nonowned Auto. Nonowned auto insurance covers an employer’s liability for use of automobiles that it doesn’t own or lease for company business, but it doesn’t cover employees. For example, if an employee has a car accident while running a business-related errand and the damage exceeds his or her own insurance liability coverage, the nonowned auto coverage would protect the property owner and manager.

Co-Insurance. Under this insurance, the owner accepts part of the risk because the property is insured for less than its value. In many cases, 80 percent insurance is used.

Thus a 100 percent claim would pay only 80 percent and the owner would be responsible for the other 20 percent. However, this is true only with a total loss. As long as the building is insured to 80 percent of its value, the insurer would pay 100 percent of a partial loss subject to policy limits.

Named Peril. This insurance covers direct physical loss caused by a particular peril that has been named for coverage, such as hail, lightning, or water damage.

Difference in Conditions. Businesses can use difference-in-conditions coverage to add additional perils to special-form and named-peril policies or to turn a named-peril policy into a special-form policy. It can address specific gaps in coverage such as floods or earthquakes.

Protection for the Manager
Many property owners feel that when they hire a property management company, they are paying for expertise. They further conclude that property managers should shield owners from any liability that may arise from management activities. In reality, property managers usually aren’t paid enough to cover this amount of risk exposure.

But management companies can limit and control their liability. Most importantly, property management companies should be incorporated. This will limit stockholders’ liability even if the company has just two or three people.

In addition, a well-written, comprehensive management agreement also can help managers protect themselves. Property managers should insist that the agreement include an "additionally insured" clause, which adds the manager to the owner’s insurance policy.

For example, if a customer falls in a shopping center parking lot and blames a broken concrete bumper guard, the insurance company would defend both the owner and the manager if the management agreement had an additionally insured clause. In other words, this clause keeps the owner, property management company, and insurance company on the same side of a lawsuit. If no clause exists, the insurance company could say that the property manager is to blame and sue the management company for not maintaining the center.

This clause should be non-negotiable for the management company unless the owner is willing to pay for a special policy to cover the manager. Even with the clause in the management agreement, property managers should notify the insurance company and change the policy to reflect the addition.

Another clause to consider in the management agreement, a "hold-harmless" clause, indemnifies the property owner and the management company against liability for actions of the other party.

For example, if the management company did repairs poorly and a tenant was injured, a hold-harmless clause may shield the property owner from liability. On the other hand, if the management company requested funds in writing to repair an unsafe condition and the owner refused to supply the necessary funds, the manager may be shielded.

The management contract could contain a cap-on-exposure clause that states the management company will be responsible for damages caused by misconduct or negligence up to the dollar amount of compensation earned in the last year.

Property managers also can take precautions when dealing with outside workers. For example, all contractors hired to work on the property should submit certificates of insurance. Whenever possible, outside service contracts — such as security or janitorial — should be between the owner and the outside company. Property managers should be listed only as the agent. In addition, the property manager’s employees and outside vendors should be covered under workers’ compensation insurance before being allowed on the property.

Property managers periodically should conduct physical inspections to find areas that may cause injury to tenants or customers. For example, one strip center’s parking lot had several burned-out light bulbs resulting in a dark area. A car hit a person, and a suit against the owner and manager resulted due to negligence in not replacing the burned-out light bulbs.

This lawsuit could have been avoided by conducting an evening inspection. Another reliable method for maintaining the grounds is to inspect the shopping center monthly and use an electrical company’s light replacement service.

By being aware of where risks exist and properly controlling them, property managers can reduce the number of lawsuits filed against themselves and property owners.

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Joseph W. DeCarlo, CCIM, CPM, CRE, is managing partner of JD Property Management in Costa Mesa, Calif. Contact him at (714) 751-2787 or jdemail@jdproperty.com.

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