Additional Named Insured

A board member contacts his insurance broker’s office more than a bit peeved because the president of their new management company has requested the management company be named as an “additional insured” on the Association’s general liability and D & O (directors and officers) policies.

“Why should we have to do this?” the board member begins by saying.  “Why do we have to insure these guys?  They are the professionals.   Shouldn’t they be insuring us?”  

Moreover, as if to reinforce his position, the board member emphatically adds, “Look, all our other vendors are required to name the Association as an ‘additional insured,’ not the other way around.”  

Of course, the board member has a point, sort of — except the management company is not a vendor. The management company is an agent of the Association.

The term “agent” isn’t used casually here; established under the guidelines of the “law of agency” (applicable in California and most states), there are two parties in an agency relationship: the “principal” and the “agent.”  When an agency relationship is established, the “agent” is contractually authorized to act on behalf of another (the “principal”) and represent the principal’s interest.

As a result, the management company is not functioning independently but instead is working at the specific direction of the Association’s board.  The CC&Rs and by-laws saddle the board, solely, with the governing responsibilities — the board of directors has chosen to delegate a portion of those responsibilities to a management company in exchange for a fee.

Since the Association has placed the management agent in a position of trust and confidence, the manager is said to have a fiduciary duty. He or she is required to act in good faith and in the best interests of the Association.  Being a fiduciary also requires the management agent to place the interests of the Association ahead of his/her own. Nevertheless, the management agent does not have the right to substitute its judgment for that of the principal. The principal retains all decision-making authority and bears ultimate responsibility. As a result, the agent is more like a custodian of the Association’s power, not a substitute for the board’s authority.

So the management agent is “carrying the water” for the board and yet frequently when a condominium association is sued, the management company is sued too. For that specific reason, management agreements require that the Association indemnify and hold the manager harmless for most actions.   When the Association names the management company as an “additional insured” on the general liability and D&O liability policies they are, in effect, “funding” the aforementioned obligation the board has in the management agreement to protect the manager.

The best condominium general liability policies will automatically broaden the definition of “insured” to include the “real estate manager.”  With D&O policies, however, it may be a bit trickier. Boards should be encouraged to check with their insurance professional to determine if their particular D&O policy can be amended to extend coverage to the management agent.  The additional cost, if any, is minimal — and yet this coverage provision is critically important.

Without the coverage, the manager can still look to the Association to be reimbursed for the defense costs and to be indemnified for a resulting judgment.   Without the “additional insured” provision, the Association will have to pay the damages out of their operating expenses instead of looking to an insurance company to carry the burden of these responsibilities.   If sufficient funds are not available, the board may have no other alternative but to special assess individual residents in the community for any shortfall – and that, too, may start a round of even more disputes.