Indemnification is a contractual or statutory obligation for one party to compensate or defend another party for its liability or losses. Homeowners associations and condominium associations may encounter indemnification in their relationship with their directors, officers, and management companies.
Homeowners Associations – Permissive Under the Michigan Nonprofit Corporation Act
The Michigan Nonprofit Corporation Act, beginning with MCL 450.2561, provides that a corporation has the power to indemnify a person who is sued, charged, cited, or investigated. The person may be a director, officer, employee, volunteer, or agent of the corporation. The corporation may reimburse attorneys fees, judgments, penalties, fines, or settlement payments. The person must have acted in good faith and with the belief that their action was in the best interests of the corporation and legal. MCL 450.2562 imposes limits if the person was found liable to the corporation. MCL 450.2563 describes providing additional protections for volunteers (and homeowners association directors and officers are normally volunteers). MCL 450.2564a establishes procedures for determining whether indemnification is proper in a particular case and voting to authorize it. MCL 450.2564b establishes procedures for paying an indemnified person’s expenses in advance, as opposed to reimbursing them. MCL 450.2564c allows a person to apply to the court for reimbursement. MCL 450.2565 provides that indemnification cannot result in a windfall to the person, that a right to indemnification applies after the person leaves their position and applies to their estates, and that the corporation cannot eliminate a person’s right to indemnification by changing the articles of incorporation or bylaws retroactively.
A homeowners association may have the duty to indemnify written in its declaration of covenants, conditions, and restrictions, articles of incorporation, or bylaws. However, the association does not need authorization in its own documents to indemnify its people. The Nonprofit Corporation Act authorizes a corporation to indemnify a person unless the articles of incorporation or bylaws prohibit it.
Condominium Associations – Mandatory Under the Michigan Condominium Act
The Michigan Condominium Act, MCL 559.154(6) makes indemnification mandatory for condominium associations. The statutory indemnification applies only to the board of directors. The section requires 10 days’ notice to the co-owners before the association pays indemnification. The section specifically excludes willful and wanton misconduct and gross negligence.
In addition to the mandatory provisions of the Condominium Act, a condominium association may also voluntarily undertake all the permissive provisions of the Nonprofit Corporation Act.
Management Companies – Contractual Under Management Agreements
Professional management companies uniformly require community associations to indemnify the company and its employees for actions taken as agents of the association. The management agreement will include this as a standard term. Associations must recognize that actions of the management company will be deemed actions of the association. If a co-owner, contractor, or other party sues the management company, then the management company will call on the association to defend it and pay a judgment or fine.
Insurance
The Nonprofit Corporation Act, MCL 450.2567, authorizes a corporation to purchase insurance to cover its indemnification responsibilities. This is commonly known as directors and officers insurance (D&O). We recommend that all community associations carry this insurance in addition to their hazard and liability insurance. For associations with management companies, we recommend that the association include the management company as an additional named insured.
We Can Help
Do you have questions about indemnification of directors, officers, employees, volunteers, agents, or management companies? We have years of experience with these matters and other issues facing condominiums and homeowners associations. Please reach out to us at (248) 349-6203 or email us using the contact form.
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