It’s one of everyone’s favorite places in the community – the clubhouse. It’s used by the association for residents to enjoy an afternoon mah-jongg game, cards, community-organized special events and more. These spaces are usually bright and airy, spacious, well-decorated and set up to host events large and small. For this reason, some associations decide to rent their clubhouses out for weddings and other private functions. However, associations need to be aware of the potential liability exposure opened up by doing this. We spoke with Robert Travis of Community Association Underwriters of America (CAU) in Newtown, Pennsylvania, who explained that liability issues are complex when a community clubhouse is rented out to a resident or third-party. He gave us some tips to prevent clubhouse rental engagements from ending on a sour note.
So, what are the liabilities that associations incur when leasing their clubhouses to residents for parties or private functions? “The first and the most obvious things are going to be general liability exposures. Those are for the most part, but not limited to, bodily injury claims that people are going to make against the association if they arrive and somehow they are hurt, injured or something happens to them while they’re attending a special event. That’s probably the biggest item associations and association insurance companies need to be concerned with,” he said.
Travis gave a few examples. “If someone has a birthday party in the middle of January in upstate New York, and as I’m walking to the parking lot I slip and fall going onto the pavement. More than likely, if I’m hurt and have to go to the hospital, I’m probably going to include the community association in my claim or lawsuit. If I go into an event and there’s dancing at the party and I fall down on the dance floor, and the result of me falling is that I need a new knee, more than likely my attorney is going to include the community association in the claim or lawsuit. If I get sick on the food at one of these events, even though the association might have had nothing to do with the serving of the food, I could turn around and sue or make a claim against the association, saying ‘you shouldn’t be allowing renters to choose any kind of caterer they want. You should have an approved catering list,’” he said.
According to Travis, these actions may not result in a judgement. “I’m not saying these are going to be successful claims or lawsuits,” he said. “But a claim or lawsuit, whether it’s successful or not, equates to exposure including defense cost.”
The problem for the association seems to stem from the fact that an attorney for the claimant is going to at least initially approach each case like it is an association-sponsored event. For example, if someone is going to the association’s New Year’s Eve party and slips and falls in the parking lot, they could very possibly sue or make a claim against the association. “The attorneys are at least going to initially treat these events that are held in the clubhouse by others as an association function. And the association is going to have all that exposure to manage,” said Travis.
This is the tip of the iceberg, and Travis explained that things can go downhill quickly if paperwork is not in order before the event. “If the association allows someone to use their clubhouse for a party, and they did not get a hold harmless/indemnification agreement signed, and the party the association rented the club to has no money and no insurance, guess who’s going to be primarily in there providing a defense and paying claims? The association insurance carrier is,” he said.
Travis elaborated that it’s not as simple as claimants going after the defendant with the most to lose. “That’s too easy to say that they go after the deepest pockets,” he said. “The association is always going to be named because the attorneys are smart enough to know that it’s a pocket that is going to have some money in it. There may not be money in the pocket of the homeowner renting the clubhouse.”
Don’t think that the liability is mitigated if the association does not charge a fee to rent the clubhouse either. “If you’re in court defending yourself and you’re trying to make it clear to the judge that this was an event being controlled by the unit owner and not the community association, it may contribute a small amount. At the end of the day, a smart claimant attorney is going to argue that it is the association’s property. They should be properly vetting who they rent the clubhouse to. I don’t think collecting a fee or not stops that train from leaving the station,” he said.
But Travis does think that charging administrative fees is a good practice, because it can mitigate regular wear and tear on the property. “After enough birthday parties and weddings things do start to wear out as opposed to being damaged,” he said. But there are two sides to every coin. “If you collect a fee for wear and tear, you have, to a small degree, limited your ability to go after people because you’ve admitted that there is going to be wear and tear.”
Travis recommended associations avoid renting the clubhouse to third parties, that is, those who are non-residents or non-owners. “Use the risk management technique of avoidance,” he said. “The assumption here is that outside parties make a more uncontrollable situation, because you’re going to be dealing with a fair amount of outsiders coming in. They stretch the liability line,” he said.
So how can how can associations safeguard themselves from a lawsuit if they do decide to allow groups (residents or not) to rent their space? Travis took us through what he thought was a correctly done clubhouse rental contract — coincidentally for his own daughter’s wedding. “Number one, the association sat me down and reviewed the association’s rules and regulations and the dos and don’ts.” Then they gave Travis the contract to take home and look over. “The most important thing in that contract was clear hold harmless/indemnification wording.” Travis explained the term further. “When I signed that contract, I was saying that if anything happens to me and mine while we’re here we will bring no lawsuit back against the association. If the association gets dragged into a lawsuit because of the exposure my family and I brought to your clubhouse on this day I will indemnify the community association,” he explained.
Further, the association needs to ensure the renters will be able to pay should a claim evolve. “The association has to make sure that the renters have the financial resources to back up the promise of the indemnification,” he said. He explained that his association told him he needed at least $500,000 in liability coverage. “When I produced evidence that I had active and good personal insurance, I was able to proceed,” he said.
If $500,000 seems like a lot, Travis said that the trend is only going up. “There are a lot of homeowner associations now asking for $1 million. The average person usually has about $300,000 to $500,000 Liability Coverage on their homeowner’s policy. So they’re in the position where they may have to increase their coverage, buy an umbrella policy, or buy a special events policy,” he said.
The special events policy is just what it sounds like — a policy just for a specific calendar day. According to Travis, they are becoming increasingly more popular. He said that they also carry a special perk other policies do not, which is one reason why they are becoming more of the norm. “One of the nice things about the special events policy is that I can get special language written into the policy adding the association as an additional insured. Most personal lines insurers are not willing to add an association as an additional insured.”
Most special events include at least one toast, so how does alcohol being served at a clubhouse event impact the rental situation? “That’s more exposure,” he said. “Now there’s liquor liability involved. The association needs an assurance from the carrier that coverage is coming from that policy to provide liquor law liability while serving liquor at the event. This is another area that is making special event policies more popular. A lot of homeowners’ carriers are not willing to have liquor liability coverage on a homeowner’s policy extended to an event. You can get liquor law liabilities added onto special event policies with much more ease,” he said.
Travis elaborated that next to bodily injury, the next thing that people are most commonly faced with when renting out the association’s clubhouse is the liquor law liability exposure. “It’s the number two thing that the association’s insurance carrier is most concerned with,” said Travis.
How can associations protect themselves from actual damage to the property or the clubhouse that may occur as a result of one of these parties or functions? Travis again used the wedding he hosted as an example. “We brought in a DJ. The DJ had a stage he needed to set up, including a photo booth. So if he damaged the association’s property, the association would come to me and my indemnity promise I made in my contract with them.” The indemnification doesn’t stop at the bodily injury — it covers all damage
But wouldn’t the association have a claim against the DJ? “Not as clear as the claim against me,” said Travis. “Because they don’t have a contract with the DJ. Now I could go to the DJ and say ‘you damaged the property and you need to pay.’ Which could end up as an agreement to pay or end up as lawsuit depending on my contract with the DJ.” This is all a lot easier to address with a party you have a contract with.
So what are best practices for renting out the clubhouse? “One thing that is not done enough, is before you even sign anything, have a sit down to go over regulations and the dos and don’ts. I think this is immensely important. Then when you lay the contract in front of them, you confirm that you’ve gone over the rules and regulations of renting the clubhouse.”
The second thing that’s important, Travis said, is the contract itself. “There needs to be a hold harmless and indemnification agreement in there. Hold harmless and indemnification are two separate things,” he said. Hold harmless means the renter won’t sue the association, and the indemnification means that the renter will make good on any damage caused by their rental.
The third part, Travis said, is to ensure the party you’re going into agreement with has the financial resources via their insurance to back you up. Travis also suggested looking at these three points. “You have to check that are there proper limits. Is there proper coverage, especially with liquor liability? And does the association want to be added as an additional insured on the policy?”
Finally, as lenders do with private mortgage insurance for a home loan, the association can opt to go out and get the special events policy themselves. “Sometimes the associations go to that extent to make sure that the policy is there. It’s not a bad idea. Because you are guaranteeing a policy is there, you’re getting the limits you want, and you’re guaranteeing that the association is being added as additional insured,” he said. Of course the cost of this policy is passed to the renter who is also named on the policy.