Properly Vetting a HOA’s Vendors & their Contracts

One of the primary purposes of any homeowners association (HOA) is to manage, maintain and repair the common areas throughout the HOA’s development. This naturally requires the HOA to contract with third-party vendors to furnish goods or services to the HOA (e.g., landscaping, construction, remediation, painting, plumbing, etc.). We are consistently surprised at how some Board members and management professionals fail to recognize how the HOA’s use of improperly vetted vendors can result in potentially significant legal and financial implications for the HOA, among other problems. Therefore, the need to properly vet vendors—and their contracts—is critical before the Board executes any vendor’s contract on behalf of the HOA.

We previously drafted a library article entitled “HOA Concerns in Contracting with Vendors” that provides some guidance as to how a HOA’s Board and Managing Agent can protect the interests of the HOA and its members. This blog post touches on some of the information contained in that article, and sets forth some recommended procedures which should be utilized before any vendor begins work at the HOA’s development.

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(1) Review Governing Document Requirements: The governing documents for a HOA (e.g., the HOA’s Bylaws or CC&Rs) often contain provisions which limit the Board’s authority to execute vendor contracts. Those provisions may require vendors to possess certain minimum levels of insurance, and also prohibit vendor contracts with terms in excess of one (1) year.

(2) Confirm Licenses: The HOA must confirm that the vendor is properly licensed in the state of California. Check vendor licensing with applicable state licensing agencies (e.g., Contractors State License Board) to ensure the vendor presently retains a “current” and/or “active” status. Check Secretary of State web site to confirm the vendor is in good standing with the state.

(3) Insurance: All vendors MUST have insurance. Confirm that the vendor is properly insured with minimum levels of insurance. The industry standard for comprehensive general liability coverage is at least $1M per occurrence.

“Additional Insured” on the Vendor’s Insurance Policies: The HOA should also confirm that the vendor identifies the Association and its management company as additional insured on the vendor’s insurance policies.

No Problematic Exclusions: Confirm that the vendor’s insurance policy covers the vendor’s work within the Association and does not include a condominium, townhouse, tract development, or other related exclusion which may act to prevent the vendor’s insurance policy from covering damage, claims, injuries or liabilities arising from that vendor’s performance under the contract.

Certificates of Insurance: Verify that the vendor has complied with the Association’s insurance requirements.  Unfortunately, vendor representations do not always match reality.  To minimize that possibility, the HOA should request the vendor’s certificate of insurance/proof of information and insurance declaration page to affirm the nature and extent of the vendor’s insurance coverage.  A review of those materials may assist the HOA with respect to confirming the validity of the insurance policy (the insurance company may be contacted by Management or the Board to verify that the vendor’s policy is valid, current, and covers the work to be done); the term of that policy (check the effective date on the policy and do not let the vendor begin work before that date); the existence of possible exclusions; and the vendor’s proper name.

In our experience, we have found that some vendors operate under multiple names or under the name of another person or entity. The HOA may not be covered under a vendor’s insurance policy if the name on the vendor’s contract is not identical to the name set forth on the insurance materials provided by the vendor to the HOA. The HOA should confirm that the vendor is using the same name in all contexts (i.e. vendor contract; insurance paperwork; state licensure; and Secretary of State). A consultation with the HOA’s insurance professional is recommended should the Board or Management require assistance with respect to the foregoing matters.

(4) Contract Reviewed by HOA’s Legal Counsel**:  Most importantly, request a legal evaluation of the proposed vendor contract by a properly licensed California attorney specializing in the representation of HOAs and common interest developments. That evaluation should be performed regardless of the nature or extent of goods and/or services to be provided therein. Occasionally, HOAs will forego a legal review because it is believed that the services/goods to be provided are nominal and therefore do not justify the expense of utilizing attorney assistance. However, that thought process could expose the HOA to significant liability if it is discovered that the vendor is not contractually obligated to possess liability insurance and/or defend and indemnify (reimburse) the HOA and its Managing Agent, among other essential protections.

For example, assume the HOA enters into a vendor contract for services that total $5,000.00. That vendor, during the scope of its work for the HOA, inadvertently causes catastrophic injury to a third party (yes, we have seen this happen). Upon receipt of a claim from an injured party, it is discovered that the vendor contract did not require the vendor to maintain adequate levels of insurance, if any. Under that circumstance, the HOA could be exposed to significant financial liability—and the Board could be targeted for failing to exercise its prudent business judgment by affirming sufficient levels of insurance before execution of the vendor’s contract.

A legal evaluation is also critical with respect to understanding a contract’s proposed indemnification provisions (i.e. duty to defend and indemnify), which tend to be overlooked as they can be difficult to understand. Occasionally, those provisions are one-sided because they attempt to shift the risk and liability of the contract to the HOA. Review of the indemnification language within a vendor contract by a qualified attorney can ensure that the HOA and Management are protected.

In addition to the insurance and indemnity provisions, problems may arise with respect to common provisions that vendor’s utilize in their standard contracts which pertain to work timelines, warranties, methods of payment, how contractual breaches are to be resolved, among others. HOA Boards and management professionals should remember that any vendor’s contract is not drafted to protect the HOA; it is drafted to protect the vendor. Problems that arise in the wake of troubled vendor relationships or defective work are far easier and cheaper to resolve when the vendor’s contract contains the appropriate protections for the HOA. The importance of having the HOA’s attorney review the vendor’s contract before it is signed cannot be understated.

Blog post authored by TLG attorney, Kumar S. Raja.