How To Interpret Indemnification Clauses As Well As Bylaws Provisions
Those who serve on condominium or community association boards must have indemnification with respect to lawsuits filed against them personally related to their board service. Most association bylaws contain provisions that provide such protections. However, most of those provisions are almost universally drafted as shields for board members, not as a vehicle for recovering attorney’s fees a board member incurs in a lawsuit they file against the board.
Such provisions were the subject of a recent New Jersey Supreme Court decision, Patrick Boyle v. Carol Huff, et al. In Boyle, Ansell.Law attorneys represented certain members of Ocean Club Condominium’s board, each of whom had been sued by Patrick Boyle. Ansell.Law attorneys also represented Ocean Club itself against Boyle’s attempt to have Ocean Club reimburse the attorney’s fees he incurred to secure reinstatement to the board. The Court’s ruling in Boyle v. Huff saved the condominium from a judgment that could have exceeded $750,000.00. The ruling also highlighted how indemnification-related provisions should be both amended and interpreted.
Case Background
Patrick Boyle, a unit owner of the Ocean Club Condominium in Atlantic City, was removed from the condominium board by the board’s other members, relying on new government regulations. Boyle successfully challenged his removal in court. He also sought indemnification for his attorney’s fees and costs incurred in order to make that challenge, relying upon the indemnification provision in the association’s bylaws.
That provision reads, in relevant part, as follows:
The Trustees and officers shall not be liable to the Unit Owners for any mistake of judgment, negligence or otherwise, except for their own individual willful misconduct or bad faith. The Association shall indemnify every Trustee and officer. . . against all loss, costs and expenses, including counsel fees, reasonably incurred by him in connection with any action, suit, or proceeding to which he may be a party by reason of his being or having been a Trustee or officer of the Association except as to matters as to which he shall be finally adjudged in such action, suit or proceeding to be liable for willful misconduct or bad faith.
The trial court interpreted that provision as allowing for Boyle’s recovery even though his fees and costs were incurred solely because of a lawsuit that he, himself, commenced and pursued. The appellate court affirmed, and on behalf of the association, Ansell.Law sought review by New Jersey’s Supreme Court.
Ambiguous Indemnity Provisions Exclude Coverage for First-Party Claims
The fundamental issue before the court was whether an indemnification provision provides for the recovery of attorneys’ fees in a first-party claim, such as here, where Boyle, the party to be indemnified, filed a claim against Ocean Club, the indemnifying party – as opposed to a lawsuit filed by a third party, like a unit owner suing Boyle agreeing to indemnify — as opposed to a claim involving a third party, where a unit owner sues Boyle with respect to his role as an Ocean Club trustee.
In Justice Noriega’s unanimous decision, the Court reversed the appellate court. It held that the indemnification provision at issue was ambiguous as to first-party claims. Under rules of contract construction, ambiguities in indemnification provisions must be strictly construed against the indemnitee (Boyle). Accordingly, the Court held that “Contrary to the conclusion reached by the Appellate Division, we cannot presume first-party coverage in the absence of language precluding it; rather, there must be affirmative indicia of the intent to indemnify to overcome the presumption that parties will each pay their own way.”
The Court concluded that “indemnification may also apply to first-party claims if that is the clear intent of the parties as expressed by their deliberate word choices when drafting contracts.” (emphasis added) It stated further that “Those word choices will govern whether an indemnification provision supports a first-or third-party claim for damages.”
Key Takeaways for Community Association Boards
- Strict Construction Against Indemnitee: Ambiguous indemnification clauses will be construed strictly against the party seeking indemnification. This means that an indemnification clause will cover first-party claims only if the provision explicitly states so.
- Importance of Clear Language: An indemnification provision must be clear and explicit. Any association seeking to allow board members to enjoy indemnification vis-à-vis lawsuits they start must amend their bylaws with specific language.
- Limitation to Third-Party Claims: Absent explicit language otherwise, an indemnification clause will likely be limited to third-party claims, not disputes between trustees and the association itself. This aligns with the traditional view that indemnification is typically about third-party actions.
The victory obtained by Ansell.Law in this case highlights the importance of one’s bylaws’ specific text, especially the provisions forced upon an association by a developer via that association’s original bylaws (as was the case here). Associations should work with counsel to ensure language clearly reflects a community’s needs and expectations.
For more information or assistance in reviewing and updating your association’s bylaws, contact Nicole D. Miller in the firm’s Community Association Law practice group.
