Risk Management for Special Events

One of the more important risk management concerns for my community association clients is the management of potential legal liability risks arising from special events.  Whether an association hosts a special event itself or permits its members to use its facilities to host their own special events, there are a number of risk exposures to be considered and addressed in order to protect the event participants and the association.  Stephanie Dufour’s blog post, Safety Considerations for Your “SPECIAL” Day,  is an excellent overview of the risk management issues to be considered.

In addition to Stephanie’s excellent post, I offer the following, addressed to the risk management needs of the venue owner (typically, in my case, a community association):

• In her 2nd point, Stephanie points out important considerations for the event sponsor regarding location selection.  For the property owner offering its facilities for use (a community association which permits use of its clubhouse for private parties, for example), a similar analysis is important.  The type of use and number of participants for which your facility is safely suited should be carefully considered, and described in your lease, permit or use agreement.  It should go without saying (but I’ll say it anyway ’cause that’s what we lawyer types so often do), that you should in fact have a written agreement for a member’s (or other third party’s) use of your facilities, and that agreement should cover the scope of permitted use, indemnity obligations, insurance requirements and liability waivers.  
• In her 3rd point, regarding food service, Stephanie notes the importance of proper food preparation and handling.  From the property owner’s perspective, if food will be sold by vendors at an event held at your facilities (an Octoberfest, for example), your written agreement for that event should include appropriate requirements pertaining to any government-required licensing or food handling procedures.
• Stephanie’s 4th point addresses risk management issues for events where alcohol will be served.  Whether the facility owner is hosting such an event itself or is permitting another party to host the event, Stephanie’s suggestions regarding procedures to institute to ensure the responsible service of alcohol are important.  In addition, liquor liability insurance coverage should be obtained (for a community association, this would typically be done via appropriate endorsement to the association’s commercial general liability – CGL – insurance policy) and, if alcohol is to be served by a third party host, by requiring appropriate liquor liability insurance coverage to be provided by the host via the property use agreement.  The potential need for a temporary liquor license should also be considered.  For example, a wine tasting event may require a one day liquor license.  Information regarding liquor licenses for special events in California can be found here (scroll to the 3rd page). 
• I cannot endorse strongly enough Stephanie’s comments concerning vendors/collaborative events (Stephanie’s 8th point).  I would add only one thing to Stephanie’s comments – if there will be vendors (booths, entertainment, food, etc.) at your special event, which party will assume liability risks and provide insurance coverage should not only be discussed, but must be carefully memorialized in writing in a binding legal document. 
• Regarding waivers (Stephanie’s 9th point), keep in mind that the law regarding enforceable terms, scope and format differs from jurisdiction to jurisdiction.  In addition, there are specific legal issues pertaining to waiver and release agreements pertaining to minors.  Do not rely on a form document found on the internet.  Seek the assistance of an attorney licensed in your jurisdiction with experience addressing these issues.
• Similarly, laws vary from state to state regarding the meaning, scope and enforceability of indemnity agreements.  You need an indemnification clause in any use agreement granting a third party permission to use your property; again, seek the assistance of an attorney licensed in your jurisdiction with experience addressing these issues to prepare your agreement, to ensure that indemnity obligations are addressed in a manner consistent with the law in your jurisdiction.
• Further to Stephanie’s 10th point, regarding photo/media releases, another issue to consider is how to protect your organization against potential breach/violation of copyright, license and/or publicity rights and similar issues.  One scenario in which a community association may be vulnerable to such claims is when the association hosts outdoor concerts.  Your contracts with live entertainment vendors must be written in such a way as to protect the association against such claims, particularly since such claims may not be covered by the association’s own insurance policies.  It is also important to determine whether there is a sound ordinance controlling the allowable decibel levels of the music, and be sure to address such rules in the vendor’s contract as well.  In my experience, such issues are rarely addressed in the entertainment vendor’s own contract (and when they are the issues are not addressed in a way which protects the association), so I would further add the recommendation that you have the association’s legal counsel review and negotiate the terms of that vendor’s contract as necessary.

Furthermore, a rose by any other name . . .

. . . may also bring a visit from the tax man (or woman).  Or the labor board.  Or a process server.

My previous “Rose By Any Other Name” posts have been about (a) misnamed/unnamed insureds and (b) contracts (verbal vs. written).  This post is about independent contractors who are really employees (at least, as far as the federal and state tax authorities are concerned), and other “thorny” employee classification issues.

At this time of rising State and Federal deficits, there seems to be an increased scrutiny of how small and medium sized businesses are classifying their workers.  In addition, attorneys who represent workers before the Labor Board seem to be experiencing an uptick in business, commensurate with rising unemployment.  This is strictly based upon anecdotal evidence (I’m receiving more calls from business owners on the receiving end of employee pay and benefit claims), but my suspicion is that such claims, as well as tax enforcement proceedings, are on the rise and will continue along that trend for some time to come. 

Proper classification of workers as independent contractors or employees (and if employees, as temporary, part-time or full-time and as exempt or non-exempt) can mean the difference between financial survival or failure, particularly for a small business, and small business owners, who do not have their own HR staff, are often the least equipped to make these determinations.  Failure to properly classify employees can leave a small business vulnerable to claims for legally mandated employee benefits such as workers’ compensation and unemployment benefits, for discretionary benefits such as health insurance and paid time off, and for back overtime pay.  Properly classifying employees is particularly difficult for small businesses with fluctuating staffing needs, since it is easy for a busy small business owner to forget to reclassify a temporary employee who becomes permanent, or a part-time employee who becomes full-time.   

The solution?  Well, my instinct as a lawyer is this – put it in writing, and keep it in writing.  Even temporary workers could be given something in writing that makes it clear that their status is temporary, with an approximate time limit.  Then calendar the end of that time limit, as a reminder to revisit the issue of how that worker should continue to be classified.  And even small businesses should have a written personnel policy to point to when your employee classifications (or other employment practices) are questioned.       

More dangerous than a misclassification of an employee is the improper classification of a worker as an independent contractor.  Such a misclassification leaves the employer vulnerable to back payroll taxes and penalties as well, which can be substantial enough to put you out of business.  And, whether a worker should be classified as an independent contractor or as an employee can be a particularly tricky determination for a small business owner to make, since the criteria for independent contractor status used by the IRS, the federal Department of Labor and state labor departments don’t all impose exactly the same standards. and are not “exact” but, rather, are open to some interpretation.  Even large companies, such as Microsoft and Federal Express, have been the subject of expensive enforcement actions alleging misclassification of workers.  The new targets for such actions appear to be small businesses, and I’m sure that has alot to do with the fact that they are the most likely to be mistakenly misclassifying their staff.    

The solution?  Again, my instinct is to put it in writing.  As far as I am concerned, a written contract is absolutely essential.  Even with a written contract, however, treating the independent contractor as an employee may indeed make the contractor an employee, whether that’s what you intended or not.  For an explanation of how the IRS analyzes these issues, see IRS Publication 15A.   

Finally, years ago one of my community association clients learned the hard way that even with no employees it still needed workers compensation insurance.  That is because California’s Labor Code provides that one who hires a worker to perform work requiring a license is that worker’s employer if it turns out that the worker doesn’t have the required license.  (It may shock you to hear that sometimes unlicensed contractors lie about their unlicensed status and either provide a fraudulent contractor’s license number or “borrow” another contractor’s license number.)  The association hired an unlicensed contractor, one of the contractor’s employees was injured, and the association was on the hook, with no workers compensation insurance and with a workers compensation exclusion in its commercial general liability insurance policy.  To get a better feel for how California’s Workers’ Compensation Appeals Board analyzes the issue of employment status, take a look here. 

The solution to this problem?  Legal liability risk management, plain and simple.  A good insurance broker and an attorney to prepare the association’s own contracts, requiring contractors to maintain appropriate licenses and insurance coverage, would have been a big help.

Solar Energy for Community Associations – Contract Formation and Risk Management

It is important for any community association considering pursuing a solar lease or power purchase agreement (PPA) to budget for the cost of two important preliminary matters, a feasibility analysis and legal costs.  Skimping on either could ensure the ultimate failure of your efforts, costing the association considerably more money in the long run. 

With respect to a feasibility analysis, I am not talking about the relatively simple analysis performed by single family residential solar installers, comparing a home’s annual electric power use and applicable tariff rates to the anticipated cost and rate reductions of a solar system.  A community association’s solar power needs will be the equivalent of a larger scale commercial solar system, and the cost/benefit analysis for such a system is considerably more complex.  Investors (the prospective system owner for the lease or PPA) will want to see a detailed feasibility analysis in order to determine whether the numbers work for them from an investment standpoint.  Project scale and net metering challenges must be addressed in such a study, so that it can then be used as the basis for the financial terms of a proposed PPA.  Typically, a project which cannot achieve close to a zero balance net metering result is not economically feasible.  As the cost of solar energy system installations drops, and with the passage of AB 920 requiring utilities to roll over or buy surplus production credits effective January 1, 2011, investors will likely be placing less emphasis on achieving zero balance and more emphasis on tax incentives and other benefits of the investment, so exact scaling should become a less critical factor, but investors will still be unwilling to fund a system the feasibility of which has not been determined by a qualified professional.  Unfortunately, unlike our neighbors in Canada, there is currently no funding available to help subsidize the cost of a multi-unit residential solar project feasibility study (with the exception of affordable housing projects).  Nevertheless, it may be necessary for an association to incur the cost in order to attract investors.  A large scale solar installer may be willing to share in the cost, however, and some large scale installers have their own in-house professional engineering staff to perform detailed feasibility studies. 

When it comes to negotiating and drafting the lease or PPA itself, board members must understand and appreciate that, unlike the vendor, maintenance and repair contracts they are accustomed to, a solar power lease or PPA will by no means be a “one size fits all” or “industry standard” contract.  The array of issues which must be addressed, just a few of which I will touch on below, and the very long term nature of the agreement, will require careful negotiation and drafting.  Missing or inadequate contract terms will be fertile ground for future disputes between the parties, undermining the viability of the parties’ long term relationship.  Any association interested in pursuing solar power should, therefore, budget for the necessary legal costs associated with the formation of a complex legal agreement such as a PPA. 

The very long contract duration will also require the careful selection of contracting “partners” (the system installer and owner), and the maintenance of  a cooperative and collaborative relationship over the term of the contract.  Because of the length of the contract, due diligence regarding the financial health and long term viability of the system owner will also be vital.

With respect to the terms of the agreement itself, the scope and complexity of a PPA is much more akin to the construction agreements for a new development than to any contract the board of directors will have previously entered.  Installation, maintenance and operation risks will need to be identified, managed and insured.  In addition, the agreement will have to address such financial issues as buy out options and costs at the end of the contract term, warranty coverage and costs, system performance and monitoring (and how attendant risks are allocated between the parties) and dispute resolution mechanisms.  Liability risks and insurance coverage (both property and liability) must also be addressed, and in a way which accommodates the fact that risk exposures for solar power projects and, therefore, the commercial insurance market to cover such exposures, is evolving, and will likely continue to evolve over the term of the agreement.  The insurance issues in particular will need to be carefully considered since, while property and liability insurance coverage for owners, maintainers and users of solar power systems has become increasingly available since insurers first began issuing “green” commercial insurance endorsements in 2006, such coverage is often provided via “manuscript” as opposed to standard form policy provisions, and not all insurance brokers understand the risks or available coverage options. 

Finally, issues specific to community associations will need to be understood by all parties and carefully addressed.  Membership approval will be required due to the long term nature of the lease or PPA, and easement or license agreements will also be required, both of which will require time to achieve.  Since government granted financial incentives are as important (or more so) to system investors than expected revenues from sale of the power produced, and some incentives are time sensitive (requiring completion of the project within a specified time frame), failure to address the time required to satisfy these community association specific legal requirements may not only undermine the relationships between the parties, but resulting damage to the financing entity may expose the association to potential legal liability for which no insurance coverage is available.  This risk must, therefore, be adequately identified and managed by the parties.

The good news is that all of this is achievable, and has been successfully navigated in the context of PPA agreements for commercial and institutional building solar projects.  There is no reason why these issues cannot be addressed for community association solar energy projects as well, if community associations are careful to work with investors and installers who are familiar with such projects, and have legal representation to help them through the process.

A Rose By Any Other Name (Part 2)

Recently, in response to a question about contractual risk management posted on LinkedIn, someone responded with a rant about how lawyers screw businesses up and the legal system deprives folks of their rights, ending with an admonishment to avoid lawyers and courts altogether by – get this – never using a contract.      

 Hmmmmm . . . . Interesting concept.  I wonder why the concept hasn’t been universally accepted by business owners everywhere? 

 Maybe because it’s impossible.

 You could, of course, try never using a written contract.  If your vendors, suppliers and subcontractors will all agree to that, of course.  Meaning not only that every agreement is sealed with a smile and a handshake, but also that folks you owe show up in person, stick their hands out, and you pay them on demand, with cash money. 

 You’d still fail.

 Because even if you were scrupulously careful not to put anything in writing, ever (not a letter, e-mail, napkin, paper airplane, not anything), and even if you could convince every one with whom you do any sort of business to do the same, just reach an agreement as to terms, smile and shake hands, and you may very well have just formed a contract.  That’s right, a contract, whether you like it or not, and with terms which, since they are not written down, are so nebulous, such a moving target, that they  just might have to be decided in an adversarial setting such as a courtroom, based on “he said, she said” “evidence”, by someone who had nothing to do with negotiating the agreement, has no relationship with any of the parties, wears a flowing robe, sits behind a high desk, gavel in hand, has a decidedly authoritarian attitude, and has the power to seriously detrimentally impact your bottom line. 

 A contract by any other name . . . is still a contract.  You just can’t do business without one.

 Even if I were not an attorney, my inclination would still be to advocate taking control of one’s destiny by crafting one’s own written contracts, with risk shifting provisions that comply with the laws in one’s own jurisdiction in order to actually achieve the protection one wants, as a means to achieve one’s own acceptable level of legal risk.  That’s just my personality, really.

I am a big advocate of having a system for everything you possible can in your business.  Creating and/or adopting business systems (a) forces you to identify specific business risks and goals, then (b) gives you the tools to avoid the  risks to achieve the goals, and your business contracts, if written properly, are the most important business system you (and your employees) have.  If you don’t have your own business contracts, then your vendors, suppliers, subcontractors and yes, even customers, will impose a system on you that may not be to your liking (or beneficial to your bottom line).  The solution is not to try to run away (by, for example, refusing to use written agreements).  The solution is to have your own, superior, system in place, and to insist on using it.

The “Why and How” of Risk Management

IRMI (the International Risk Management Institute, Inc.) recently published an excellent “white paper” covering the basic principals of business risk management.  You can find it here.  It is somewhat lengthy (approximately 70 pages), but well worth the read. 

Described as an “illustrative introduction to risk management for business executives”, the author (George L. Head, Ph.D., CPCU, ARM, CSP, CLU) begins by asking the reader to consider a hypothetical scenario (a fire causing the near collapse, and ultimate demolition, of a 2-story concrete garage supporting a 5-story, 80-unit apartment complex).  This factual scenario is then used to provide a “concrete foundation” (pardon the pun) from which the author explains the basic “whys and hows” of risk management for business organizations.  

One of the things I particulary like about the paper is that, in explaining “Why We Manage Risk”, Dr. Head includes “Preparing for Opportunities”, and puts it right up there near the top of the list (second only to “Safeguarding Resources”).  The positive aspect of business risk (the fact that business risk is necessary to the creation of business opportunities) is rarely mentioned, much less highlighted, in discussions of business risk management.  My most successful clients understand this key point and are careful to put themselves in the best position possible to take advantage of business opportunities by effectively managing the risks inherent in those opportunities, through appropriate insurance coverage and contractual risk transfer (the basics of which are also discussed in this paper).