Key Insurance Provisions to Mitigate Contractual Risk

Welcome

Joseph D. JeanLowenstein Sandler, LLPjjean@lowenstein.com

Rachel M. WrightsonMorrison & Cohen LLP

rwrightson@morrisoncohen.com

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Introduction

Effective risk management is critical, and a key ingredient to managing risk is having the right contracts in place.

The primary purposes of insurance provisions in contracts are to guarantee performance, protect against third party claims, and promote responsible service providers.

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Overview

• Why Insurance Provisions in Contracts Are Critical Goals

• General Insurance Requirements• Contractual Risk Transfer – The Basics

– Analyzing the Risks and Relationships – Using a Hold Harmless (Indemnity) Provision– Selecting Appropriate Insurance Specifications– Verifying Coverage– Report Claims Promptly– Subrogation

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Why Insurance Provisions in Contracts are Critical

• Your company can be held liable for damages caused by your contractors

• You should be able to rely on a contractor to do the job safely – if it doesn’t, it should pay for the consequences

• Risk is placed upon those best able to control the work

• You have a source for payment of claims against your entity

• To maintain your own project or entity budget• To maintain a good loss history and lower

insurance costs

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Goals for Insurance Provisions in Contracts

• Uniformity• Risk Transfer• Cost Control• Operational/Quality Assurance

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General Insurance Requirements

• Be specific re: types of insurance required • Describe maximum deductibles or retentions that

the other party may maintain • Addition of your Entity, its officials, employees and

volunteers as Additional Insureds to all required liability coverage

• The other party’s insurance is primary• At least thirty (30) days notice of cancellation

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Analyze Risks and Relationships

• Think about the relationship objectives:– What could go wrong?– What are the critical steps in completing your project? – Is the contractor qualified?

• Remember each situation is unique. – The risks and your options for managing them vary. – Learn as much as you can about the work, the

contractor, and the risks involved to develop the best ways to protect your company.

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Analyze Risks and Relationships (cont’d)

• Review the scope of work, persons tasked completing it successfully, and the relationship that person will have with your entity. – Pay special attention to the scope of work.

Is it sufficient to describe the work to be performed, especially in case of a dispute as to who was responsible for certain duties?

Make sure you understand what is to be accomplished based on what is written in the scope.

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Hold Harmless (Indemnity) Provisions

• Shifts responsibility for loss or damage arising from the activities of a contract from one party (your entity) to the other (the contractor).

• Avoid risk and simplify liability• Obligates one party to pay for tort damages

caused by fault of other party

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Hold Harmless Provisions (cont’d)

Type of Risk Accepted:• Negligence? Other?

Breadth of Risk Accepted:• Own? Joint? Sole?

Nature of Damage/Injury Accepted:• Direct? Consequential?

Property Damage:• Our property ? Other party’s property? Third persons?

Bodily injury/Personal injury:• Our employees? Other party’s employees? Third persons?

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Selecting Appropriate Insurance

• Acceptability of Insurers: – Look up an insurer’s rating at www.ambest.com. – If your contractor is covered by a captive, self-insured,

risk pool, or other alternative risk transfer mechanism: Research the company Request documentation from the agent Seek advice from broker or risk manager

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Selecting Appropriate Insurance Specifications

• Certificate of Insurance – Usually provided by a contractor’s agent or broker– Lists the types of coverage, insurers providing the

coverage, policy period, and limits. – Your entity will be listed as the Certificate Holder and if

you are additional insured– For ongoing contracts you should receive a new

Certificate when the policies expire– Make sure the agent is aware of the length of the

contract when requesting the initial certificate and your entity should be notified automatically when their coverage renews.

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Selecting Appropriate Insurance Specifications (cont’d)

• A Certificate of Insurance is NOT proof of coverage when your entity wants to be named as an additional insured on the contractor’s CGL policy;

• You MUST also have an endorsement in order to be so. The standard CGL contains “contractual liability” coverage which affords the insured coverage for liability they assume in most contracts, and some policies may automatically name your entity as an additional insured if required in a written contract, or they may issue a “blanket” endorsement to that effect, but you will want to obtain proof of your status, either through the endorsement or a copy of the applicable policy language.

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Verifying Coverage

• Get a copy of the policy and carefully read it

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Review Forms and Save Them

• Review the forms promptly– Be sure they are completed fully and signed– Note the expiration date of the policies; if any policies

expire during the contract or project term, you should receive proof of renewal or replacement of coverage.

• Save the signed forms indefinitely!– Claims may be presented many years after work is

completed.– These forms may be your Entity’s only proof of coverage.

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Report Claims Promptly

• Inform the other party’s insurer immediately, in writing, of any incidents or claims; send a copy to the Contractor and its agent as well.

• Most policies require reporting of incidents or claims to the insurer; notice to agent does not fulfill this responsibility. – If you report by telephone, make a note of it, including

the date and person spoken to, and follow up in writing as soon as possible.

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Subrogation

• Transfer to the insurance company of the contractor’s right to collect for damages from another party, in this case, your Entity.

• Regardless of which party agrees to purchase and maintain insurance, you should look for a waiver of subrogation clause in your contracts.

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Subrogation (cont’d)

• When your company agrees to maintain insurance for both your company and the other party, look for a contractual provision that would waive your company’s ability, through its insurer, to pursue a subrogation claim against the other party.

• Waiver of subrogation clause– may protect you if the other party to a contract agrees to

maintain insurance coverage– can hinder your company and your insurer if your

company has agreed to maintain insurance for the benefit of the other party.

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Subrogation (cont’d)

• Once a loss occurs, if one party has agreed to maintain insurance to protect the other, the insurance company will be forced to cover the loss, even if it was caused by the negligence of the other party.

• If the contract also contains a waiver of subrogation clause, the insurance company will have no recourse to recoup these funds from the at-fault party; without the waiver of subrogation clause, the insurance company would be free to pursue a claim against the at-fault party.

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Q&A