Inside Insurance
Critical Checkpoints for Contractual Liability
Most businesses routinely enter into contracts that contain indemnification language, hold-harmless agreements, and insurance requirements that obligate them to assume the liabilities of others. Before taking on the risk of others, it is critical to understand contract language and its implications for exposure. From an insurance perspective, contracts are risk management in black and white. And it’s where your attorney and your insurance broker are invaluable resources.
Do you routinely have your attorney review contracts before you sign them? If not, you should. But does your insurance broker also check your contracts from an insurance perspective for indemnification and insurance clauses, for areas of assumed liability, and for transferable risk? If not, he or she should. Provided your broker is qualified to do so, it can make the critical difference.
Like law, insurance has its own vocabulary. Knowing some basic terms helps clarify areas of agreement in contracts. Here are a few fundamental words and phrases for staying on friendly — and safe — terms with contractual clients, vendors, employees, and subcontractors.
Reducing Assumed Liability
Good insurance brokers make contractual review part of their standard service process. The best ones know methods for reducing the level of assumed liability. For instance, does the contract contain language about bodily injury, property damage, and personal injury? If so, does your insurance policy provide coverage? Don’t assume you’re covered. There may be coverage gaps that need to be filled before you sign a contract.
By signing the contract, are you agreeing to indemnify the liabilities of others, including assuming sole negligence?
Is it best to hold out for a hold-harmless agreement? Should there be a waiver of subrogation?
Talk to your attorney and an insurance broker who can answer nagging contract questions and uncover the hidden insurance questions — those that barely reveal a question mark until there is trouble. Get your attorney’s opinion and broker’s response in written form, and try to get them within the same day to avoid delays in your company’s timeline.
Transferring Risk
You face enough risk in your own business. Why assume the risk of others? In contractual relationships, ask for evidence of insurance — certificates of insurance — from subcontractors and vendors. Make sure your vendors’ or subcontractors’ coverage is applicable, adequate, and responsive. Learn the policy terms, limits of coverage, and special conditions. Waiting for a problem to arise is no way to learn that the insurance of someone you are contracting with is lacking in any of these critical areas.
Before signing on the dotted line, find out if additional primary insurance is required or needed. Have your broker help you weigh the pros and cons of “additional insured.” Whose policy should carry that clause and cost? Contracts need not be risky business if properly reviewed by your legal counsel and insurance broker.