For better or worse, contracts are a fact of life for business owners. From property and equipment leases to service and construction agreements, it is hard to find a business that does not sign or require some type of contract in their normal course of business. As a result, the most common type of risk management work I do involves the evaluation of these contracts and the insurance ramifications that they might create. The purpose of this article is to briefly describe the most common insurance clauses that I see and offer some observations. Before doing so, however, I offer the following caveat — the Department of Insurance frowns mightily on my pretending to be an attorney. None of the information below, therefore, should be construed as legal advice. For legal questions, consult an attorney. We are blessed with some excellent ones to choose from in our area. Now, with that out of the way, on with the show!
– Additional Insured– If I could go back in time and beat senseless the first person who came up with this concept, I think I’d be doing the world a great service. That said, this contractual requirement is as pervasive as herpes and potentially just as charming. In essence, this is a formal request to confer coverage that you purchased over to a third party at no charge to that third party. You read that right: Rather than relying on their own coverage, they want to freeload on yours and potentially erode the limit that you purchased to protect your business. This request is extremely common in leases and service contracts, and I’m afraid it is rarely waived as a requirement. Be sure to share a copy of the contract with your agent prior to signing, so he or she can advise you of the cost of compliance as well as assist you in negotiating with the contractor to potentially mitigate the lecherous impact of this requirement on your coverage.
– Waiver of Subrogation- This is the ugly sister of the additional insured clause. Simply put, it says that not only will you compel your liability insurer to name a third party as an additional insured, but should they be forced to pay a claim on the third party’s behalf, your carrier promises in advance not to go after the third party’s insurance carrier for reimbursement (even if the loss was the third party’s fault). We see this request commonly applying to both general liability and workers’ compensation.
– Primary & Non Contributory – Completing the holy trinity of giving away your insurance coverage, this contractual requirement is typically paired with one or both of the above and clarifies that even if both parties carry coverage, it is your policy that will be paying first in the event of a loss (without regard to fault).
– Indemnification Clause– In the event that your nausea has not reached an intolerable level after reviewing the insurance section of a contract, the average indemnification clause will surely push you over the edge. There are three types of indemnification agreements, listed as follows in order of severity: limited, intermediate and broad. Having never attended law school or passed a contract law class, I don’t want to wade too deep into the water here, but it should suffice to say that signing a contract that contains an indemnification clause does not automatically mean that your insurance carrier agrees to live up to the obligations set forth in that clause. In fact, if you see either CG 2139 Contractual Liability Limitation or CG 2426 Amendment of Insured Contract Definition on your liability policy, both commonly used endorsements, you may have significant contractual liability limitations on your coverage already.
I realize that this article should come with two aspirin and a coupon for a free pint at Swamp Head Brewery, but as unpleasant as it is to consider all of the contractual liabilities we take on as business owners, I think it unwise to simply ignore those obligations and hope that nothing bad happens. My recommendation going forward is twofold: One, work with your agent to identify insurance issues presented by the contracts you encounter (preferably before signing them); and two, consult with a qualified business attorney for the legal ramifications of these contracts. With a good risk management team behind it, a business can mitigate a huge amount of liability before it ever becomes an issue. Please take my word on this — a small headache on the front end beats a huge pain in the posterior in the future.