Managing Risks with Contracts Presented by: Larry Gracer

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Managing Risks with ContractsPresented by
Larry Gracer Larry BowenMarsh USA, Inc

• March 15, 2007

Marsh is in the business of providing insurance
brokerage services, not the practice of law. The
following presentation includes information from
an insurance/risk management perspective. You
should consult Counsel with regard to contract
provisions.
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Why Are Contracts Important?

• In the business world, the rearview mirror is
  always clearer than the windshield. Warren
  Buffet

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Objectives of Contract Review

• Ensure adequate distribution of liabilities
  between parties in the indemnification agreement
• Eliminate onerous wording which is typically
  excluded under insurance contracts
• Avoid ambiguous terms and conditions
• Compare the adequacy of the program terms and
  conditions against the contract
• Recognizing self insured risks

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The Contract Review Process
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Scope of Work

• What Services are you performing for a third
  party?
• What are the key exposures associated with the
  type of work to be performed?
• Are the key exposures adequately covered under
  your insurance program?
• Are you subcontracting any work?
• Are there any unique hazards or exposures?

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Indemnification Agreements

• A contractual undertaking whereby the indemnitor
  (promisor) agrees to assume the legal obligations
  of the indemnitee (promisee) arising out of the
  conduct of one or both of the contracting parties
  or a third party.
• The indemnification agreement does not relieve
  the indemnitee of liability to an injured third
  party. Indemnitee is still liable and must pay
  damages, whether or not the indemnitor responds.
  However, the indemnitee has right to sue the
  indemnitor to force it to honor the obligations
  of the contract.

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Types of Indemnity Agreements

• Each Indemnity Agreement is unique, however,
  there are three general types
• Broad Form
• Intermediate Form
• Narrow or Limited Form
• Courts look at intent of the parties, as
  expressed in the indemnity provision, when
  determining the rights and obligations of the
  parties under an indemnity provision.

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Narrow or Limited Form

• Obligates the indemnitor to indemnify the
  indemnitee only to the extent of the indemnitors
  own negligence.
• Does little or nothing to increase the
  indemnitors liability under common law
  principles.
• Agreement is useful in proving to the other
  partys insurer that the agreement qualifies as
  an insured contract.
• Example Adams Corp agrees to indemnify Smith
  Corp for any liability arising from the
  negligence of Adams Corp. (only covers
  liability arising out of Adams acts.)

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Intermediate Form

• Indemnitee is usually indemnified only for acts
  of passive rather than active negligence, which
  cause or contribute to a loss.
• Does not specifically address the issue of the
  indemnitees own negligence.
• If language does not clearly state an intent to
  indemnify the indemnitee from the consequence of
  its own active negligence, then the agreement
  will probably be considered Intermediate by the
  courts.
• Example Adams Corp and Smith Corp enter into an
  agreement where Adams agrees to defend and
  indemnify Smith against any and all liability or
  damages, of any sort, whatsoever. (specifically
  covers negligent acts of Smith)

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Broad Form

• Indemnitor assumes an unqualified obligation to
  hold the indemnitee harmless for all liability
  associated with the subject of the agreement,
  regardless of which party was at fault.
• Indemnitor is obligated to respond.
• Indemnity provision is most favorable to the
  indemnitee.
• Example Adams Corp. agrees to indemnify Smith
  Corp for all liabilities arising out of the
  Adams work, whether caused in whole or in part by
  any act or omission of Smith.

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Risk Transfer Mechanisms

• Indemnification Agreements - if drafted properly
  it can limit or eliminate potential risk.
• Additional Insured provision requirements in
  insurance contracts.
• Severability of Interest /Cross-Liability clause
  - requires the party providing insurance to
  obtain an endorsement in its policy whereby the
  other party is named as an additional insured.
  This endorsement further modifies coverage so
  that, in the event one insured incurs liability
  another insured, the policy will cover the party
  against whom the claim is made as if a separate
  policy had been issued to each insured. Most
  primary insurance forms contain this provision
  however, Excess or Umbrella policies may not.
• Waiver of Subrogation clause - parties to a
  contract agree to give up their rights to sue
  each other, should the other cause damage. These
  clauses are generally limited to the extent that
  the damages are covered by insurance. Since the
  partys right to recover against the other has
  been waived, that partys insurers right to
  subrogate against that other party has been also
  waived.
• Limits of Liability clause - mechanism used to
  limit the risk to which a party may be exposed.
  Limits the partys liability to a predetermined
  amount or type of recovery.Vitally important
  to the success of a contract and potentially the
  survival of clients company.

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Insurance Issues for Consideration

• Appropriate limits
• Coverage form (claims made vs. occurrence)
• Cost vs. benefit of any particular coverage
• Policy exclusions
• Certificate requirements
• Optional coverage extensions
• Insurance company financial security
• Your role in the contract

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Standard Insurance Requirements

• Insurers licensed to do business in the state of
  operation
• Additional Insured on General Liability and Auto
• ACORD Certificate w/30 days notice of
  cancellation
• Waiver of subrogation as respects
  property/builders risk only
• Limited Indemnity form
• Contractual Liability coverage

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Standard Insurance Requirements

• Evidence of statutory Workers Compensation
• Employers Liability limits of 500,000
• General Liability limits of 1M per occurrence
  and 2M aggregate
• Business Auto Liability limit of 1M combined
  single limit
• Umbrella Liability with a limit of 5M per
  occurrence and aggregate

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Stringent Insurance Requirements

• Insurers licensed to do business in the state of
  operation and with a minimum Best rating of A -
  VII
• Additional Insured on General Liability and Auto
• Modified ACORD Certificate or manuscript wording
  w/60 days notice of cancellation
• Waiver of subrogation required for all coverages
• Intermediate Indemnity Form
• Contractual Liability coverage
• Requires disclosure of deductibles and retentions

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Stringent Insurance Requirements

• Owners/Contractors protective liability policy
• Professional Liability
• Pollution Liability
• Maintenance of insurance coverage for a
  substantial period after project completion (1-3
  years)
• Aviation Liability

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Stringent Insurance Requirements

• Evidence of statutory Workers Compensation
• Employers Liability limits of 1,000,000
• General Liability limits of 1M per occurrence
  and 2M aggregate with aggregate applying per
  location/per project
• Business Auto Liability limit of 1M combined
  single limit
• Umbrella Liability with a limit of 10M per
  occurrence and aggregate

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Rigorous Insurance Requirements

• Insurers acceptable to lessor/customer
• Additional Insured on General Liability, Auto,
  and Professional Liability
• Certified copies of policies and endorsements
• 90 days notice of cancellation
• Waiver of subrogation required for all coverages
• Broad Indemnity Form
• Contractual Liability coverage
• Establishes maximum deductibles and retentions

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Rigorous Insurance Requirements

• Commercial Crime
• Railroad Protective Liability
• Force Majeure risks
• Reinstatement of impaired or exhausted limits
• Punitive damages where not prohibited by law

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Rigorous Insurance Requirements

• Evidence of statutory Workers Compensation
• Employers Liability limits of 1,000,000
• General Liability limits of 1M per occurrence
  and 2M aggregate with aggregate applying per
  location/per project
• Business Auto Liability limit of 1M combined
  single limit
• Umbrella Liability with a limit of 20M per
  occurrence and aggregate

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Potential Landmines

• Any and all liabilities wording
• Extension beyond bodily injury, death, and
  property damage
• Breach of contract
• Intentional acts wording
• Primary Noncontributory Wording
• Waivers of subrogation
• Limitation of liability clauses
• Warranties

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Contractual Liability Coverage

• Exception to contractual exclusion for Insured
  Contracts
• A contract or agreement pertaining to your
  clients business should be included (if not
  automatic) under the definition of Insured
  Contract
• Exception is only made for tort liability only,
  which means a liability that would be imposed by
  common law in the absence of a contract.
• Indemnity agreements that are too broad will not
  be covered under the typical definition of
  insured contract and tort liability.

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Indemnity Agreement Case Study

• Rizol Corp. v. Liability Company, Inc.
• Valve Company, Inc., and Rizol shall indemnify,
  defend and hold harmless
• from claims, demands, and causes of action
  asserted against each other by
• any person (including, without limitation,
  Valve's and Rizol's employees) for
• personal injury or death, or for loss of or
  damage to property that results from
• the indemnifying party's negligence or willful
  misconduct hereunder. Where
• personal injury, death, or loss of or damage to
  property is the result of the joint
• negligence or misconduct of Valve and Rizol, each
  party's duty of
• indemnification shall be in proportion to that
  party's allocable share of such joint
• negligence or misconduct.

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Degrees of Insured Status

• Named Insured
• Responsible for Premium Payment
• Authorized to cancel coverage
• Authorized to request coverage amendments
• Additional Named Insured
• Subsidiaries, Partnerships, etc.
• Covered for all Operations
• Additional Insured
• Coverage for Liability arising out of operations
  performed by or on behalf of the Named Insured
• Reinforces the risk transfer accomplished in the
  indemnity agreement providing AI with direct
  rights under the policy

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Additional Insured Clause

• Advantages
• Risk Transfer -- especially if indemnity is
  unenforceable or indemnitor unable to pay
• Additional Insurance another insurance policy
  for the additional insured
• Duty to Defend policy may provide defense
  indemnity may not
• Direct Cause of Action additional insured has
  many of the same rights against carrier as
  insured

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Additional Insured Clause

• Disadvantages
• To the Named Insured
• Dilution of policy limits
• Defense conflicts
• Providing unintended coverage
• To the Additional Insured
• Loss of defense control
• Increase likelihood of coverage disputes
• Other insurance conflicts

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Certificates of Insurance - FAQ

• Q What is a Certificate of Insurance?
• A A standardized document that provides evidence
  of insurance for coverage such as Workers
  Compensation, General Liability, Automobile and
  Property.
• Q Why is a Certificate of Insurance needed?
• A A certificate is used to certify that policies
  of insurance listed have been issued to the
  insured named, for the policy periods indicated.
  This is used in lieu of providing copies of an
  entire policy to another party.
• Q Who might request Certificates of Insurance?
• A Any party to a contract, including Business
  Partners, Customers, Vendors, Suppliers, etc.
• Q When is a Certificate generally requested?
• A After a contract is finalized and before work
  begins.
• Q Is a Certificate the same as an Insurance
  Policy?
• A No. Certificates are used for informational
  purposes only and do not change the terms of
  coverage provided under a policy. A certificate
  does not identify detailed coverage terms,
  exclusions, or conditions. These are set forth
  in the policy.

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Certificates of Insurance - FAQ

• Q Can you agree under a contract to provide
  broader protection to a third party than your
  insurance coverage provides?
• A Yes. Doing so however, would not place any
  additional demands upon the insurance carrier.
  You have the right to accept liabilities beyond
  the scope of your insurance coverage. It is
  important to recognize and consider the
  ramifications of taking on the additional risk.
• Q What rights does a Certificate Holder have?
• A The issuance of a certificate to a person or
  organization (ie. the certificate holder) does
  not grant any additional rights to that person or
  organization beyond those available under common
  law. The only exception involves cancellation of
  coverage. The certificate states that should
  any of the above described policies be cancelled
  before the expiration date, the issuing insurer
  will endeavor to mail notice to the certificate
  holder, but failure to do so shall impose no
  obligations or liability of any kind upon the
  insurer. It is the endeavor to wording which
  confirms that notice of cancellation is not a
  guarantee. A request to remove the endeavor to
  wording from a certificate means a certificate
  holder is looking for that guarantee, which needs
  to be addressed.

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ACORD Forms

• Commonly used forms
• Certificate vs. Evidence
• Property ACORD forms, which one to use?

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• Questions Answers