Property owners rely on crucial relationships with contractors, subcontractors and vendors. In these relationships, agreements are made and written contracts are negotiated. However, a growing trend involves contracts in which the contractors and vendors are assuming the liabilities of others. Savvy property owners recognize the benefit of transferring potential liability to others and negotiate contracts to their advantage.
Agreeing to assume other’s liability without limitations can be costly. By signing such agreements, you may be forced to pay for claims that normally would not be your responsibility. Alternatively, as a condition of conducting business, you may be asking one of your subcontractors to sign an agreement to indemnify and hold you harmless. In either case, it is important to understand what you are agreeing to and limit any unintended consequences.
What Is Risk Transfer?
Risk transfer is a risk management and control strategy that involves the contractual shifting of a pure risk from one party to another. When done effectively, risk transfer allocates risk equitably, placing responsibility for risk on designated parties and consistent with their ability to control and insure against that risk. Essentially, liability should rest with whichever party has the most control over the sources of potential liability in addition to having it relative and specific to the scope of work defined in the contract.
Risk Transfer Methods:
Insurance: Risk transfer is most often accomplished through an insurance policy. This is a voluntary arrangement between an insurance company and the policyholder, whereby the insurance company assumes strictly defined financial risks from the policyholder. Simply put, if the policyholder is sued, and coverage is provided, the insurance company pays to defend the policyholder and their interests in addition to paying any settlements up to the policy limits purchased.
Contracts: Risk transfer can also be accomplished through non-insurance agreements such as contracts. These contracts often include indemnification provisions. An indemnity clause is a contractual provision in which one party agrees to answer for any specified and unspecified liability or harm that the other party might incur. These clauses can also include a hold harmless provision which to its definition means that you will hold others harmless for your acts.
Contractors most times are asked to indemnify the customer, property owners etc. against loss. The loss usually takes the form of a lawsuit by a party that has been injured on the customer’s property.
When you agree to defend and indemnify the customer, you are essentially agreeing to pay for the legal defense of a lawsuit and to pay any settlement or judgement that the plaintiff in that action takes against your customer (property owner).
Indemnity is triggered when three things coincide:
- The language of the indemnity agreement
- Your conduct
- The accident facts
If the indemnity agreement mandates that you indemnify an owner for accident or injury “arising out of your work”, and the accident has no connection to your work, then your obligation to indemnify the owner is not triggered. However, under the same agreement, if an accident is connected to your work, then you are obligated to indemnify the owner.
Example of indemnity not triggered: You are contracted to only maintain Parking Lot B. Your indemnity agreement with the lot’s owner only requires you to indemnify the owner for claims arising from your work. You do not have anything to do with Parking Lot A. A customer slips on trash in Parking Lot A, falls and is injured. Your contractual indemnity to the owner is not triggered.
Example of indemnity triggered: You are contracted by a multi-level parking garage owner to inspect and maintain the entire garage under an indemnity agreement that mandates indemnification of all claims against the owner caused “in whole or in part” by your work. A person trips on a depression in the pavement of the parking deck and is injured. Indemnity is triggered.
Insured contract – Basis for coverage: In almost all General Liability policies, you are covered for claims from other parties who have a right to defense and indemnity, provided that party is relying on a contract that you have signed with them. This is often called the “insured contract” for which the other party gains access to the proceeds of your insurance policy. Ultimately there must be a contract which describes its right to a defense and indemnity from you.
Additional insured status: Often times your customers require to be named as "additional insured" on your Genera; Liability policy. This endorsement to your policy provides coverage to the additional insured entity with respects to liability arising out of your negligence for work performed under contract for the customer.
Primary – Non-contributory: This means that insurance is issued on the basis that it will not seek contribution from other insurance policies that apply to a covered loss on the same basis. When issued on this basis, the "additional insured" (your customer), is seeking assurance that its own policy will not be asked to contribute to a covered loss.
So, with all the mechanisms in place for property owners, managers, third party providers to Transfer Risk to the contractor, it’s crucial to understand what that means for your business and how it can impact your insurance.
A common theme regarding slip and fall claims from contractors: “I don’t know why my insurance company paid that claim when we had absolutely nothing to do with it. We don’t service that area of the property. We weren’t even there at that time. We didn’t see that obstruction or impairment so how could we report it.
Steps To Protect Your Business:
Review all contract language completely, especially the Risk Transfer language. Have your attorney and insurance advisor review as well.
Clearly define the scope of work for which your company is being contracted to perform.
Be very specific about time frames for services.
Clearly define the boundaries of the property for where the work will be performed. Many properties have intersecting roadways, walkways etc that may not be within your scope. You do not want to assume the responsibility of non related properties.
Document pre- and post-service inspections.
Hopefully you have a better understanding of what the method of risk transfer means and how it can affect your business and ultimately your insurance. The goal is to minimize risk by not assuming the liability exposures of others and maximize risk by transferring it elsewhere. These methods are all accomplished by the proper understanding and wording of your customer contracts.
The content of this article is for information purposes only. Some or all of the information contained herein may or may not apply to specific businesses or individual scenarios. Pavement Maintenance & Reconstruction and Scott Cerosky do not warrant or make any representations regarding the use or the results of the use of the materials, or the accuracy, adequacy, completeness, legality, reliability, or usefulness of the enclosed material.Any and all contracts/agreements should be reviewed by your individual legal counsel and insurance representatives for final opinion and/or approvals.
Scott Cerosky is Crum & Forster Marketing Consultant, Contractors Segment - Pavement Maintenance, Morristown, NJ. He can be reached at 914-714-0787 or [email protected].
