- Each entity should have their own risk philosophy that meets their individual risk tolerance, and that philosophy should be reflected in their required contract provisions.
- The primary purpose of the contract is not risk transfer, but rather to obtain needed services or goods.
- The purpose of risk transfer is to have the contractor, rather than the entity, responsible for exposures/losses that might grow out of the contracted service.
- The potential exposure from each contract must be considered separately, and on occasion may allow for some flexibility in terms.
- The “cost” of the contract is not necessarily an indicator of potential exposure.
- The indemnity/hold harmless clause in the contract defines the obligation and scope of the risk transfer accepted by the contractor.
- The insurance provisions attempt to ensure that there is adequate independent funding available to satisfy the indemnification obligation found in the indemnity/hold harmless clause.
- The entity's status as an “additional insured” under the contractor's policy creates an indemnity/hold harmless and defense obligation independent of, but generally more limited in scope, than the contractual indemnity clause.
- The entity's contract specifications/requirements are integrated and designed to work together to obtain the desired results; these specifications are probably not unique to the entity, but are consistent with most public entities in the State.
- While most contractors cannot redesign their insurance programs to satisfy the unique requirements of each party they contract with, hopefully their broker has obtained coverage that is broad enough to meet the requirements generally found in the type of areas that the contractor conducts business.
- The waiver or changing of risk transfer provisions after the awarding of a contract could create an exposure to unsuccessful bidders in the form of a lawsuit.
An indemnity agreement, often called a “hold harmless”, is found in the contract.
- This is completely independent of any insurance coverage.
- The clause does not relieve the entity of liability, but rather substitutes the contractor's assets in satisfying any liability or defense costs.
- Classified by the scope of obligation the contract language places on the contractor/indemnitor.
- Broad = transfers all the risk: not allowed in construction or design.
- Intermediate = transfers all the risk except for the sole negligence of the entity/indemnitee; strongly preferred.
- ” … except such loss or damage which was caused by the sole negligence or willful misconduct of the entity.”
- ” … whether or not it is caused in part by a party indemnified hereunder … “
- Limited/comparative fault = only to the extent of the contractors fault, but generally gives the entity unapportioned defense costs.
- Reciprocal = dual clauses where each party agrees to hold the other harmless for their own acts.
- Hybrid = different levels of protection for different specified risks.
- In addition to the scope, you need to look at possible limitations on the subject matter of the obligation = “arising from”; “arising out of the project”; “arising out of or resulting from the performance by” “arising out of, incident to, or in connection with the agreement or performance of the work or services hereunder.”
You will usually need:
- General Liability (premises and negligence),
- Auto Liability (when vehicles used in any way),
- Workers' Compensation/Employer's Liability (whenever there is an employee).
You might need:
- Professional Liability (Errors and Omissions/Malpractice for professional services),
- Environmental Impairment Liability (pollution),
- Fidelity (employee dishonesty) and other coverage's required by the applicable contract or exposures.
Carriers & Ratings:
The entity wants to be sure that the insurance company will be financially able to meet its contractual/coverage obligations. The AM Best Company rates insurance carriers on their financial condition (A++ on down) and financial size (XV on down). We generally look for a minimum of “A” (Excellent) “VII” ($50 to $100M in assets).
(Currently the State Fund is not rated due to fiscal disputes.)
Most insurance companies use standardized policy forms created by the Insurance Services Office (ISO). Self-insured companies might have manuscript forms with unique language. If there is not an ISO number (ex. CG 10 03 97) you might need to see the policy to determine what is included and excluded from the coverage.
Occurrence and Claims Made Policies:
- Occurrence: The insurance contract covers incidents that occurred during the policy term regardless of when the claim is submitted to the carrier.
- Claims Made: Only provides coverage for written claims that are submitted to the carrier during the policy term or during an extended reporting period called a “tail.” Generally there is no problem with coverage as long as the policy is renewed each year. If not, the entity should require the purchase of a tail for a specified period.
- Professional Liability policies are only written on a “claims made” basis.
Deductibles & Retentions:
- Deductible: The carrier's responsibilities under the insurance contract start at dollar one; the carrier has the responsibility of getting the deductible payment from their insured.
- Retention: The carrier's responsibilities do not start until the insured has paid the full amount of the retention. The entity generally reserves the right to review retentions to protect against an insured that might not have the financial ability to trigger coverage by satisfying the retention limit.
- Limits: Minimum limits should be established not by what should happen, but by what could happen; to establish required limits, each exposure needs to be evaluated looking at all the involved factors in anticipation of the worst scenario. It is better to set the limits too high, than to set them too low.
- Aggregate Limit: This is the maximum amount that will be paid out on an insurance policy for all claims, from all projects, throughout the entire policy term. The policy limits could be reduced below the required level by payments on other claims that collectively approach or exhaust the aggregate. The aggregate should either be avoided, or set substantially higher than the required limits; an alternative would be requiring a separate policy covering the entity's contract.
- Primary: The entity needs to ensure that the contractor's policy states that it is primary — that their limits will be exhausted before any contribution from the entity's coverage is made; this may require a separate endorsement.
- Additional Insured: This is an endorsement that modifies the contractor's insurance policy adding the entity as an insured under their coverage. This status allows the entity to deal directly with the insurance carrier without going through the contractor/named insured, and can create additional duties by the carrier running to, and for the benefit of the entity. The new ISO form endorsements end coverage when the contractor's work is completed even though the exposure for the work might continue. An entity cannot be named as an additional insured on a Workers' Compensation policy, or an Errors and Omissions/Professional Liability/Malpractice policy.
- Certificate of Insurance: Has the limited purpose to state that the described insurance existed for that brief moment of time when the certificate was issued. The certificate states it is for “information only” and confers “no rights,” nor does it “amend, extend or alter” the coverage. The Certificate is probably adequate proof of insurance if it includes endorsed copies of any coverage endorsements (especially the additional insured endorsement), and promises adequate notice of cancellation.
- Notice of Cancellation: The entity usually asks for sufficient notice of cancellation of the contractor's insurance to allow the entity to take steps to maintain protection against potential exposures. Carriers, in their Certificates of Insurance, state that they will “endeavor” to mail notice, but try to avoid promising notice that could create an exposure for them should they fail to comply. The compromise position seems to be 30 days notice for cancellation, but only 10 days notice if it was for failure to pay the premium.
- Waiver of Subrogation: Endorses the contractor's policy to cut off any right of recovery for the contractor or carrier when the entity caused or contributed to the injury or damage.
Conclusion — Deviations from the entity's standard risk transfer requirements
should be the exception rather than the rule.