Educational Series Part 4: Know Before You Sign a Contract

Don’t sign that contract without first speaking to your insurance advisor!

Know your risk and make certain the proper coverage is in place. If the contracts you sign contain insurance requirements, limits, or terms you cannot fulfill with your current program or choose not to purchase coverage to satisfy the terms of the agreement, the contract requirements still apply.

Contractual liability is defined as liability that one party assumes on behalf of another under a contract. In simple terms, it is a promise that may be enforced by a court. Knowing what impact a contract will have on your existing insurance policies is critical in protecting business and personal assets. Every insurance policy is different; it should be standard practice to always have your insurance advisor review the insurance requirements contained within any contract your business may be entering before signing to avoid any surprises in the event of a claim.

Contracts are part of business operations. It is common for businesses to agree, usually in writing, to be responsible for someone else’s legal obligation to pay damages to third parties, liability they would not otherwise have. This agreement is located in the terms of the contract and states that one party will not hold another party liable for risk. The clause can be one-way (unilateral) or two-way (reciprocal). This type of agreement, where one party takes on or assumes the liability of another by contract, is commonly called a “hold harmless” or “indemnity” agreement.

Common examples of liability and clauses that can be assumed by contract:

Additional Insured (AI): Defined as a person or organization not automatically included as an insured under an insurance policy who is included or added as an additional insured under the policy at the request of the named insured. The named insured’s reasoning for providing AI may be to comply with a written contractual agreement requiring the named insured to do so (e.g. project owners, customers, owners of property leased by the named insured). AI status carries the following rights:

• The right to file a claim for damages directly against the primary insured’s insurance carrier.
• The right to a legal defense against third-party claims.
• Coverage for damages caused, as defined by the policy.

IMPORTANT: 

• Contracting parties must have a written contract agreeing to create AI status; Contract must be executed and signed prior to any loss.
• If you have a risk management program in place, relying solely upon certificates of insurance to evidence AI status is not sufficient. Written contracts must be in place in order for insurance policies to respond.

Primary and Noncontributory (PNC): This term stipulates the order in which multiple policies triggered by the same loss are to respond.

• Example: A contractor may be required to provide liability insurance that is primary and noncontributory. This means that the contractor’s policy must pay before (primary) other applicable policies and without seeking contribution from other policies that also claim to be primary (noncontributory).

Waiver of Subrogation (WOS): An agreement between two parties in which one party agrees to waive subrogation rights against the other in the event of a loss.

• Subrogation assumes the legal rights of a person for whom expenses have been paid. It occurs when an insurance company pays losses to its insured then sues the party that the insured contends is liable for the loss in an effort to recover the amount of the loss.
  • Example: If an SUV runs a red light and hits a contractor’s business-owned truck, the contractor files a claim on his commercial auto insurance policy and his insurance provider covers the damages to his truck. After the claim is settled, the contractor’s insurance provider uses subrogation to seek reimbursement from the SUV owner by going to court on behalf of the contractor.
• Intent of WOS is to prevent one party’s insurer from pursuing subrogation against the other party.

Direct Notice of Cancellation (DNOC): Provisions in policies mandating that insurers are to provide advance notice of cancellation or nonrenewal of a policy. The most commonly requested cancellation notice period is 30 days, although state amendatory endorsements can shorten this period to 10 days or extend to 60 days.

Alternate Employer Endorsement: An endorsement added to a workers compensation policy that provides an entity scheduled as an alternate employer with primary workers compensation and employers liability coverage as if the entity were an insured under the policy.

• Commonly used when a temporary employment agency is required by its customer (the alternate employer) to protect the alternate employer from claims brought by the insured’s employees.

When dealing with contracts, a close working relationship with your attorney and your insurance advisor is essential to minimize your risk and make certain you have the necessary coverage in place.

#teamkoppinger – ready to assist with contract review guidance and solutions