62
RISKMANAGEMENT
ACT
DECEMBER 2014
Bill Smith
discusses
the slippery slope of
contract language
that youneed tobe looking for: the
indemnityprovision and the insurance
provision.Arguably the twomost
important clauses in a contract, these
twoparagraphswill tell you exactlyhow
your companyneeds to react in the event
of a claim andwho, specifically, your
insurancepolicyneeds to cover.
Indemnity provisions
Brokendown into its simplest form,
indemnity is apromise– apromise to
pay for possibledamage, loss or injury.
Inmany cases, failure to accept the
indemnityobligation in the event of a
claim can constitute abreachof contract,
or in some cases, take a companyout of
the running for being awarded a certain
job in the first place. But indemnity
provisions are tricky– and sometimes
dangerous – and it’s important that you’re
not giving away “additional insured”
coverageobligationsunnecessarily.Many
general contractors and subcontractors
useoverlyburdensome contract language
to trigger coverageobligations regardless
ofwhose fault the claim is. Insisting that
the language reads in such away that
your companyonlyhas to respond to
losses that result fromyour ownnegligent
operation is oneway to ensure you’ve got
a fighting chance in court.
Togive you an ideaofwhatwemean,
compare these two indemnityprovisions.
Just by adding thewords “negligent
operation” to theprovision,we’ve
successfully limited the instances inwhich
your companywill have to respond. The
first example is open ended,whereas the
second example closes thedoor to claims
that didn’t arise from somethingyour
company actuallydid.
To the fullest extent permitted
by law,Vendor agrees tohold
Contractorharmless from and toprotect,
defend and indemnifyContractor against
any and all liability, damage (whether
for personal injury, propertydamage,
or direct or consequential damageor
economic loss), costs, attorney’s fees
and expenses arising fromor suffered
or incurred inor anymanner connected
withofVendor’s Services.
To the fullest extent permitted
by law,Vendor agrees tohold
Contractorharmless from and toprotect,
defend and indemnifyContractor against
any and all liability, damage (whether
for personal injury, propertydamage,
or direct or consequential damageor
economic loss), costs, attorney’s fees
and expenses arising fromor suffered
or incurred inor anymanner connected
with thenegligent operationofVendor’s
Services.
Insurance provisions
As you canprobablyguess from the title
above, the insuranceprovision spells out
exactlywhat is requiredof you from an
insurance standpoint. It’s theparagraph
in the contract that specifies exactly
what limits of coverage your company
needs toprovide, the financial rating
your insurance companyneeds tohave
(usually anA.M. BestCompany rating),
and inwhat circumstances your insurance
policyneeds to extend coverage to a
general contractor or subcontractor as an
“additional insured.”Additional insured
status –we call it “AI status” for short
– essentiallygives the same rights the
policyholderhas to anyonewho’snamed
as anAI in the contract. In fact, I’dgo as
far as to say that theAI requirement is the
most critical component to contractual
risk transfer in all types of construction
liability claims and lawsuits.
Inmany cases, general contractors
and subcontractors try to require
unconditionalAI status that allows
them to carryon their tasks on a jobsite
virtuallyworry free.Withunconditional
AI status, thatmilliondollar insurance
policyyoupay a significant premium for
follows theAI around the jobsite, covering
Negotiating
contract
language
THEAUTHOR:
Bill Smith
is
executive vice president
of claims and risk
management for NBIS.
A
tNBIS, contract negotiation
is ahugepart of our business.
We simultaneously fight
for the right contract language for our
insuredpolicyholderswhile trying to
educate them about the things they
shouldbe lookingout forwhen signing
subcontracts.
JohnSchoppert,NBIS loss control
riskmanager, isheavily involved in
our contract reviewprocess, andhe
spendshis dayshelpingpolicyholders
understand and incorporate the right
terms and conditions into their contracts.
When I askedhim about thebiggest
problemhe seeswhen first analyzing a
crane company’s contract, his answer
was a simpleone. “Thebiggest problem
wehavewith contracts is gettingour
insureds tounderstand and incorporate
the ‘indemnity’ and ‘insurance’ language.
They just don’t understand that you can’t
haveone contract for all the states they
work in.”
Schoppert’s right, of course, because
there isn’t aone-size-fits-all typeof
contract out there. Each job is different,
andmost of the time the stateswhere
the companies completing thework are
domiciledvary, sohow couldwe think
that one contractwould suffice?Perhaps
we justwant things tobe easy.Andwho
canblameus?Butweknow also that
almost nothing inbusiness is easy, and
contracts are certainlyno exception.
Tobreak this down into somethingwe
can easilydiscuss in amonthly column,
we’ll focus on two things inyour contract
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