LOSS CONTROL ALERT
Risk Transfer Techniques Certificates of Insurance, Waivers of Subrogation, Hold Harmless Agreements
Imagine that you are the owner of a multi-tenanted retail building that just had a new roof installed. Shortly after the construction is completed, the new roof collapses. You arrive at the scene of the collapse and see your tenants’ customers injured, some still pinned beneath the collapsed debris. Who is responsible for this accident? Who will pay for the injuries and medical bills of the injured shoppers? Who will compensate your tenants while the building is being repaired requiring them to close their businesses during the repair period? How will you afford the costs of defending yourself once the law suits are filed? Questions of liability arise when a subcontractor installs a product or performs services on your behalf that results in an injury or property damage, or when a contractor’s employee is injured in your workplace or on your premises. Liability should ideally lie with the party that has the most control over the potential sources, hazards and exposures of the potential liability. One way to prevent or avoid such confusion and your assumption of unintended liability is to employ a strategy where your suppliers, contractors and subcontractors agree to assume the risk or indemnify you. Transferring risk is a strategy that involves contractually shifting risk from one party to another. The most common form of transferring risk is purchasing an insurance policy transferring risk from the entity purchasing the policy to the insurer issuing the policy. Other methods of transferring risk to another party or entity include contractual agreements or requirements and hold harmless agreements. Performed effectively, transferring risk distributes or allocates risk in an equitable manner and places responsibility for assumption of risk on specific and designated entities in a manner consistent with their ability to control risk. Adequate insurance coverage for the other parties, verified by Certificates of Insurance, along with Waivers of Subrogation, Hold Harmless Agreements and Owner’s & Contractors Protective Policies are important assurances. The guidelines listed below are intended to assist you or your company in applying each of these risk transfer techniques. These guidelines are not an appropriate substitute for adequate insurance, appropriate loss prevention activities or thorough legal review practices on your corporation’s part. Certificates of Insurance To minimize the liability arising out of the work performed by contractors, subcontractors, vendors or a supplier (of a product or a component part), begin by ensuring that the other party carries General Liability, Product Liability, Completed Operations and Workers’ Compensation insurance. (If the service being provided requires transportation activities, the evidence of Commercial Automobile Insurance coverage should also be requested). A Certificate of Insurance is a document that attests to the existence and limits (amounts) of insurance coverage on the other party. When issued to you or your company by the other party’s insurer, Certificates of Insurance also allow you to receive notification of lapse of coverage.
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All Certificates of Insurance should contain the following information; date the certificate was issued name of the insurance carrier for each line of coverage policy numbers, effective date and expiration date for each line of coverage limits of liability or coverage amounts for each line of coverage (the policy limits or amounts should be equal to or greater than the amounts of insurance you or your company carries) include a requirement to notify you or your entity should the policy be cancelled prior to the expiration date provided name, address and telephone number of the agent issuing the certificate of insurance the certificate should be signed by a representative of the insurance carrier or an authorized agent of the insurance carrier (do not accept faxed copies of certificates of insurance); if you do accept a fax copy, insist on the original being mailed to you your name or your company’s name as the certificate holder you or your company should be listed on the certificate as an “Additional Insured”
Being listed as an “Additional Insured” on a policy provides specific rights under the policy provisions as compared to simply being a “certificate holder” which only provides information regarding the other party’s insurance coverage. An “additional insured” status requires the other party’s insurance policies to be endorsed to add you or your company as the named insured. Once you or your company has been endorsed as an “additional insured” you should receive a copy of the policy(s) endorsement indicating your status as an “additional insured”. This status can provide protection under the other party’s insurance policy for liability that may occur as a result of the named insured’s performance or involvement on a job. When requesting status as an “additional insured” you should assure that the other party’s policy will provide the same broad scope of coverage as afforded the named insured, as the coverage could differ significantly. Your legal department or advisor should review the policies, endorsements and differences in coverage to assure proper protection. Benefits of an “additional insured” endorsement: provides certain rights under the other party’s insurance policy, specifically defense coverage discourages the insurance company providing the additional insured status from subrogating against you when a loss is caused by your acts, errors or omissions provides coverage in the event a court decides that your hold harmless agreement is invalid Offers more protection than being a certificate holder
By requiring the contractor, subcontractor, vendor or supplier to name you or your company as an “Additional Insured” you effectively make their insurance coverage the primary respondent in the event of any claims resulting from their work, service or product. This requirement should also be applied to their Umbrella and/or Excess Coverage policies. Most importantly, the other party’s primary responding policy should provide the “additional insured” endorsement. Certificates of Insurance should be updated every year or as the certificates expire based on the policy expiration dates listed on each certificate. If the certificates expire while a contractor is still performing a job for you, an updated certificate should be required. Consideration should be given to use specific disciplinary measures to encourage enforcement and compliance with your certificate of insurance requirements. These measures should include actions that can be contracted for including;
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terminating the contract unless sufficient and satisfactory proof of compliance is provided within a specified period of time not permitting services, work or installation to begin until sufficient evidence/proof of compliance is received withholding payments for services until sufficient or satisfactory evidence of compliance is received acts as a stop gap tool if the indemnity provisions turn out to be unenforceable
Waivers of Subrogation Even if each of your vendors, contractors or subcontractors is adequately insured, their insurers have a right to seek subrogation (recover some or all of their costs) from you if they believe or determine that you were at fault or that you caused the event that led to the claim. This can obviously result in significant legal action and blaming between the parties involved. To avoid such actions, you or your company would need to have a waiver of subrogation from the other party’s insurer prior to any loss. The waiver of subrogation is an endorsement to the insurance policy issued to another party. The following points should be remembered about waivers of subrogation; A waiver should be general and encompass all hazards, locations or work performed. It should cover all operations for which the other party is responsible when performing their work for you or your company. A waiver of subrogation should not contain limitations as to the specific entities, locations or work performed. It should cover all operations conducted by the other party. A waiver of subrogation should not contain clauses requiring the consent of the named insured (the other party) for the waiver to be applicable. A waiver of subrogation is necessary even if no specific clause in the policy of the other party expressly permits subrogation.
Hold Harmless Agreements or Indemnity To maximize your protection, you may wish to seek a Hold Harmless Agreement from your vendor, contractor or subcontractor. This agreement is a legally binding contract in which the other party agrees to hold you or your company harmless for any liability that may arise out of their work (or product) including liability for claims that would normally not be covered by insurance (such as product recalls). In Particular, these agreements even cover situations where you or your company is solely negligent. One caveat is that many hold harmless agreements have been invalidated by courts finding them too binding on the other party and passing too much of the liability or responsibility from you to the other party. Important points to remember about hold harmless agreements include; Hold Harmless agreements must be in writing and must clearly state the indemnifying party’s (the other party’s) responsibility to indemnify you or your company against any liability, loss or damage. If a corporation signs the agreement, the authority of the person signing the agreement should be apparent (vice president, president, etc). Most corporate bylaws permit a vice president to contractually bind the corporation. The same may not be true for corporation secretaries, treasurers or managers. The preferred form of indemnity agreement is one that indemnifies against liability; since it does not require that actual damages be shown before the agreement operates. For this reason, Indemnity agreements that indemnify against “liability” are preferred and should go so far as to require the indemnitor to “defend against suits/actions” and should also include legal fees and costs incurred by the indemnitee (you or your company) in their own defense of the claim or suit.
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The agreement should not have a term or be cancelable without sufficient notice in writing to you or your company. There should be no limitations on the amount of time in which to make a claim. There should be no limitations on the amount of the indemnitor’s liability. The agreement should specifically state that the indemnification is provided for your own or your company’s own negligence.
In conclusion, risk transfer strategies are an important part of a risk management program because the permit your entity to minimize its chances of taking on another entity’s liability unknowingly, or from being exposed to additional liabilities due to the actions of others. They also permit the shifting of liability to others. Prior to accepting any of these risk transfer strategies, documents and contracts (or prior to providing them to others), you or your company should have them reviewed by your legal advisors or corporate attorney.
Loss Control is a daily responsibility of your individual management. This publication is not a substitute for your own loss control program. The information that is provided in this Alert should not be considered as all encompassing, or suitable for all situations, conditions, or environments. Each organization is responsible for implementing their safety/injury/illness prevention program and should consult with legal, medical, technical, or other advisors as to the suitability of using the information contained in this Alert.
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