| Contracts as a Risk Management Tool | ||
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Indemnification Indemnification is the most common form of risk transfer. In an indemnification transaction, one party agrees to assume another's liability. This shifts normal liability and potential risks from one contractual party to another. Implied indemnity is a matter of common law while express indemnity is written in a contract. Indemnification takes many different forms: The agreement language is often construed against the drafter of the contract. It should be noted that state civil procedure codes can often have a significant impact on contractual language. So what does indemnification really entail? Here are some key elements of an indemnification pact: Furthermore, there are Additional Insured endorsement requirements. Primary non-contributory language is often required of the indemnitor. Also, notice of cancellation and non-renewal is often required by the business contract. The insurance policies do not track with this requirement. The policies must be endorsed to provide this notification to the Additional Insured. Deductibles and retentions are to be carried by the indemnitor in an indemnification contract. Insurance coverage often does not respond to the breadth of the indemnity agreement. Indemnity issues There are a slew of issues that accompany indemnification. Let's examine some of the key concerns. First of all, there's the wording of the indemnity agreement itself. The agreement should have "clear and unequivocal" wording, resulting in both contract parties understanding of the intent. And obviously the contract should comply with the law, per the jurisdiction in which the contract is composed and enforced. Negotiating the indemnification contract is an issue that must be properly addressed. Negotiation of terms are based on many factors: Another concern is relying on the indemnitor's contractual obligations. This would involve: The rating of the carrier during the contract term is a key point here. It is important to verify that the contract is clear if the rating of the carrier is downgraded during the contract term. Either the carrier is approved or replaced with another carrier that is in compliance. Related to the above concern is the ability of the indemnitor to comply with contractual obligations. Defense-attorney fees, court costs, other costs, and damages to a third party-should be a separate issue in the business contract. Defense should be addressed specifically in the contract. The contract should specify insurance to contain contractual liability protection. It should be noted that defense costs for an indemnitee can reduce the indemnitor's limit of insurance. The parties involved should review the effects that choices have on the reporting of loss requirements. They should also review the impact of prior knowledge of loss limitations and exclusions contained in the client's policy. Indemnification can have an effect on the existing insurance programs, as relates to protection of limits and control of losses. If setting up the other party in the contract as the primary insured, do you structure the client's insurance as excess? Do you allow the client's insurance to remain as the primary insurance? The business contract should be clear that the indemnification requirement exists, whether or not insurance is valid and collectible. Also, insurance programs should remain in effect after the term of contract. Specify the length of time required. Determine the ability to follow up on that requirement. The contract needs to be clear that the indemnitor will be responsible for any deductible or retention on behalf of the indemnitee. Some contracts are now specifying that the deductible or retention will not be applicable to the indemnitee and/or Additional Insured. The depletion of the indemnitor's insurance can impact the following areas: Non-response of the indemnitee's insurance can result from known loss, damage limitation / exclusion, or prior work exclusion. Another concern is the type of indemnity agreement. Does it involve a lease? Does it involve a construction agreement? If it's a construction agreement, is it with a general contractor or a subcontractor. Certificates of insurance are a factor that relates to indemnification per business contract requirements. Proper indemnification can be supported with an endorsement(s). Certificate holders or Additional Insureds do not normally receive notice of cancellation or non-renewal, which is often required by a business contract. Some types of policies do not provide contractual liability: Be sure to specifically require modification of contractual liability exclusion in these latter types of policies. CGL policy language A CGL "insured contract" responds for bodily injury and physical disability claims only-not personal or advertising injury. The newer CGL editions provide that the insured's limits could be reduced to pay other party's expenses for defense. A CGL policy may respond to any contract or agreement pertaining to your business, under which you assume the tort liability of another party to pay for bodily injury or property damage to a third party. As mentioned before, tort liability means a liability that would be imposed by law in the absence of any contract or agreement. In certain cases, state courts have ruled that CGL policies cover damages "because of" bodily injury or property damage, not just "for" bodily injury or property damage. |
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| Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course. |
