Businesses enter into numerous contractual agreements year after year that have both risk management and insurance implications. On these agreements, which are often given only a cursory review, it is important that policies and procedures should be in place so that every contract could be reviewed, the risk quantified, and transferred if appropriate.
The purpose of a contract is to spell out the responsibilities of each party, the consideration being exchanged, and other terms and conditions that affect the transaction. Another way to look at a contract is “a piece of paper that marries two business parties together by explicitly anticipating every eventuality of their divorce.”
The importance of contract review in the risk management process cannot be overstated.
We routinely review contracts in order to avoid or minimize the assumption of risk by our clients, detecting uncertainty in the meaning of insurance policy wording, controlling insurance premiums through intelligent, creative, skillful risk management -protecting their interests, while keeping premiums at reasonable levels.
Here is a set of the most common insurance issues that arise when reviewing business contracts.
“Any and all claims” or “without limitation” language. Insurance cannot be said to address “any and all claims without limitation.” Terms, conditions and exclusions within commercial insurance policies define the scope of claims addressed. By contrast, depending on the situation, this language might be acceptable in an indemnification clause context (where a company may assume broad liability beyond the scope of insurance that may be in play).
“Additional Insured” requirement for Professional Liability/Errors and Omissions Liability/Cyber Liability. These policies are already designed to address third-party liability. It may not make sense or be beneficial to add a customer, for example, as an additional insured on a policy that already protects their interests.
Subcontractors and Independent Contractors. Contracts commonly attempt to require that the company’s insurance policies address claims related to Subcontractors or Independent Contractors of the company. While a company’s insurance may include limited coverage for work performed by contractors on its behalf, this needs to be verified and is not the same as covering these parties explicitly as insureds under the company policies. In general, commercial insurance policies only address the legal liability of the company itself and its employees’ actions in the scope of their employment.
Separate limit requirements for coverage modules under E&O/Cyber Liability Policy. We regularly see contract insurance requirements that read something like:
- Professional Liability (errors and omissions liability): €5,000,000 limit required
- Media Liability: €5,000,000 limit required
- Network Security Liability: €5,000,000 limit required
- Privacy Liability: €5,000,000 limit required
This implies a separate €5 million limit for each component which could be prohibitively expensive (insurance overkill!). Typical E&O/Cyber Liability policies cover each of these areas within a single policy and with an aggregate insurance limit of €5 million, for example.
Requirement to provide advance notice of “changes” to policies. Your insurer will not accept responsibility for providing notice to third parties of policy changes. An incremental improvement to this language might change the threshold to “material” changes and shift responsibility to the insured company.
Third Party Crime or Fidelity coverage. Commonly appearing in contracts with Financial Institutions, this insurance addresses the risk that employees of the company will steal from a third party (i.e., customer). Companies that do not have a “blanket” policy already in place will need to obtain a new policy to meet this requirement.
Catastrophic Perils – Flood and Earthquake. Some leases require a tenant to insure its own property or even the building owned by the landlord (!) against flood and earthquake. This coverage is not included in most commercial property insurance policies, or may be included at minimal sublimits. Specialized coverage may need to be procured to meet such requirements.
Modest Requirements – “Okay, we’ll comply”
Some common requirements may necessitate endorsements to your policies, perhaps with a modest additional premium charge.
- Waiver of Subrogation for Workers’ Compensation
- “Primary and non-contributory” wording for policies other than Commercial General Liability.
- Loss Payee for Property – identifying the third party as the beneficiary of property insurance.
“Owned, leased” auto liability. Companies without corporate-owned vehicles cannot technically comply with this requirement as they would have in place only Non-owned and Hired Auto Liability.
Indemnification language: Many contracts require broad indemnification by one party of another. By their nature these clauses are outside the scope of insurance. There are, however, some general risk management related practices around indemnification language:
- When possible or applicable include a mutual indemnification language such as mutual hold harmless clause.
- Include an exception to the indemnification obligation for negligent actions of the other party.
The insurance policy is the final and only contract that outlines the insurer’s obligations to the insured. If not issued properly in compliance with all the specific terms and conditions upon which the coverage was negotiated and bound, problems are likely to arise if a claim develops down the road.
Having the policy reviewed by qualified risk management/insurance experts, is to make certain that all terms and conditions in the policy contract properly reflect the terms on which the coverage was bound.
At EXL Consulting we are such experts when it comes to risk management and business
insurance and we are there to help.