Contractual Risk Transfer — Friend or Foe? The legal answer: It depends. It is usually the friend of the stronger party in a contract, who is frequently in a position to dictate terms that are often heavy handed—as far as the law will allow, and sometimes more than that.
But sometimes the onerous terms in a contract can be struck or mitigated. My personal success rate in getting undesirable terms removed or softened is about 50%. But you have to ask, and it sometimes depends on one’s approach.
Most of the time we get to review a client contract before it gets signed. Reviewing after it’s signed is somewhat “academic,” since it’s not likely that any burdensome language will be removed. At that point we can only advise the client of what it might mean for them in the event of a loss.
How a loss is settled by an insurance company often depends on what the parties agreed to in a lease or contract. This is something that many business people don’t think much about, especially if they have never had a claim. Frequent areas of concern include:
- Construction contracts nowadays call for the additionally insured parties to be covered on a “primary & non-contributory” basis, and that the coverage will also apply to completed operations, which are not found in every GL policy. Also, most additional insured endorsements are automatic—that additional insured coverage is granted, but only when required in a signed contract. Starting work without a signed agreement usually means that no additional insured coverage is in effect.
- If a lease does not have a mutual waiver of subrogation, a tenant may have limited or no coverage at all for a loss they cause to that portion of the building which they occupy. This coverage must be purchased specifically.
- Most leases require the tenant to insure the full replacement value of the improvements & betterments, whether they paid for them or not, even though the landlord owns those improvements. Leases can sometimes be ambiguous on this point, which calls for even closer scrutiny. If the tenant does not carry sufficient insurance, they could be in breach of contract, or worse—out of business after a loss.
- Most rental agreements require the lessee to replace the equipment if it is damaged or stolen, even if it is already old. The lessee is also responsible for the loss of use for the lessor’s inability to rent it while it is being repaired or replaced. If you rent equipment infrequently, your best bet might be to pay the additional 12-15% for the damage waiver, which usually extends to loss of use as well. Otherwise, put coverage in place for this exposure.
Bottom line: Read contracts carefully before signing, enlisting your insurance professional and attorney when in doubt, and check your insurance policies to make sure your coverage will address what you have agreed to in your various contracts.
Information about the Author: Mike Cash has been in the insurance industry for almost 40 years, as an insurance company underwriter and a large accounts manager with national & independently owned insurance brokers.
To learn more about Contractual Risk Transfer please contact the author:
Michael Cash, CIC
Senior Account Executive
Insurance Associates, a Marsh & McLennan Agency LLC Company, Inc.