Contract Do's & Don'ts
Contract language can be tricky, especially when it comes to insurance requirements. While The Trust is always available to review proposed contracts on behalf of its Members, there are some things you should look for, within third-party contracts, to ensure you are properly protected.
- DO make sure that the contract requires that the Member entity is named as an Additional Insured on the third-party’s General Liability policy. A Certificate of Insurance showing the Member entity as the Certificate Holder and Additional Insured should be obtained when the contract is executed. The benefit of being an Additional Insured on the third-party’s General Liability policy is that it provides liability coverage for the Member for all claims arising out of the third-party’s negligence.
- DO make sure that the level of General Liability coverage required to be obtained by a third-party is, at a minimum, equal to the level of General Liability coverage that the Member has with The Trust.
- DO make sure that the third-party’s coverage includes an annual aggregate amount that is two or three times greater than the General Liability amount. The importance of this is to guard against the misfortune of having one occurrence cause harm to more than one person. In such an event, for instance, if the third-party entity has a General Liability coverage limit of $1 million per occurrence, when there are more than one person harmed, the $1 million coverage for that occurrence may not be sufficient to protect the Member. Therefore, as an example, when the third-party entity is required to have $1 million in General Liability coverage, per occurrence, make sure that the coverage includes an annual aggregate of $2 million or $3 million.
- Do make sure your contracts include the necessary and appropriate lines of coverage applicable to your project (i.e., Workers’ Compensation, Automobile Liability, Professional Liability, General Liability, Property, Bonds, etc.)
- DON'T agree to Waive Rights of Subrogation for General Liability coverage. The Liability Insurance Policy issued by The Trust to its Members has an express authorization that The Trust is subrogated to all rights which the Member may have against any person or entity with respect to a claim. The importance of preserving all rights to subrogation is that any recovery that The Trust is able to obtain in a subrogation action against a third-party is to the direct benefit of the Members.
- DON'T agree to name a non-eligible entity as an Additional Insured on the Member’s policy with The Trust. As per its enabling statute, The Trust can only name “eligible entities” (city, town, school committee, water or fire district, or other public or quasi-municipal authority, agency or entity, or organization that is an instrumentality of such cities or towns) as insured entities. The Trust is able to issue an Evidence of Insurance Certificate which holds the Certificate Holder (the third-party) harmless on behalf of the Member for claims arising out of negligence of the Member, subject to the Policy language.
- DON'T agree to defend and indemnify a third-party for claims arising out of the negligence of the third-party. This issue arises when the third-party asks the Member to agree to defend and indemnify the third-party against all claims except for claims arising out of the “gross” negligence of the third-party. Always delete the word “gross” from the draft contract. This would mean that the third-party will remain responsible for claims arising out of its conduct, regardless if the conduct is “gross” or merely negligent.
For more information, contact Colleen Bodziony, Director of Operations & Member Services, at email@example.com or (401) 438-6511, ext. 512.