The Basics to Understanding Insurance and Indemnification Clauses

By Remmie Butchko, CIC

Georgetown Insurance Service, Inc.

Silver Spring, MD

 

When entering into agreements, such as leases, construction agreements, etc. it is critical to understand the structure of insurance and indemnity provisions. These agreements can be very complex, and you need to maintain control over liability, so you don’t put your business’ future at risk.

First, it has become somewhat commonplace to add another party as “additional insured.” When you name somebody as “additional insured” you are basically giving the other party(s) rights under your policy. As in rights to make a claim.

Secondly, it is becoming more common that the insurance be primary-noncontributory. Primary means regardless of circumstances, yours pays first. Noncontributory means should there be multiple parties involved in a negligent act, yours pays all. So even if you are determined to have contributed 1% negligence to the accident, you pay all.

Waivers of subrogation are also popular. Subrogation is when your insurer pays a claim, and then recovers the money from another party who was actually responsible for the loss. A common example is an employee who is injured, but the injury was the fault of another person or perhaps another contractor on site. When subrogation rights are waived, your insurer has no right to recover against the person responsible for the injury, and the claim is stuck on your loss record (and eventually into your Experience Modification if it is a Workers Compensation loss).

From an indemnification standpoint, hold harmless clauses are also popular. Holding someone harmless basically means one party assumes the legal liability for the negligent acts of another party. Sometimes this can be problematic, especially since the scope of a hold harmless agreement can be broader than the extent that insurance is available. This means you could be contractually obligated to claims broader than what your insurance coverage will provide.

If possible, it is best to avoid these requirements. If they cannot be avoided, consider obtaining advice from a lawyer familiar with the laws of your state. In some cases, it may be prudent to consider these clauses to be “deal-breakers.”

At the end of the day it is your business to protect. These are terms and conditions that can adversely impact, or perhaps even take down, everything you have built.

It is worth taking the time to negotiate these terms and conditions, and in some cases walking away might be your best option.

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