Because municipalities enter agreements with outside vendors and contractors, reviewing contracts to ensure you are properly protected and requesting the appropriate proof of insurance is crucial
By Bobby Dufkis
Broadly defined, risk transfer is the transfer of risk from one party to another party who is willing to accept that risk. It is a critical tool to make sure your municipality is not responsible for someone else’s operations or mistakes that can cause property damage or bodily injury. If risk transfer is properly established, it places responsibility on the designated party that controls the risk.
On a frequent basis, municipalities enter agreements with outside vendors and contractors. Whether it is for a new construction project, snow plowing, fireworks display, carnivals/festivals or an outside organization leasing municipal space, these exposures can result in property damage, as well as severe and even fatal injuries. Reviewing the contract to ensure you are properly protected and requesting the appropriate proof of insurance coverage can be a daunting task.
Here are five important elements to consider for properly transferring risk:
- Have a written contract signed by both parties, rather than accepting a verbal agreement.
- Have your municipal attorney review the agreement for acceptable language before signing. If the written contract is provided by the outside entity/vendor, it likely contains language in their favor.
- Include hold harmless, defense and indemnity language that is favorable to your municipality. Again, having your attorney review is important.
- Ensure the agreement clearly identifies the specific insurance coverage and minimum acceptable limit amounts to be carried by the entity/vendor. Your insurance broker can assist you in developing these coverages and limit specifications.
- Require that the entity/vendor add your municipality to their commercial general liability policy as an additional insured for the event/project. The agreement should further require the entity/vendor provide you with evidence of the required insurance coverage through a certificate of insurance, including a copy of the endorsement showing your municipality as an additional insured.
Having systems like this in place will help to ensure you have properly transferred risk away from your municipality and to the appropriate party. To put it all in perspective, below are a few examples of potential issues involving contract review and why proper risk transfer is important:
The Contractor’s Aggregate Is Depleted
Your contractor had $1-2 million worth of General Liability insurance, just as you stipulated in the bid specifications. Unfortunately, the contractor had several jobs underway, and all their projects were damaged by an unexpected storm. So, now you are sharing the loss with other parties. The contractor’s $1 million per occurrence is divided equally among the aggrieved parties, without a “per project” endorsement.
Your Certificate of Insurance (COI) Is Not “Endorsed”
The contractor’s policy may state that to be properly listed as an additional insured, your entity must be endorsed on the policy. Therefore, it is critical to require the contractor/vendor provides you with an original copy of the actual additional insured endorsement as proof.
The Contract Provisions Limit the Contractor’s Obligations
It is crucial that you require contractors/vendors to defend, indemnify and hold harmless your public entity for damages and expenses arising out of the ongoing work or service performed under the contract. Do not accept contract provisions that limit the contractor’s/vendor’s defense and indemnification obligations to damage or loss that results from their “sole” or partial negligence.
In addition, your insurance broker should aid in reviewing the various risk transfer mechanisms your municipality has in place. A good risk transfer program should:
- Identify the Exposure – Assemble a list of your projects, contractual obligations, subcontractors, leases and mutual-aid agreements. These agencies should provide you with a Certificate of Insurance (COI) naming you as an “Additional Insured”.
- Evaluate the Risk – Determine the amount of exposure you are undertaking. Frequency and severity are the factors you need to consider in assessing your exposure to risk.
- Control the Risk – Finance the risk by purchasing insurance to cover the exposure. You can attempt to avoid the risk, although this is often difficult to do because of the duty public entities have to the public for certain services. The best option is to control the risk through prevention and solid risk transfer.
- Implement Risk Control – Reduce your losses by implementing effective risk controls. All controls should be rigorously and consistently applied.
- Monitor the Program – Continue to monitor your program’s effectiveness to improve your results.
By addressing your risk transfer exposures, you can avoid the example scenarios and many other risks as well. Be sure that your risk transfer program funnels down to staff trained to handle these important documents.
Bobby Dufkis is a Principal in the Property and Casualty and Employee Benefits divisions of Assurance. He has over 18 years of experience managing the overall strategic development and service platform for clients. Bobby takes a highly personalized and aggressive approach with his clients in order to deliver innovative benefit solutions and cost-effective measures for managing risk. Bobby graduated from Lewis University with a Bachelor’s degree in Marketing and is a member of their Council of Regents. He is also on the board of directors for St. Joseph High School.