Understanding & Mitigating Risks in Contracts Presented by R. Scott Agar, CPCU, ARM Principal Consultant

Introduction I AM NOT A LAWYER! I am a risk management and insurance consultant. One is licensed to practice law. One is not licensed to practice law.

The Starting Point Liability or risk you (or the other party) would have under common law. Liability or risk you (or the other party) would have in the absence of a contract.

Contracts In General Contracts form the basis of an agreement between the parties involved in some business relationship. Contracts should reflect the intent of the parties. Contracts should identify each parties’ responsibilities.

Contract Responsibilities One responsibility (risk) is what happens when bad things happen? When bad things happen, who is responsible (liable) for the bad thing and the financial consequences of it?

What is Contractual Risk Management? Contractual risk management means: Identifying “risks” to your municipality posed by your contractual relationships with other parties, and Putting in place mechanisms to manage or limit those risks.

What is Contractual Risk Management? Contracts have many risks, including Operational Risks: Technical Specifications Scheduling Payment Changes Default Regulation Compliance

What is Contractual Risk Management? Our focus is on risks of loss resulting from: Damage to property Injury to persons Acts of God Insurable and uninsured

What “Risks” Are We Managing? Where a contractor/vendor/tenant/permittee engages in activities that pose a risk of liability for your municipality, but who may not be financially able to cover the loss. Where you assume risk of loss or liability for the other party.

What “Risks” Are We Managing? When you release a party from liability. Limitations on the other party’s obligations. When you assume a risk for which you do not have coverage

Contract Formation You can’t manage contractual risk if you don’t control contract formation. If your agreement isn’t in writing. Beware of “boilerplate” terms and conditions on a vendor/contractor’s form.

Contract Formation Understand that contracts are easily made in Pennsylvania. Enact a written contracting policy so that your workforce understands who has authority to enter into agreements, and train them on it.

Good Contracting Policy Identifies who has authority to approve and execute contracts. Describes when legal review of a proposed contract is required. Designates an employee who is responsible to implement the policy. Requires the use (where possible) of standard agreements/purchase orders prepared by your municipality. What used to be called boiler and machinery insurance is increasingly being called "equipment breakdown insurance," precisely because that title provides a better description of what is covered. Of course, equipment breakdown policies cover loss resulting from boiler explosions--but they also cover mechanical breakdown and electrical damage (such as electrical arcing) losses that can be suffered by almost any type of organization, regardless of the type of equipment used. Mechanical breakdowns and electrical damage losses are relatively commonplace occurrences that are not covered under standard commercial property policies

Contract Elements Indemnification Hold Harmless Defense Limitation of Liability Limitation of Damages Limitations on Litigation

Contract Elements (cont.) Waiver of Right to Subrogation/Third-Party Recovery Insurance Coverage Requirements Hazardous Substance Obligations Waiving statutory protections (i.e., Governmental Immunity)

Indemnification/Hold Harmless These require one party to pay a claim/judgment against another party. The event that triggers the obligation to pay and the timing of payment depend on the language used (hold harmless v. indemnify).

Parties to Indemnification Indemnitor – the party assuming the liability or responsibility for loss of the Indemnitee. Indemnitee – the party that transfers the liability or responsibility for loss to the Indemnitor.

Different Forms of Indemnification Broad Form Intermediate Form Limited Form

Broad Form Indemnification The indemnitor has assumed an unqualified obligation to hold the indemnitee harmless for any and all liabilities arising out of the agreement, regardless of which party was at fault. Includes the indemnitee’s sole negligence.

Intermediate Form Indemnification The indemnitor assumes all liabilities of the indemnitee, except where the injury or damage is caused by the indemnitee's sole negligence. The indemnitor assumes all liabilities of the indemnitee caused in whole or in part by the indemnitor.

Limited Form Indemnification Sometimes referred to as comparative fault form, this form obligates the indemnitor to indemnify only to the extent of its own fault.

Your Indemnification Obligation Does it track with your Coverage? Does it have a Limit of Liability? Does it have any Exclusions? Does it survive the Agreement (Term)? Negligence in Whole or in Part?

Other Party’s Indemnification How will they finance it? Does track with their Coverage? Does it have a Limit of Liability? Does it have any Exclusions? Does it survive the Agreement (Term)? Is it enforceable? Negligence in whole or in part?

Defense Clauses An obligation to defend means paying for a lawyer to defend that party in a lawsuit, including related costs of litigation. While some lawyers recommend that you require the ability to choose you own counsel, that may not be viable. Contracts that permit the Other Party to select legal counsel conflict with insurance.

Limitation of Liability and Damages An agreement to limit the types of claims that you can assert against the other party than the law would otherwise allow. A restriction on the type or amount of damages that you can recover from the other party than the law would otherwise allow.

Limitations on Litigation Choice of Forum Choice of Law

Limitations on Litigation Choice of Forum - a Pennsylvania municipality agrees to a contract term that requires all litigation to occur in Scottsdale, AZ. Choice of Law - All contracts should state that PA law controls and that all litigation (even if arbitration) occurs in federal or state court in PA (don’t give up the home field advantage).

Waiver of Right to Subrogation When someone harms you, you may have a right of recovery from that someone. When you enter into an agreement with an insurer (or PennPRIME), it is customary that you agree to preserve that right of recovery. If the insurer pays a claim on your behalf as a result of that harm, you pass on that right of recovery.

Subrogation Subrogation is when an insurer exercises the insured’s right of recovery from the party that caused the damage. A waiver of subrogation is an agreement by the insurer not to exercise its right of subrogation. If you waive your right of recovery or agree to secure a waiver of subrogation, this limits PennPRIME’s ability to reduce losses through subrogation.

Insurance Coverage Requirements Have contract language that requires the other parties to maintain insurance coverage appropriate to risk. Have a written policy or procedure that describes the “who, what, and how much” for contractual insurance requirements. Require proof that the other party has the required insurance through certificates of insurances and endorsements.

Insurance Coverage Requirements Name your municipality, its elected and appointed officials and employees as additional insureds on the other party’s commercial general liability (CGL) policy. Require notice to municipality of cancellation or modification of the policy. Require that insurer be licensed in PA and rated.

Insurance Coverage Requirements WATCH what insurance coverage you agree to provide to other parties. There have been a number of circumstances where Member’s agreed to: Provide higher limits than they had. Provide coverages (i.e. pollution liability) they did not purchase. Provide coverage on operations or exposures that were excluded (i.e. property coverage on land)

Common Contractual Coverage General Liability Bodily Injury and Property Damage assumed in a contract Arising out of your Work Police Professional Liability Mutual Aid Agreements Public Officials None

Obligations for Hazardous Substances Often appear in construction contracts. Requires municipality to hold contractor harmless for existing environmental hazards contractor. Most municipalities do not have pollution liability insurance coverage.

Political Subdivision Tort Claims Act You benefit from the immunity provided by Pennsylvania’s Tort Claims Act. However, indemnification/hold harmless language could create contractual liability that effectively waives the protections of the Tort Claims Act.

Professional Help Know when you need it? Solicitor/Legal Counsel for Contract/Legal questions. Insurance Representative for Coverage questions. Do it BEFORE you sign!

Questions?

Contractual Risk Management Presented by R. Scott Agar, CPCU, ARM Principal Consultant