Contractual and Other Liabilities – Page 2 – Setnor Byer Insurance & Risk

What is a Certificate of Insurance?

Certificates of Insurance are documents provided by Agents to verify the existence of insurance coverage. They are commonly used when an agreement or contract requires a party to maintain specific types of insurance. For example, a Certificate of Insurance can be used when:

A general contractor wants to verify that its subcontractor has the statutorily required workers’ compensation insurance;
A mortgage lender wants to verify that the homeowner has sufficient property insurance;
A commercial landlord wants to verify that its tenant has all the insurance coverage required by the lease; or
A homeowner wants to verify that its lawn service company has general liability insurance.

Certificates of Insurance are issued to the certificate holder—the person or entity that needs to verify insurance coverage. Though common and relatively straightforward, there is quite a bit of confusion about what Certificates of Insurance do, and more importantly, do not do.

A Certificate of Insurance provides a superficial snapshot of insurance coverage that is in place at the time it is created. Contrary to what many believe, Certificates of Insurance:

Are NOT insurance policies.
Do NOT provide certificate holders with any rights under the insured’s policies. This means certificate holders cannot file a claim or request a defense under the insured’s policies.
Do NOT amend, extend or alter the coverage provided by the insured’s policies. This can only be accomplished with an endorsement, rider or amendment to the policy.
Do NOT create a contract between the insurance company and the certificate holder.
Do NOT guarantee that insurance coverages listed on a Certificate of Insurance will continue in the future. A Certificate of Insurance issued today may not be accurate tomorrow.
Are provided for informational purposes ONLY.

Though there are various Certificate of Insurance forms, those developed by ACORD (Association for Cooperative Operations Research and Development) are widely used to provide specific information about existing insurance coverage, such as:

the insurance companies issuing the policy
the policy numbers
effective dates
types of insurance (ex. general liability, automobile, workers’ compensation, property)
policy limits

These forms also provide a space to add additional comments or conditions. This is where problems may arise if an insured or certificate holder wants to add specific language to their Certificates of Insurance. For example, a certificate holder may want to state that there is an additional insured under the policy, or an insured may want the certificate to state that any obligation to indemnify the certificate holder is covered by the policy.

If such statements happen to be true, it is not because they were typed on the certificate. Remember that Certificates of Insurance do not affect, extend, or change the insurance policy, so any incorrect or contradictory statements are meaningless to the insurance company. They can, however, be grounds for a costly lawsuit, so an experienced insurance agent should be used when issuing or receiving Certificates of Insurance.

If you would like to learn more about dealing with Certificates of Insurance or how we can help, please contact us.

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What is a Third Party Over Action?

Assume an employee suffers an accidental workplace injury. After collecting benefits under his employer’s workers’ compensation insurance policy, the employee tries to get more money by filing a negligence lawsuit. Can the employer be required to pay the employee for his negligence damages? Maybe. Would the employer’s commercial general liability insurance policy cover this? Maybe not.

Workers’ compensation laws are basically a trade-off. On one hand, employees enjoy the benefit of what is essentially a no-fault compensation system that provides benefits for workplace injuries. In exchange, employees generally give up the right to sue their employers for negligence. So, if our employer is immune from the employee’s negligence lawsuit, what is there to worry about? A Third Party Over action.

A Third Party Over action is a type of action in which an injured employee collects workers’ compensation benefits from the employer and also sues a third party for causing or contributing to the employee’s injury. Then, because of some type of contractual relationship between the third party and the employer, the liability for the employee’s lawsuit is passed back to the employer. Here is an example of a typical Third Party Over action.

John, an employee of Acme, trips on a broken floor tile while at work. Despite collecting benefits under Acme’s workers’ compensation insurance policy, John also sues the owner of the building where Acme’s offices are located because it negligently failed to repair the broken tile. Under Acme’s lease, Acme is contractually required to indemnify the building owner for any claims brought by Acme’s employees. Upon being sued by John, the building owner demands indemnification from Acme pursuant to the lease, and essentially passes the liability for John’s negligence lawsuit back to Acme.

Though state statutes and judicial decisions may provide employers with limited protection in certain situations, Third Party Over actions still pose a significant risk. Employers that have agreed to indemnify a third party for its employees’ lawsuits must find out whether they are insured against the risk. This can be very difficult.

Claims involving injured employees are typically not covered by commercial general liability (CGL) insurance policies. However, a Third Party Over action may be covered by some CGL policies if the employer’s indemnification agreement with the third party meets the policy’s requirements. Other CGL policies may exclude Third Party Over actions altogether. This is why it is important to read both the policy form and the third party indemnification contract very carefully.

Given the complexity of Third Party Over actions, a reputable insurance agent with substantial experience in evaluating and insuring against Third Party Over actions should be consulted.

If you would like to learn more about protecting your organization against Third Party Over actions, please contact us.

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Condominium Association 2013 Legislative Update

The 2013 legislative session saw relatively little activity involving Florida’s Condominium Act. Nevertheless, laws have changed, and that’s always important. Here is a brief summary of some of the statutory amendments.

Insurance

The Condominium Act identifies property that must be insured by the association and property that is the responsibility of each unit owner. Unfortunately, the statute was not clear in distinguishing insurance obligations from regular maintenance and repair obligations. As a result, unit owners often believed that their association had an obligation to repair property (usually air conditioning units) because it was covered by the association’s insurance.

The 2013 amendment clarifies that the association is responsible for property covered by the association’s insurance policy if it was damaged by an insurable event, as opposed to regular wear and tear.

Financial Reporting

Condominium associations have annual financial reporting requirements. The type of financial statement an association must prepare depends on its total annual revenues. The 2013 amendment made the following changes to the statutory revenue thresholds used to determine an association’s financial reporting requirement:

Report of Cash Receipts and Expenditures: total annual revenues are less than $150,000 (was $100,000)
Compiled Financial Statement: total annual revenues are $150,000 or more, but less than $300,000 (was $100,000 – $200,000)
Reviewed Financial Statement: total annual revenues are $300,000 or more, but less than $500,000 (was $200,000 – $400,000)
Audited Financial Statement: total annual revenues are $500,000 or more (was $400,000)

Associations operating fewer than 50 units, regardless of annual revenues, must prepare a report of cash receipts and expenditures. Under the old law, this requirement applied to associations operating fewer than 75 units.

Official Records

Unit owners have a right to inspect and copy the association’s official records. Associations are now required to let unit owners make electronic copies of these records with portable devices, including smartphones, tablets, portable scanners or any other technology capable of scanning or taking photographs.

Member Directories

The Condominium Act prohibits associations from disclosing unit owners’ personally identifying information. However, associations are now allowed to publish and distribute to unit owners a directory containing the name, address and telephone number of each unit owner. Unit owners can exclude their telephone number from the directory by making a written request to the association.

Elevator Safety

Condominiums covered by Florida’s Elevator Safety Act were exempt from having to comply with Elevator Safety Code updates until either July 1, 2015 or until the elevator is replaced or requires major modification, whichever occurs first. The 2013 amendment removed the July 1, 2015 deadline. Accordingly, covered condominiums will not have to comply with all updated provisions of the Elevator Safety Code until their elevators require major modification or are replaced.

Some of the other 2013 amendments address board member terms, suspensions from using common elements and board member recalls. It is important for those serving on their condominium board to become familiar with all of the 2013 statutory amendments.

To learn more about your obligations as a board member, take our affiliate’s recently updated online course Condominium Operations: A Primer for Board Members, which has been approved by the Division of Florida Condominiums, Timeshares, and Mobile Homes.

If you would like to discuss how Setnor Byer Insurance & Risk can serve you and your association, please contact us. Clients of Setnor Byer’s Condominium Program enjoy access to various risk management services, such as Setnor Byer’s Risk Management Group and Unit Owners’ Report Line, as well as our affiliate’s Board Member Education Certification,

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Health Benefits and Value under the Affordable Care Act

The Department of Health and Human Services (HHS) released final rules pursuant to the Affordable Care Act (Act) that are designed to help consumers shop for and compare health insurance options in the individual and small group markets. According to the HHS, these final rules will promote consistency among health plans, protect consumers by ensuring that plans cover a core package of health benefits and limit out of pocket expenses.

To make it easier for consumers to make apples-to-apples comparisons among health insurance plans, the final rules create uniform standards of coverage and value.

Essential Health Benefits

The Act provides that health plans offered in the individual and small group markets, including those available through Health Insurance Marketplaces (Exchange), must offer a core package of items and services known as Essential Health Benefits or EHBs, which must be equal in scope to those benefits offered by a typical employer plan. Under the Act, EHBs must provide:

Ambulatory patient services
Emergency services
Hospitalization
Maternity and newborn care
Mental health and substance use services, including behavioral health treatment
Prescription drugs
Rehabilitative services and devices
Laboratory services
Preventive and wellness services and chronic disease management
Pediatric services, including oral and vision care

To protect consumers against discrimination the final rules also:

Prohibit discriminatory benefit designs
Include special standards and options for coverage not typically covered by individual and small group policies
Include standards for prescription drug coverage

Actuarial Value

The final rules outline actuarial values of individual and small group plans to help consumers distinguish and compare plans offering different levels of coverage. Actuarial Value, or AV, is calculated as the percentage of total average costs covered by a plan. For example, if a plan has an AV of 70%, a consumer could expect to pay an average of 30% of the costs.

Beginning in 2014, non-grandfathered health plans in the individual and small group markets must meet certain AVs, which have been assigned the following “metal levels”:

A platinum health plan has an AV of 90%.
A gold health plan has an AV of 8%.
A silver health plan has an AV of 70%.
A bronze health plan has an AV of 60%.

To give health plans some flexibility, a plan can meet a particular metal level if its AV is within 2% of the standard. For example, a silver plan may have an AV between 68% and 72%. The final rules also provide flexibility, if necessary, for issuers in the small group market regarding annual deductible limits to achieve a particular metal level.

To streamline and standardize the calculation of AV for health insurance issuers, HHS is providing a publicly available AV Calculator. In 2014, this calculator will use a national standard population, but in 2015, HHS will accept state-specific data sets for the standard population if states choose to submit alternate data for the calculator.

According to HHS, these final rules will give consumers a consistent way to compare and enroll in health coverage in the individual and small group markets, while giving states and insurers more flexibility and freedom to implement the Act. Time will tell if these final rules will achieve their desired purpose.

At Setnor Byer Insurance & Risk, we are committed to guiding you through Health Care Reform. Check back with us periodically for informational updates about the Affordable Care Act. If you have specific questions about the Act or if you are ready to take action and would like to see how Setnor Byer Insurance & Risk can help, contact us.

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Protecting Your Business from Cyber Liability Risks

Almost every business relies on computers, networks and electronic data to support their business operations and serve their customers. What most business owners don’t realize is the substantial exposure associated with their use of electronic platforms and the data those platforms host. Today, Cyber Liability insurance is available to business owners for the exposures associated with their use of electronic platforms.

Most businesses are not aware that standard Commercial General Liability policies do not contemplate these types of claims, leaving companies with significant gaps in coverage for cyber-related perils. Any business that collects or handles confidential information, stores client data, uses email, generates revenue online, relies on the internet for transactions or uses a network to conduct its business is in need of this important coverage.

Cyber Liability insurance is designed to protect the insured against direct and indirect loss to the Company’s assets as well as third party claims of negligence. Losses can be caused by hazards such as the transmission of virus/malicious code, denial of service attacks, physical theft of a computer/device, accidental release of an insured’s confidential data and attacks by hackers. First party coverage under the Cyber Perils policy includes:

Loss of data
Loss of business income
Electronic theft
Cyber extortion
Security event costs

Third party claims of negligence can include allegations that an insured:

Permitted the unauthorized disclosure of confidential information
Failed to secure a Network against attack
Committed an act of defamation

Of particular interest to many businesses are data breach security concerns. Recent studies have shown that over 70 percent of all data security breaches are experienced by small to medium sized businesses and the cost of a breach can be staggering. The average cost for a data breach claim is over two million dollars. These damages include the cost of data reconstruction, customer/client notification and credit monitoring. This leaves small businesses most at risk because they are unlikely to have the time and resources necessary to handle a data breach security event.

Given the variety and complexity of these occurrences, an experienced insurance agent should be consulted to ensure that proper coverage is obtained and that no gaps remain. If you would like to learn more about insuring against data security breaches, contact us.

Contract Litigation Insurance: Focus on the Principle Rather than the Principal

Unfortunately, the concepts of right and wrong often may not influence the decision to breach a contract. This is particularly true during difficult economic times when parties to a contract often use the threat of litigation to forcibly renegotiate the terms of their agreements. Needles to say, when asking a party to honor their contract, it is unsettling to hear someone respond with “sue me.”

Though litigation may be a necessary evil in today’s business environment, it is disruptive to business itself. Lawsuits often bring about harmful and potentially devastating side effects, such as damage to reputation, increased costs of production, decreased ability to obtain credit, disruption of growth opportunities, and overall uncertainty.

Typically, the greatest burden of litigation involves attorney’s fees. Many contracts contain a provision stating that the prevailing party in a contract dispute is entitled to have its attorney’s fees paid by the losing party. Similar “fee shifting” or “loser pays” provisions are also found in many state and federal statutes.

Though confident litigants often rely on such provisions to justify their decision to litigate, attorney’s fees are only awarded after victory has been declared by judge or jury. Thus, there remains a significant risk of having to pay an opponent’s attorney’s fees.

However, for those seeking some certainty surrounding legal fees associated with engaging in contract litigation, an insurance product offered by Zurich may be the answer.

Zurich’s Contract Litigation Insurance is designed to insure a plaintiff or defendant in a contract-based lawsuit against the risk of paying their adversary’s attorney’s fees if unsuccessful in prosecuting or defending their contract claim.

Zurich’s Plaintiff Contract Litigation Insurance and Defendant Contract Litigation Insurance can offer various benefits to individuals and businesses, such as:

Reducing the financial exposure of litigation;
Increasing settlement negotiation power;
Providing greater budget certainty;
Supporting attorney best practices in litigation;
Tiered pricing that is tied directly to the increased level of risk of a lawsuit; and
Claims handled by former practicing attorneys who understand an insured’s needs and litigation best practices.

As with any insurance policy, it is important to understand the extent and nature of the coverage, as well as any limitations or exclusions from coverage. Consider the following highlights of Zurich’s Contract Litigation Insurance:

For Plaintiff Contract Litigation Insurance, policies must be purchased within 60 days of filing of a contract-based complaint; for Defendant Contract Litigation Insurance, policies must be purchased within 60 days of service of the lawsuit.
Upon being deemed the prevailing party in a contract lawsuit, policies will pay reasonable attorney’s fees, as determined by the court. This may also occur in tort or statutory claims provided the court finds they were intertwined with the contract claims for purposes of any award of attorney’s fees.
Policies are subject to exclusions and non-coverage caveats, including: (1) “bad boy” fraud; (2) no fees awarded if there is a resolution other than a merits-based prevailing party determination; (3) no fees awarded for post-rejection fees incurred after rejection of an offer of judgment (or similar device) under applicable rules of procedure (although pre-offer fees may be covered); and (4) no fees awarded if they are based on discovery sanctions or bad faith conduct sanctions.
The insurance company reserves the right to appoint, at its own expense, counsel to oppose a fee petition or represent the client in an appeal of a fees award.
The insurance will follow if the plaintiff is compelled to arbitration by defendant; however, the insurance coverage will not remain if plaintiff compels arbitration or if the defendant under a Defendant Contract Litigation Insurance policy compels arbitration.

The cost of engaging in litigation is oftentimes the determinative factor in deciding whether to enforce or defend one’s contract rights in court. As a result, a party to a contract may elect not to file a breach of contract lawsuit for purely financial reasons despite having a winning case. Moreover, if the loss resulting from a breach of contract is small compared to the costs of filing suit, a party is vulnerable to abuse simply because the other party to the contract knows it is not worth pursuing in court.

When applicable, Contract Litigation Insurance allows a party to a contract dispute to focus on the merits of the case, rather than the attorney’s fees associated with pursuing the case.

If you would like to learn more about Contract Litigation Insurance, or if you would like to discuss how we can help you in identifying and controlling your business risks, please contact us.

Did You Know About Leasehold Interest Coverage?

Did you know that in response to the high number of commercial property vacancies, landlords, in an effort to entice new tenants, are increasingly offering more favorable lease terms? But even sweetheart deals like these carry some risks that business owners need to protect themselves against with well-designed insurance policies.

Generally, a lease is considered favorable when the rate per square foot is somewhat or substantially less than the rate for comparable space currently available in the local commercial real estate market. Landlords are often willing to offer these extremely favorable lease rates in tough economic times to attract tenants, who can lock into these deals not only to save now but also to enjoy a better-than-market lease agreement when the real estate market recovers.

But favorable lease agreements are not without risk. These lease agreements generally allow a landlord the option of cancelling a lease should a specified event, such as major property damage, occur. If a tenant has a lease rate that cannot be replicated in the local real estate market, then losing that favorable lease can result in an unplanned increase in operational expenses for years to come.

Here is an example: ABC Advertising enters into a five-year agreement with its landlord, paying $15 per square foot for 20,000 square feet of space. When the building suffers major property damage during the first year of the agreement, ABC’s lease is cancelled, forcing ABC to either find a new operating location or accept a renegotiated lease at a higher cost. With the current area market price for equivalent space at about $20 per square foot, ABC, to lease 20,000 square feet of space, would see its monthly lease payments jump from $25,000 to $33,333, an increase of 33 percent. Such a spike in monthly lease payments translates into $100,000 of additional annual operating costs in rent alone, a potentially crushing increase.

Business owners can protect themselves against the risk of cancellation of a favorable lease by obtaining Leasehold Interest Protection insurance. This policy covers the losses suffered by an insured tenant when a premises lease with favorable terms is cancelled as a result of damage to the premises from a covered cause of loss, thereby forcing the insured to lease a replacement premises at a significantly greater expense. Like a Business Income policy, Leasehold Interest coverage protects against the harsh financial consequences of an indirect loss that arises from a direct loss.

There are four exposures that can be insured by Leasehold Interest Protection:

Tenants Lease Interest: the difference between the rent actually paid by the tenant and the market value of the premises.
Bonus payment: a non-refundable amount of money paid by the tenant to acquire the reduced lease (not equivalent to a security deposit). For example, a landlord, for an upfront payment of $100,000, agrees to lease space at $10 per square foot rather than at the market value of $15 per square foot. The landlord receives an immediate infusion of revenue, and the tenant gets a favorable lease, saving the insured hundreds of thousands of dollars over the term of the lease.
Improvements & Betterments: additions and upgrades the tenant has made to the property that cannot be removed, thus becoming the property of the building owner.
Prepaid Rent: rent the tenant has paid in advance that will not be returned.

Given the volatility of the current commercial real estate market, savvy business owners with favorable leases must protect themselves from the devastating financial losses that can result if their lease agreements are cancelled. Contact a Risk Management professional today to learn more about Leasehold Interest Protection and how it can help you dodge this speeding bullet.

Did You Know? July 2009

Business owners commonly agree to accept the liability of another party, in a practice known as “risk transfer.” Contractual risk transfer is a non-insurance contract between two parties whereby one agrees to indemnify and hold another party harmless for specified actions, inactions, injuries, or damages. The ideal use and true purpose of contractual risk transfer is to place the financial burden of a loss on the party best able to control or prevent the incident leading to injury or damage. However, in practice, some parties attempt to contractually absolve themselves of responsibility for injury or damages they are solely liable for.

When entering into a contract with another company or a government entity, business owners often find themselves agreeing to insurance terms that may not be supported by their current insurance program. In business contract situations, it is common for the parties with the most bargaining power, such as large general contractors, corporations, and government entities, to demand onerous insurance requirements from the other party to the contract. A few examples:

Requiring outdated additional insured endorsement language in the contract;
Demanding that the commercial general liability policy continue in force, with no specific termination date, even after all work has been completed;
Forbidding any exclusionary language for risks such as pollution, mold, or earth movement;
Asking for omnibus wording that essentially requires anyone and everyone be listed as additional insureds; and
Requiring that language in the standard certificate of insurance form be modified or deleted.

Typically, most insureds expect their commercial general liability policies to support all of the risk transfers outlined in a contract, but this is not always the case. In fact, the coverages sought for those risks may be unavailable from the current insurance carrier or generally unavailable in the insurance marketplace as a whole. The result is that the risk is ineffectively transferred or not transferred at all, contrary to the expectations of all parties. So, if one party to the contract does not fulfill its obligations by failing to provide additional insured status or to obtain proper coverage, litigation may result in the form of a breach of contract action. That’s why it’s essential for business owners to understand insurance requirements before agreeing to meet them. Be sure to consult your insurance agent to assist you with this analysis.

For more information about properly insuring against contractual risk transfers, contact us.

Surety Bonds for Construction Firms: What Contractors Should Know

It goes without saying that before entering into a contract, especially a construction contract, any prudent businessperson should make sure that the contractor is not only qualified to do the work but also able to meet all the financial obligations required by the job. After all, if the contractor cannot pay for the labor, equipment, and materials required for the job, the work will not get done. The problem is that obtaining vital information about a construction firm’s finances is no easy task.

That’s where surety companies can provide an invaluable service. By definition, a surety is one who has contracted to be responsible for another, especially one who assumes responsibilities or debts in the event of default; the term is also used to describe the promise to provide such security. In the construction industry, a surety company will prequalify a contractor, based on both the contractor’s expertise and financial stability, before assuming the risk of contractor failure by performing an in-depth review of the contractor’s financial position and business operations.

So what does a surety look for prior to issuing a bond to a contractor? The surety company must ascertain that the contractor has the following:

A good reputation in the industry, backed by solid references;
The ability to meet current and future contractual obligations;
The equipment necessary to do the work (or the ability to obtain it);
Experience that matches the requirements of the contract;
The financial strength to support the desired construction project;
An excellent credit history; and
An established banking relationship with an available line of credit.

In addition to the information listed above, the surety company will also seek to establish that the contractor’s business is well managed; a surety wants to know if the contractor deals with clients fairly, keeps its promises, and satisfies its obligations in a timely manner. In fact, because prequalifying a contractor is such a comprehensive process, surety bonds are usually underwritten with very little expectation of loss.

Contractors seeking to ensure that they remain competitive in the industry and win their fair share of bids, both big and small, should consult an insurance specialist, who can help them meet the requirements for bonding prequalification.

To Hold or Not To Hold: The Financial Risk of Indemnification and Hold Harmless Agreements

Often, organizations agree to accept the liability of another party (or business) as a standard practice. Such practice is known as “risk transfer,” and the transfer is either embodied in a written contract or agreed to, verbally, by the parties. Contractual risk transfers are commonly found in construction agreements, landlord/tenant agreements, service contracts, and purchase orders, but may also appear in a host of other agreements. The two most common elements of risk transfer clauses are “indemnification” and “hold harmless” provisions. These provisions may be used together or independently, and create a duty to pay (indemnification) and a duty to defend (hold harmless).

Learn more about indemnification with our online course “Indemnification and Contractual Liability.” Only $29.95

Parties to indemnification agreements are known as “indemnitors” and “indemnitees.” The indemnitor is the party who agrees to accept the liability of another and the indemnitee is the party receiving protection from liability. As a matter of law, such contractual provisions must be clear and unequivocal in expressing the intent of the parties who transfer such risk.

It is important to recognize that a business that agrees to become an indemnitor is assuming liability, which in the absence of the agreement, may not exist. The construction industry is known for routinely incorporating broad indemnification provisions in contracts, and transferring liabilities for not only bodily injury, but also for pollution, design flaws, delay in construction and other perils not typically understood or contemplated by the indemnitor. Therefore, it is critical that the indemnitor understand the extent of potential liability for the risks assumed.

Both the indemnitor and the indemnitee should determine whether insurance coverage is available to the indemnitor to cover the risks assumed (or transferred) by the indemnification agreement. And, as insurance contracts typically provide coverage for only certain types of loss, it is probable that certain risks will not be financed by either the indemnitor’s or indemnitee’s respective policies.

Indemnitees will often, and prudently, request to be named as an Additional Insured on an Indemnitor’s policy, providing the indemnitee with direct access and legal rights to the benefits of the policy. While it is not suggested that an indemnitee rely solely on additional insured status for the funding of a loss, largely because the limits may be inadequate as they are shared with the named insured, and the policy terms are largely controlled by the named insured, additional insured status is, nonetheless, the standard to finance loss of the indemnitee.

Additional insured endorsements vary widely by insurance company and often require that the contract between the parties transferring liability be in writing. Indemnitees as well as indemnitors need to scrutinize an insurer’s policy language when additional insured status is requested because both parties are financially exposed if a risk that is thought to be financed (insured) is actually not.

Each party needs to, first, understand that an Additional Insured is only provided protections covered by the insured’s “natural” policy language, so economic loss, for example, from “a delay to market,” while an indemnifiable loss, will not be financed by a general liability policy that requires a trigger of bodily injury or property damage. Each party also needs to be aware of the insurer’s definition of Additional Insured, including whom the insurer defines as an Additional Insured, and the limitations drafted within the endorsement. If any of the language within the additional insured endorsement is inadequate, an indemnitor may very well find themselves financing an obligation without the benefit of insurance, and an indemnitee may be caught financing a loss intended to be assumed by an another (indemnitor).

Insurers typically limit coverage to the current policy term, not when a claim is made, so particular attention must be paid to whether the additional insured language includes coverage for “ongoing operations” or completed work, referred to most recently, in policies, as “your work.” It is also important to note that many additional insured endorsements will not provide coverage for acts emanating from the sole negligence of the Additional Insured, and yet contract language may attempt to transfer this liability.

Careful consideration needs to be given to the potential exposure of the indemnitee and indemnitor if it is determined that the insurance policy and additional insured endorsement do not extend to cover the assumed obligation(s). So, prior to entering into a risk transfer agreement, ask yourself the following:

What are the terms and implications of the indemnification and hold harmless clauses in the agreement?
Is the indemnitor required to obtain additional insured status for another?
Is the language of the additional insured endorsement adequate, covering the indemnitor’s responsibilities or must additional measures be taken to ensure that contractual obligation are properly financed?

Any questions on the matter should be addressed with your insurance agent or attorney.