Although many businesses are concerned about their insurance costs, they often look in the wrong places for relief. In fact, there are a few areas that many businesses fail to consider despite their potentially huge impact on an insurance program and profitability.
Two of these areas are contracts and additional insured, says Brian Chance, vice president of claims and services at ECBM Insurance Brokers and Consultants.
“Companies assume liability in the contracts and purchase agreements they enter into,” Chance says. “It’s always best to make sure you understand what those liabilities are before you find yourself paying for them.”
Smart Business spoke with Chance about the keys to managing the impact of contracts and additional insured on your insurance program.
What types of problems could companies encounter if they are unaware of the resulting liabilities of contracts they sign?
Companies can wind up being responsible for paying for damage suffered by their business partners, or to members of the public. As a result of these contracts, they may be forced to give up rights and defenses they have under the law for accidents that take place. They could even be agreeing to give someone else insurance coverage under their own insurance policy — an additional insured.
Why is allowing a business partner to be an additional insured a bad idea?
It creates additional expense and risk. When you make someone an additional insured under your policy, you give that person coverage under your policy, even for the things that they do wrong. So you essentially become the insurance company for someone else. You and your carrier become responsible and liable for those actions.
Without a proper contract review, you will find yourself paying for things or forcing your insurance company to pay for things that you didn’t anticipate because you can’t control the behavior of the people with whom you do business.
What steps can companies take to manage contracts and additional insured?
Companies should first limit and control the people who are allowed to execute contracts with anyone for anything. Once they know which people will be allowed to work on their contracts, they should train them on the problematic issues they should be looking for in any agreements they may enter into. Additional training is important for anyone working on contracts
Finally, they should work with a competent insurance professional to help evaluate what they are being asked to sign and to determine what liabilities they are taking on for their company. An insurance adviser can help you identify some of the common problems in the agreements he or she is reviewing and find ways avoid those problems.
What particular issues should companies look for in contracts
It is standard practice in most industries, especially in leases or construction agreements that, as part of a business transaction, you become responsible for anything and everything that goes wrong. For example, in a lease agreement, if you are a tenant, your landlord might include language in the lease that makes you responsible for things that happen in the parking lot. So if something were to happen in the parking lot, you could be surprised to find out that you are responsible, under some circumstances, for taking care of it on behalf of the landlord.
What can happen as a result of signing a contract that isn’t properly evaluated?
You could become responsible for paying the other party for damages that arise under that contract that aren’t covered by insurance. The simple fact that you have an insurance policy doesn’t mean that it covers everything that you might find yourself doing.
If you sign a contract with someone, and as part of that contract you agree to be responsible for something your insurance policy doesn’t cover, you have to pay for it — not your insurance company.
How can a company determine whether someone should be added as an additional insured
First, you should avoid doing it as much as possible. But in business today, that’s not always possible. When it is unavoidable, you need to be as careful as possible as to who you are giving insurance coverage to — and what responsibilities you are taking on.
For example, if you are hiring a contractor to do work for you, you want to make sure that person has a very good safety record.
On the flip side of that argument, when you are doing business with someone else, you should always try to get the other party to give you additional insured status under its policy. It can be helpful because it gives you some protection that you aren’t paying for. Otherwise, you would have to fall back on your own insurance policy or pay for it out of your own pocket.
It’s like playing offense and defense. You don’t want to give additional insured status to others, but you should try to get it yourself if you can.
What can companies trying to gain additional insured status under another company’s policy do to increase their chances of success?
Many business owners don’t understand the value of the insurance coverage that is provided to them as an additional insured. Therefore, you should always ask for it with the hope and expectation that the other side will give it to you because they don’t understand how valuable it is.
Brian Chance is vice president of claims and services at ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100, ext. 1325, or [email protected]