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One of the most daunting risk management tasks involves creating a contract with clear and effective risk transfer provisions. Because risk transfer protocols are complex, they often are left to attorneys familiar with state indemnity statutes and other compliance and regulatory provisions. However, it is important for attorneys and insurance advisors to work closely together to ensure that the contract language captures the commercial intent of the risk being retained and that the risk is transferred in an enforceable manner.

Insurance policies are complex. Coverage must be specific, yet balanced, contingent on the size of the project or transaction, loss potential and the relative negotiation power of each of the contract parties. The larger and more complex the transaction,the greater the chance of obtaining comprehensive insurance coverage from the counterparty that adequately covers the risk. However, there is a coverage baseline for most industries that can be applied. Coverage should expand from that baseline.

Correctly Define the Scope of Services
The contract’s scope of services is very important because it defines the role of the counterparty and helps ensure any liability arising out of that scope will provide appropriate recourse. The drafter of the contract can use contractual penalties, insurance and indemnity provisions. The counterparty must have clear and defined performance obligations in order to assess how they may have breached that duty. Then, they would be responsible for the resulting damages.

Insurable vs. Uninsurable Loss Exposures
Some damage smay be insurable while others are uninsurable. It is important to make that distinction early and write the contract’s insurance requirements to support insurable damages. This allows the counterparty to understand what damages are not insurable. Then, the other party can arrange collateral backup. Tailor contract language to make financial stability a duty of the counterparty.

Writing thoughtful and comprehensive insurance requirements has become more challenging given the nature of the insurance industry. For instance, there are more than 30standard additional insured endorsements along with hundreds (if not thousands)of non-standard or manuscript endorsements. Contracts should specify the standard form of insurance required for the project. This usually correlates with various Insurance Services Office (ISO) forms or endorsements. A word of caution: The myriad of non-standard endorsements being used by insurers often have additional conditions or restrictions that need to be considered carefully.

Monitoring Contract Compliance
Monitoring insurance compliance continues to be a significant challenge for contract parties. The insurance industry has traditionally provided certificates of insurance that often are considered more meaningful than they actually are. In fact, a disclaimer stipulates the certificate “is issued as a matter of information only and confers upon the certificate holder.” Certificates of insurance simply outline the coverage and limits in an industry-specific format that format provides the most basic overview of the policyholder’s insurance.

Typically, contract parties will use certificates to demonstrate their compliance with contractual provisions. In most cases, the certificate lacks specific evidence of insurance coverage and conditions. Don’t settle for just a certificate of insurance; insist on more prior to the start of a project. A counterparty should furnish a certificate of insurance, the declarations pages of the policy, the forms listing page and any actual endorsements that either have direct relevance (additional insured, primary and non-contributory, waiver of subrogation, etc.) or would modify base coverage forms potentially restricting coverage on the policy. This allows firms to specifically review coverage for exclusions or limitations that can reduce or eliminate vital protection.

Standard commercial contracts often cover long time frames. The insurance industry, with very limited exceptions, provides a one-year policy. This means that during the life of a 10-year contract, the project manager must obtain full insurance compliance 10 times.

Personnel monitoring contract compliance should develop a thoughtful framework to request, analyze and track evidence of coverage that ensures the insurance coverage provided corresponds to the agreed-upon contractual terms. Along with legal counsel, an insurance advisor can help review vital contractual insurance provisions and help obtain supporting documents.    

Albert L. Sica is founder and managing principal of The ALS Group, Edison, N.J. For more information, call (732)395-4251, email asica@thealsgroup.com or visit www.thealsgroup.com.

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