Large-Client Contracts: Insurance Ramifications and the Contractual Risk-Management Process
Posted on 12/7/2021
Mayer Tree cleaning up storm debris from a Massachusetts school. TCIA file photo courtesy of Mayer Tree Service.
This article was written by Corcoran & Havlin's Rick Weden (Producer) & appeared in the December 2021 edition of the Tree Care Industry (TCI) Association Magazine.
As your business providing tree services to residential and small-business owners develops, it is not uncommon to run across the opportunity to work for larger buyers of arbor services. Large-property owners, including HOAs (homeowners associations), municipalities, golf courses and others, obviously need arbor services. Many of these property owners have substantial budgets for tree care services.
Granted, large contract work is not for everybody, but if you think your company has “the right stuff” and the ability to handle this kind of work, what follows here should have some value and importance to you. And for those who are already in the big-buyer space, this might shed some additional light on a few things.
Due to their often-extreme size, large-buyer clients have a lot on the line on all fronts. Along with holding extreme assets – and heavy compliance requirements – they also often hold considerable legal and financial responsibility to investors and a host of other stakeholders, which exposes them to significant levels of risk. As a result, many of them have invested considerable resources into the development of extremely high levels of risk-avoidance measures and risk-management procedures. The main goal for them is to be as legally protected and secure from as much potential liability as possible. They do this by passing as much exposure to loss as they can on to other parties with whom they work, including their service providers.
Almost all large-buyer projects involve some form of written contract. Whether you are working directly with a property/project owner or are a subcontractor under another managing entity hired by the owner, a written contract for the project probably exists somewhere, and your company undoubtedly holds some, or perhaps all, legal obligations as set forth in the contract.
Many of these written contracts are lengthy, incorporating what is expected of all parties to the agreement on everything from descriptions of the work, terms of payment and duration of the project to how the operations are to be conducted and, of course, the insurance requirements of all the parties to the contract. Read on as we look at some of the insurance issues that are created by contracts, what they are and what they can mean to you.
Most all written contracts contain what are referred to as Indemnification Agreements.These can be extremely complex legal agreements, and they range widely in scope as to the degree of responsibility of the parties to a contract.
It is important to clarify that the intent here is not to give legal advice on contracts. It is always advisable that you consider retaining competent legal advice when dealing with contracts, as their legalities are complex and can vary by state.
In their most basic sense, Indemnification Agreements enforce that the contracting party (usually your client) is compensated by your tree care company for all monetary damages caused to them because of your services to them under a written contract. Indemnification Agreements can vary greatly in scope, often imposing significant amounts of liability and legal responsibility on your tree care company. In some cases, the scope of the legal responsibility of an Indemnification Agreement can be broader than the terms and conditions of your insurance plan!
Hold Harmless clause
Hold Harmless clauses are often built into contracts along with an Indemnification Agreement. Hold Harmless clauses are designed to protect the contracting party (usually your client/customer), affirming they will not be held legally liable for any risks, dangers, injury or damage that your company may cause from services you provide under the contract. Again, this is a very simple definition of a Hold Harmless clause. And, as with Indemnification Agreements, they can vary in degree of scope and terms.
The differences between Indemnification and Hold Harmless may seem subtle, but from a legal perspective, each carries a powerful and specific difference. Indemnification centers around one party’s (yours) obligation to compensate another party (usually your client/customer), while Hold Harmless relieves the other party (usually your client/customer) from any legal responsibility.
Written contracts and your insurance plan
In many contracts, following the Indemnification and Hold Harmless clauses, are found the insurance requirements. It is the general intent of the contract that your insurance will, in essence, fund the liability that you assume under the Indemnification and Hold Harmless conditions, as well as comply with other specific insurance requirements included in the contract.
It is not uncommon for those first entering the large-client-contract arena to learn that their current insurance plans may not be sufficient to meet the insurance requirements of the contract. Many large buyers of services want to see significantly high limits of General Liability/Umbrella coverage. Some may require that you carry certain insurance coverage that you presently do not have in your plan, such as Pollution Liability or other forms of insurance. The contract also may require you to alter your current insurance to follow certain insurance requirements.
One of the first things you should ask for when courting a large buyer for bids is a copy of the contract they will use. You need to know what the terms of the agreement are before you bid so you know about any potential additional insurance and other costs that might be involved. This also will enable you to get some appropriate legal advice early in the process. All big-buyer prospects already have their contracts formed for use, so they are available.
Most contracts from large buyers require that the large buyer have Additional Insured status in the agreement. Furthermore, your large-contract clients will want to see evidence of them having Additional Insured status noted on the Certificate of Insurance that they will require and pre-approve before they will award a contract to your company.
When you add a third party (usually your client/customer) as an Additional Insured to your insurance, you have essentially, in the event of a liability claim, opened your own insurance plan to them, giving them certain rights to legal defense costs and to indemnification under your General Liability, Umbrella and, often, your Auto Insurance policy’s limits of coverage. Note, however, that you cannot add an Additional Insured to a Workers’ Compensation policy.
Primary and Non-Contributory terms
Many contracts include a requirement to Additional Insured status that goes beyond the basic conditions noted above. They also want your insurance to be Primary and Non-Contributory. In other words, in the event of a claim, regardless of who may have caused the claim in the first place, your insurance is first in line to pay claims before the insurance of any others may be called upon to participate.
Waivers of Subrogation
Waivers of Subrogation are another common insurance requirement found in many large contracts.
What is Subrogation? Often, insurance companies pay claims knowing that the claim was, in fact, caused by another party that holds a degree of fault (negligence) in the cause of the claim. After they have settled the claim on behalf of their insured, they retain the right to pursue the at-fault party, usually through a legal process, to recover the monies they paid their insured. This is called Subrogation, and it is a commonplace activity among all insurance companies.
When one asks for a Waiver of Subrogation, they are asking their own insurance company to waive their rights to take this action.
So, let’s tie this all together:
When you enter a contract that contains the kinds of components noted above, you are adding a third party, your client/customer, to your insurance program. You also are granting that third party certain rights to your insurance agreement that they can independently exercise on their own if a claim occurs. Another thing to understand is that, when a claim is made against an insurance policy, a change takes place. Your insurance becomes, essentially, a financial asset to a third party. Comparatively speaking, your customer, through a contractual agreement, has, in effect, just obtained a significant amount of what could be considered free-of-cost insurance, legally syphoned from your insurance to them.
This practice is commonplace in most all large-contract situations. It has become, in effect, an expected and anticipated cost of doing business for many in the large-contract world. I think it is important that, as a business owner, you have a good understanding of what you are giving up when you enter large contracts. Yes, they can be lucrative, but they do come with a price!
If you are considering taking the plunge into the large-contract arena, which, in the right circumstances, can bring nice rewards, it is highly advisable that you assemble a good team to work with you on understanding the potential risks and costs. Retaining advice from a competent attorney, skilled in contracts, is invaluable. You also should review your entire insurance program with your insurance providers to be sure your current coverage and terms will follow these large and complex contracts. You should do this before you interact with the large-contract bid and compliance process.
Rick Weden is team practice leader of the Tree Care Insurance Specialty Team at Corcoran and Havlin Insurance, a division of Cross Insurance and a 13-year TCIA corporate member company located in Wellesley, Massachusetts. He manages the insurance needs of many tree care operations countrywide using a wide range of insurance companies, including ArborMax. He has presented at many TCI EXPOs and is a member of the Massachusetts Arborists Association.