A university’s guide to achieving savings through contractual risk transfer
As highly visible institutions with perceived “deep pockets,” colleges and universities are targets for lawsuits arising from injuries and property damage only tenuously tied to the schools’ actions. The negligence of contractors, vendors, and professional service providers can and do land universities in court where they pay millions of dollars to defend and settle claims — from simple slip-and-falls to sexual assaults to privacy claims arising from massive data breaches. Frustrated administrators often resolve that such claims are a fact of life or simply part of the cost of running an educational institution. Yet, many administrators miss a basic mechanism to achieve savings: insisting that effectively drafted and legally enforceable indemnification provisions and insurance requirements are included in every contract, agreement, or lease the university signs.
Shifting liability to another party via an indemnification provision or having that party list a university as an additional insured on its insurance policies are two key contractual risk transfer tools. Employed properly and consistently, these provisions can help universities avoid the potential lawsuits that fall within either one of the two large categories:
- claims against the university by employees of the university’s service providers, and
- suits brought by students and guests arising from the university vendors’ operations. Understanding how these contract terms operate and how courts interpret them provides a college or university the greatest likelihood of successfully shifting liability for future claims.
Levels of Indemnification Provisions
Indemnification provisions obligate one of the contracting parties (the indemnitor) to indemnify and defend the other (the indemnitee) against specified losses. Provided that the indemnitor has proper insurance, it can expect its insurer to step in and defend and indemnify the indemnitee. This is because standard Commercial General Liability Policies cover tort liability for injury or damage assumed in what these insurance policies define as an “insured contract.”
Indemnification provisions are superior contractual risk transfer tools to additional insured requirements for the simple reason they are not dependent upon the indemnitor having appropriate insurance coverage or any insurance at all. If the indemnitor’s insurer does not cover the contractually assumed liability, the indemnitor itself must pay the costs to defend and indemnify the university.
Three levels of indemnification
- Broad Form Indemnification is the strongest form of indemnification whereby the indemnitor/vendor indemnifies the university for the school’s sole negligence. It is legally and technically enforceable under most circumstances in most states, but limited by statute or case law in many other states so as to be unenforceable in specific contexts (often construction contracts). Even in those states where it is permitted, courts are reluctant to enforce Broad Form Indemnification provisions due to perceived inequities and the uneven bargaining power that enables a university to insist its contractors and vendors contractually assume the university’s liability for others. Contract terms purporting to trigger Broad Form Indemnification must be worded precisely to satisfy stringent interpretation standards, such as the “clear and unequivocal” standard, applied by most courts. Broad Form Indemnification provides a university the best protection from liability for injuries to its vendors’ employees. That is because injured employees seeking more lucrative tort awards following a work-related injury must allege the university or parties other than their employer were solely responsible for their injury. Such claims don’t trigger lesser forms of indemnification. These so-called “Third Party Over” claims generally are covered by the vendor’s General Liability insurance, provided the policy contains standard language and has not been amended to remove coverage for liability assumed in an “insured contract.”
- Intermediate Form Indemnification is when the vendor indemnifies the university for the school’s own negligence, unless the university is solely negligent. Intermediate Form Indemnification is intended to cover the college or university in the event a party claims both the indemnitor and the school were responsible for their injuries. This type of indemnification may protect the university if a student or guest sues the university and the school’s vendor claims both were responsible for the injury. Intermediate Form Indemnification will not protect the university in the event a vendor’s injured employee sues the school alone to recover tort damages.
- Limited Form Indemnification is when the vendor indemnifies the university only for its vicarious liability arising from the actions of the vendor. Limited Form Indemnification does not shift any of the university’s own liability to the vendor. It essentially offers the protection available in common law.
Additional Insured Requirements
Requiring a contractor, vendor, or service provider to name the university as an additional insured on its insurance policies, when done properly, provides a clean transfer of risk. Theoretically, the school can look directly to the other party’s insurance carrier to defend and indemnify it in the event of a loss. Obtaining the right coverage and rights under the service provider’s liability insurance, however, is not as simple as merely requiring the identification of the university as “additional insured” under all liability policies. Rather, a college or university must specify in the contract to what extent and under what circumstances additional insured coverage will apply. Like indemnification provisions, the strength of additional insured coverage can be broken down into three categories:
- Sole Negligence of the Additional Insured (Broad Form): Coverage provided by Sole Negligence Additional Insured endorsements is triggered by broad “Arising Out of” wording. This is the highest level of protection available to an additional insured, even covering claims alleging its “sole negligence.” Sole Negligence Additional Insured coverage is the only form of additional insured coverage that covers the school in the event a vendor’s employee sues the university alleging it was solely negligent for a work-related injury. This level of additional insured coverage is increasingly rare and not available via any of the 24 current (2013) ISO additional insured forms. The university’s service providers can secure this coverage only if their insurer agrees to use older additional insured endorsements or amend the policy to include language specified by the service provider.
- Partial Negligence of the Additional Insured (Intermediate Form): Partial Negligence Additional Insured Coverage extends additional insured status to the university provided the covered loss or damage is not alleged to be caused by the sole negligence of the university (the additional insured). It should cover the university in the event a student or guest sues both the university and its vendor for damages caused by the vendor’s operations for the school. It will not cover the university for a claim by a vendor’s injured employee who is alleging the school was solely responsible for a work-related injury.
- Vicarious Liability of Additional Insured (Limited Form): Vicarious Liability Additional Insured Coverage is provided by most standard additional insured endorsements. Vicarious Liability Additional Insured Coverage is the least protective form of additional insured status. It only protects the university to the extent the school is deemed to be vicariously liable for the actions of its vendor.
State Anti-Indemnity Statutes
State statutory law layers additional complexity onto negotiations over indemnity and insurance terms in contracts. Accordingly, judicial decisions in a given state, too, must be considered when crafting contract language to shift risk. Colleges and universities must take care to avoid drafting indemnification and insurance terms that conflict with state law. Doing so may result in a court nullifying the entirety of the indemnification or insurance provisions.
By their nature, colleges and universities are open institutions that welcome academics, students and the public. They are also complex institutions that require assistance and partnership from vendors and service providers. It is these characteristics that make universities such common litigation targets. Universities, then, should incorporate Broad Form Indemnification provisions and Sole Negligence or Partial Negligence Additional Insured requirements in to all of their construction, vendor and service provider contracts. This is especially true for contracts with parties whose operations are likely to result in injuries to their own employees or third parties (e.g., janitorial service providers and landscapers) or whose negligence could lead to catastrophic injuries or property damage (e.g., contractors and armed security providers).
The factors impacting the effectiveness of contractual risk transfer are myriad and complex. This means there is no simple boilerplate language that colleges and universities can include in every contract to effectively shift liability and costs to their vendors and service providers. Rather, schools must tailor the indemnification and insurance terms on a contract-by-contract basis. The university’s insurance broker or counsel should review the indemnification and additional insured terms in every new contract and recommend revisions to ensure the contract terms operate consistently with the university’s intentions.
A good contractual risk transfer process takes forethought, control and discipline. While it will take some work to set up and maintain, effective contractual risk transfer should cost nothing. Implemented correctly and consistently, it will pay big dividends.
Micah J. M. Knapp, Esq., is a Producer at The Graham Company, one of the mid-Atlantic region’s largest insurance and employee benefits brokers. www.grahamco.com.