Negotiating Win-Win
Insurance Provisions:
Current Corporate
Insurance Best Practices
What negotiators should watch out for in dealing with corporate insurance provisions and how to
interpret and manage proposed insurance risks.
BY a l l i e s ta n z i o n e
Any contracts professional would agree that the time of
“adhesion contracts”1 in the business environment is over.
We envision most standard corporate contract terms and
conditions as a starting place, or even an invitation to negotiate,
and tend to revise these terms to reflect our particular transaction. As negotiators, our job is not only to review, question, and
resolve the expressed provisions, but also to sense and predict
the implied ones in order to protect our organization’s interests.
In the daily battle of the forms, one provision that almost
always sends a flashing red light during negotiations is the
insurance provision. The consequences of an overlooked
insurance provision that seems fairly straightforward at first can
be costly. This study explains what negotiators should watch
out for in dealing with corporate insurance provisions and
how to interpret and manage proposed insurance risks.
Even though all contracts vary in requirements, how to best
manage risks and keep your company compliant remains the
billion-dollar question. When assessing a proposal or a
contract, one must consider all potential risks in a contract
and establish who will bear the liabilities resulting from
uninsured risks, and the consequences of taking on too much
risk. In competitive proposals, too much risk taking or risk
aversion could mean a win or a loss of a major effort. Taking
too much risk can hike the proposal price up, thus bidding an
organization out of competition. Not calculating all risks and
blindly proposing a low price can negatively affect the
company’s profit and diminish success of a program. Even
worse, an extremely low offer can be labeled as “buying in”
and can negatively reflect the organization’s corporate
reputation. In order to stay ahead of competition, one must
know how to negotiate the best insurance provisions, limit
the risk, and at the same time remain price competitive. Four
steps to take prior to issuing certificates of insurance include:
•
•
•
•
Identify, access, and prioritize risks;
Consult your organization’s policies;
Develop and implement a risk mitigation plan; and
Adjust and negotiate insurance requirements.
In both the federal and commercial worlds, organizations
must be covered by insurance to protect their interests. Most
large companies have a separate risk management group that
reviews and analyzes the company’s exposure to risk, establishes appropriate risk management programs, and provides
optimum insurance coverage recommendations. However,
About the Author
ALLIE STANZIONE, MBA, CFCM, is a contracts negotiator for
Raytheon Company. She is also the membership co-vice president
for the Boston Chapter of NCMA. She is a former graduate of the
NCMA Contract Management Leadership Development Program.
Journal of Contract Management / Summer 2011
31
negotiating win -win insurance provisions: current corporate insurance
best practices
since the contracts department normally has the first glance
at the terms and conditions, we must be able to recognize
high-impact insurance provisions and bring them up to legal/
risk management counsel if necessary.
In the present day, commercial insurance requirements are
very comprehensive and are usually tied with other terms of
the contract. It takes knowledge to analyze and decode
certain provisions in order to shake hands on a win-win
contract. Since each contract is different, the insurance
provisions vary. They might include higher insurance
coverage than provided by your organization, reference
certain waivers that raise the organization’s risk, or contain
provisions regarding deployed employees. As contracts
managers, we should be able to analyze and pull together the
most beneficial provision that fits our organization’s needs
and at the same time serves the customer.
Insurance provisions for U.S. government contracts are mostly
defined by the Federal Acquisition Regulation (FAR) and its
agency specific supplements. According to the federal
requirements, the contractor must provide an annual certificate or written statement of insurance prior to commencement
of work under the contract and maintain insurance at the
minimum amounts specified by FAR 52.228-5 at its own
expense. Whether or not your organization’s contracts are
subject to Cost Accounting Standards (CAS) 416,2 federal
contracts generally have a set of minimum limitations. For
example, insurance is mandatory when commingling of
property, type of operation, circumstances of ownership, or
conditions of the contract make it necessary for the protection
of the government. The minimum amounts of insurance
required by this regulation are described in FAR 28.307-2.
However, the government can allow a company to “self-insure”
itself per FAR 28.311-1, if a company meets criteria in FAR
28.308. The government can also revise limitations when a
contract is to be performed outside of the United States.
Major Insurance Provisions
Refer to FIGURE 1 on this page.
Workmen’s Compensation/
Employer’s Liability Insurance
Workmen’s compensation/employer’s liability insurance
covers medical expenses and lost wages for employee injuries
arising out of the course and scope of employment under the
Workmen’s Compensation Act of 1952 and the subsequent
amendments to the act or at Common Law. By law, it is
32 Summer 2011 / Journal of Contract Management
Figure 1. Major Insurance Provisions
Workmen’s
Compensation/
employer’s
liability
Insurance
Comprehensive
General
liability/
Insurance for
Bodily Injury
Comprehensive
automobile
liability
Major Insurance Provisions
usually based on the state of hire and varies by state
regulations. See FIGURE 2 on page 33.
Comprehensive General Liability/Insurance
for Bodily Injury
Comprehensive general liability/insurance for bodily injury
covers bodily injury and/or property damage to parties to the
contract as well as third parties due to any negligent act or
omission committed by a company or its employees and includes
products and operations liability. See FIGURE 3 on page 33.
Comprehensive Automobile Liability
Comprehensive automobile liability covers bodily injury and/
or property damage to third parties due to any negligent act
or omission committed by a company or its employees arising
from the use of company owned or non-owned vehicles. See
FIGURE 4 on page 34.
Overseas Workers Compensation and War
Hazard Insurance
Overseas workers compensation and war hazard insurance
endorsements to workmen’s compensation covers employees
negotiating win -win insurance provisions: current corporate insurance
best practices
Figure 2.
Figure 3.
Federal Regulations
Typical Commercial
Provisions
Federal Regulations
Typical Commercial
Provisions
Per FAR 52.228-5/28.307-2, the
required workmen’s compensation
insurance needs to cover employer’s
liability (which is third-party liability
arising out of the course and scope
of employment) for accidental bodily
injury or death and for occupational
disease with a minimum liability limit
of $100,000.
This provision
has a limitation per
accident (e.g., $2
million per each
accident).
FAR 52.228-5/28.307-2 requires
bodily injury liability insurance—in the
minimum limits of $100,000 per person and $500,000 per occurrence—
on the comprehensive general liability
form of the policy.
This provision has
a primary limit per
occurrence and
umbrella/excess limit
per occurrence (e.g.,
$1 million primary
limit, $300 million
umbrella limit per
occurrence).
working or traveling overseas or in war zone areas. Over the
past several years, many defense contractors have been
performing projects overseas on behalf of the U.S. government. Many U.S. employees have been deployed in war zones
and face the unsettled and dangerous conditions of the
Middle East. Federal law requires all U.S. government
contractors and subcontractors to secure workers compensation insurance for their employees working overseas. The
statutes include the Defense Base Act3 and the Longshore and
Harbor Workers’ Compensation Act.4 Implementing
regulations can be found at Title 20 Code of Federal Regulations (C.F.R.) Parts 701, 702, 703, and 704.5
The Defense Base Act provides workers compensation
protection to civilian employees working outside the United
States on U.S. military bases or under a contract with the U.S.
government for public works or for national defense. The
Longshore Act requires every employer either to secure
insurance for the payment of workers compensation benefits
provided under the act or to be permissibly self-insured
(based on the minimum coverage in the FAR). If these
requirements are in the contract, make sure to modify the
coverage to include an illnesses and injuries provision based
on the country of business.
Defense contractors/subcontractors or other equipment
manufacturers doing business overseas that are subject to the
Defense Base Act and the Longshore Act should be aware that
every employer is liable for securing payments for disability,
medical, and death benefits to its employees in the event of
injury or death. Even more important is that in the case
where a subcontractor fails to secure the payment of compensation, the contractor will be liable for and be required to
secure the payment of such benefits. See FIGURE 5 on page 34.
Aircraft Public and Passenger Liability Insurance
Aircraft public and passenger liability insurance covers
contractors if an aircraft is used in connection with
performance of the contract. See FIGURE 6 on page 35.
Vessel Liability Insurance
Vessel liability insurance is similar to the aircraft public and
passenger liability. When the contract performance involves
the use of vessels, the government requires vessel collision
liability and protection and indemnity liability insurance.
See FIGURE 7 on page 35.
Cargo Insurance
Cargo insurance covers cargo in the care, custody, or control
of the carrier. Transit can be transported over water, air, and
ground. Cargo insurance can cover one cargo exposure or all
cargo exposures on an “all risk/all peril” basis, depending on
the coverage needed for the specific contract. Since shipments
are done on a daily basis, most organizations have open cargo
policies that cover all shipments of goods and/or all trips.
Risks that cargo insurance would cover are nondelivery—including theft, loss of shipment due to a collision, explosion, or
burning—and damages due to bad weather, flood, mud, and
grease. There are major exclusions to the policies that can
include war, nuclear disaster, wear and tear, dampness, mold,
losses due to delay of shipment, and loss of market for the
cargo. See FIGURE 8 on page 36.
Work on the Government Installation
A “work on the government installation” clause covers
contractors’ or subcontractors’ work at the government
facility/installation. In all cases, contractors must provide and
maintain at least the minimum insurance requirements listed
in the FAR:
• Workers compensation,
• Employer’s liability,
Journal of Contract Management / Summer 2011
33
negotiating win -win insurance provisions: current corporate insurance
best practices
Figure 4.
Figure 5.
Federal Regulations
Typical Commercial
Provisions
Federal Regulations
Typical Commercial
Provisions
FAR 52.228-5/28.307-2 requires
injury and property damage liability
covering the operation of all automobiles used in performance of the
contract. The minimum limits of
$200,000 per person and $500,000
per occurrence for bodily injury and
$20,000 per occurrence for property
damage are required.
This provision has
a primary limit per
occurrence and
umbrella/excess limit
per occurrence (e.g.,
$2 million primary
limit, $400 million
umbrella limit per
occurrence).
The FAR sets out the workers compensation insurance requirements
for all overseas contracts at 48 C.F.R.
§28.305 and at 52-228-3–4.
n/a
• Commercial general liability, and
• Automobile liability.
If you are a subcontractor, your prime might want to
negotiate to use your insurance as a primary while your team
is performing work on the government site. Ensure consistency in your negotiations, and do not leave an insurance
clause that could potentially conflict with the rest of the
contract. If your insurance is not primary in the rest of the
contract clause, keep it this way even for the “government
installation” sub-clause. See FIGURE 9 on page 36.
Insurance Against Loss of or Damage to
Government Property
An “insurance against loss of or damage to government
property” clause covers government property in the event of
damage. Organizations can satisfy this clause by providing
specific insurance policies or by inclusion of the risks in the
contractor’s existing policies. The policies must disclose the
government’s interest in the property.
If you are an “other equipment” manufacturer or a government prime contractor, you cannot be relieved of any
responsibility to the government that the prime contractor
may have under the terms of the prime contract. See FIGURE
10 on page 37.
Insurance Best Practices
Preparation for Negotiation
Before negotiating a favorable insurance provision for your
organization, you should gain a full understanding of what
your contract is to fulfill. By knowing the scope of work to be
completed for the customer, the contract value and duration
of performance, and whether the contract includes any
34 Summer 2011 / Journal of Contract Management
warranty and maintenance periods, you can establish what
should be reinforced in the insurance provisions and what
you can eliminate. If you know where work will be performed,
you can estimate how much work should be performed by
your team at government installations, and what shipping
charges and insurance you might need to get in advance. By
inquiring about the replacement value of the hardware, and
assets or equipment for which your organization has risk of
loss, you can determine a proper risk management program
in advance. If your organization will hire subcontractors for
the job, you should think about potential flow-downs
including the insurance provisions and how they might work
in the long run. For example: Would your organization
benefit by requesting to be listed as an additional insured on
the subcontractor policy? Would your organization’s costs or
liabilities increase or decrease if the free on board point were
changed from “origin” to “destination”?
Corporate Forms
Your organization might have a set of forms that may be
applicable for insurance provisions usage. They might include
certificate of insurance forms, corporate insurance terms, and
conditions of sale, supply, and services. It is very important to
understand that these guides are there for you as a starting
point in your negotiations; you can always fall back and
consult them. If your solicitation calls for a change—e.g., a
higher limit of workmen’s compensation insurance or a
government form is offered to be substituted for your
corporate certificate of insurance—do your research and
compare both forms and guidelines carefully.
Sometimes what seems to be a minor change in an insurance
provision can turn major if overlooked. Check each change
for compatibility with the entire contract. Changes, if not
consistent with the entire contract, can raise unmanaged risks
for the organization and your contract. In each situation,
review your corporate standards and apply them as circumstances dictate. If you carefully craft your provisions based on
the guidance from your corporate guidelines, both you and
your customer prevail, as both sides will concentrate on
negotiating win -win insurance provisions: current corporate insurance
best practices
Figure 6.
Figure 7.
Federal Regulations
Typical Commercial
Provisions
Federal Regulations
Typical Commercial
Provisions
FAR 28.307-2(d) requires coverage
to be at least $200,000 per person
and $500,000 per occurrence for
bodily injury, other than passenger
liability, and $200,000 per occurrence
for property damage. Coverage for
passenger liability bodily injury shall
be at least $200,000 multiplied by
the number of seats or passengers,
whichever is greater.
Commercial
practices vary;
however, they are
similar to the FAR
requirements and
have coverage
per person, per
occurrence for bodily
injury and property
damage. Passenger
liability is calculated
based on the state
insurance company’s
policies.
FAR 28.307-2(e) does not prescribe
amounts for vessel collision liability,
as these values are determined by the
agency based on the contract size,
value, and type of work performed.
Similar to the aircraft
liability, vessel
liability is calculated
based on the state
insurance company’s
policies.
calculating risks, adjusting price based on a specific attribute,
and redrafting provisions as necessary.
When an organization enters into a contract to manufacture
or lease equipment, or to perform services, the contract
usually requires provision of certificates of insurance based on
the amounts specified in the contract. Most of the time,
organizations estimate risk based on the customer’s requested
insurance requirements and negotiate the provisions prior to
issuing certificates. The organization’s insurance broker
provides the certificates to demonstrate that the organization
complies with the contracts insurance requirements.
Indemnification Provision
“The principle behind indemnity is a financial restoration to a
level just before the accident or injury or illegal act.”6 In his
article “What is Indemnity?” Michael Pollick explains that
indemnity protects the holder from suffering financial loss
due to a lawsuit: “The principle behind indemnity is a
financial restoration to a level just before the accident or
injury or illegal act.”7 Indemnification provisions usually ask
for a seller to indemnify the buyer for personal injury,
property damage, direct and indirect damages resulting from
negligence or misconduct, and are usually limited to a certain
time frame, such as a warranty period. The indemnity clause
provides a mechanism for compensation in the event of losses
incurred while fulfilling a contract.
Most of the time, commercial contracts contain both
insurance and indemnity provisions that are tied together and
require one party to indemnify the other and to include it as
an additional insured under the other party’s insurance.
Furthermore, the indemnification provision usually relates to
the limitation of liability, making it even easier to overlook
and more challenging to negotiate. Insurance indemnifications are necessary to limit liability when the risks are too
great to assume.
For example, some contracts could involve danger to personnel or involve hazardous conditions during installation of
equipment on site, or even provide for war zone conditions.
In situations when the risk of loss, damage to property, or
personal injury—including fatal injury and disease—is
unpredictable, a reciprocal indemnity where both contractual
parties protect and hold each other harmless from specified
liabilities or losses that are caused by either party’s own acts
that incorporates sharing of damages in proportion to each
party’s fault is a win-win solution.
While you might want to confer with a legal counsel, some
negotiation points you might want to consider regarding the
indemnification provision include:
• From the seller’s perspective, in order to protect your
organization and limit indemnification, you might want
to argue for “willful” misconduct instead of simply
“misconduct”;
• Try limiting negligence to only one side—“sellers”
negligence;
• Adding “gross” negligence if possible, and
• Avoid any “indirect” damages.
• Claims by customers in an indemnification provision
should be limited to claims only by direct clients (not
third parties who are not direct parties to the contract)
for damages, and limited to a time span; e.g., “when they
incur.” The seller should have the right to defend any
claim that gives rise to a payment under the indemnity
clause.
The “duty of defense” language in an indemnification
provision could require the “defending party” to pay the
other’s defense costs. For example, the provision can state that
the seller agrees to defend the buyer against loss, damage, or
Journal of Contract Management / Summer 2011
35
negotiating win -win insurance provisions: current corporate insurance
best practices
Figure 8.
Figure 9.
Federal Regulations
Typical Commercial
Provisions
FAR 52.2289 provides for
coverage per vehicle to cover
the value of property on each
vehicle. The clause also asks
to insure the total value of
the property in the shipment.
Exceptions are if freight is
shipped under rates subject
to released or declared value.
In the commercial world,
cargo insurance companies
provide financial reimbursement for financial losses if
exported goods are damaged
or destroyed before delivery to the importer. Major
exclusions are for losses
caused by improper packing
or when customs officials
reject the delivered goods.
It is important to make sure
that your negotiated contract
defines if cargo insurance excludes claims for abandoned
property, importers’ failure to
pay, spills or other damages
due to the product’s nature,
and/or damages at port cities
after cargo is unloaded.
expense by reason of suits, claims, or causes of action arising
out of the performance of the contract.8
Another aspect of the indemnification provision is order of
precedence. In the article by James Stilwell, “The Chicken or
the Egg—Insurance and Indemnification Clauses in the
Same Contract,” Stilwell explains that in order for the
indemnification provision not to be interpreted to be an
excess to the coverage required by the insurance provision,
the parties should expressly state that indemnification applies
in the first instance, even in the face of an insurance requirement under the contract; otherwise, the insurance provision
will get the order of precedence based on case law.9 Based on
his research, the case law repeatedly held that the insurance
coverage offers the first line of protection and the contractual
indemnification only kicks in upon exhaustion or failure of
the insurance.10
What Does it Mean to be Named
“Additional Insured”?
A customer may request for you to name his or her organization as an “additional insured” on your organization’s policy.
Here is what it means: If a liability issue arises and is caused by
the work of your organization’s employee, your organization’s
insurance will not only cover claims made against the
employee, but will also provide claims made against your
customer in regards to the employee’s negligence. According
to Howrey LLP, a large attorney’s group specializing in
36 Summer 2011 / Journal of Contract Management
Federal Regulations
FAR 52.228-5 requires both
contractor and subcontractor to
maintain all mandatory insurance coverage during the entire contract period of
performance. An advance notice of 30 days
is required to switch/inform the agency of
insurance policy changes.
Typical
Commercial
Provisions
n/a
government contracts, insurance companies have been revising
their additional insured endorsements to limit their coverage
obligations, thus now the additional insured endorsements
usually cover only claims arising during the project, and fail
to cover claims that arise later.11 Based on this fact, this
change limits protection from most defects claims that
become apparent after the completion of projects.12
Let’s assume that you have negotiated the additional insured
language into the insurance provision from your vendor/
subcontractor, and are now waiting for the certificate of insurance with your organization’s name as additional insured. Is
that enough? Even though it is common in the industry to
provide a certificate of insurance with additional insured
language, a certificate of insurance is not a valid endorsement
to a policy and in some case law proved not to provide
coverage to the additional insured. The reason is simple:
When you get a certificate of insurance, you check the box
and assume that you are covered. Despite that, you have not
seen what your subcontractor/vendor really endorsed you for,
as you do not know exactly what his or her policy states and
what has been negotiated between the insurance company
and the vendor.
Something to discuss with your legal advisor, in certain
circumstances, is whether you can endorse your customer/
client as an additional insured on your policy if you limit
their exposure. A good example would be:
Contractor shall endorse client, its officers, and employees as
additional insured but solely with respect to those matters for
which contractor is required to provide indemnification under
this agreement and then only to the extent of the indemnification provided by contractor under this agreement.
Since all terms and conditions insurance provisions are
worded differently, watch out for “third-party beneficiary,”
“principal,” “co-insured,” and “joint assured,” which all mean
additional insured. Also, do not name your organization’s
negotiating win -win insurance provisions: current corporate insurance
best practices
liability insurance primary to the customer’s insurance, as it
impacts who is liable for premium payments.
Major Exclusions to be Aware of
It is extremely important to analyze all exclusions under each
provision. Typically, an exclusion is a provision within an
insurance policy that eliminates coverage for certain acts,
property, types of damage, or locations.13
For example, in workmen’s compensation insurance, major
exclusions could be the liability to employees of contractors
of the insured (unless specifically declared), war and
terrorism, as well as pollution and radioactive and nuclear
energy risks. If your organization is bidding on a contract in
a war zone, or is about to sign a contract to work with
hazardous materials, it is important to calculate all risks and
add an endorsement. Workmen’s compensation insurance
limitations can vary; therefore, when negotiating, try to
avoid higher ceilings and limit the “third party” to only the
first-tier third persons—i.e., the organization and its
employees—and avoid broad language like “organization
and all its subsidiaries and/or subcontractors.”
In a general liability policy, there might be exclusion for
claims related to professional negligence or failure to perform
your professional duties. In order to protect your organization
against such claims, you would need to purchase separate
professional liability insurance, also known as “errors and
omissions coverage.”14 Errors and omissions insurance
protects an individual or a company from bearing the full
cost (up to the amount of the policy) of defense for lawsuits
and related cost of lives or property lost relating to an error or
omission in providing covered professional services. It
protects against claims arising from actual or perceived
negligence, errors, and mistakes in the performance of service
for others.15 The other typical exclusion from general liability
might be that it does not cover “unfair or discriminatory
employment practices, including hiring and terminationrelated claims.”16 Further, “[e]xcluded claims might be related
to demotion, reassignment, employee evaluation, discipline,
harassment, and other employment-related policies.”17 A
separate endorsement called “employment practices liability
insurance” covers claims for discrimination, harassment, and
wrongful termination. The negotiator also needs to watch out
for exclusions such as damage to an organization’s product/
services, war, or expected or intended injury that might not
be covered by your organization’s policy. In a comprehensive
automobile liability policy, there are usually exclusions for
intentional malicious abuse by the policy holder, recovery of
Figure 10.
Federal Regulations
FAR 28.303 and 45.103,
“Responsibility and Liability for Government Property,” declares that
contractors are responsible and
liable for government property in
their possession, unless otherwise
provided by the contract.
If government property is in the
possession of the subcontractor,
the rule applies to the subcontractor as well: Subcontractors
are liable for loss or damage of
government property furnished
through the prime. The clauses
also set forth that the prime/sub
can reduce/eliminate liability if a
fixed-price, cost-reimbursement,
or sealed bid service contract is
negotiated where the contractor
has only limited, indirect control
over government property located
at the government installation.
Liability reduction, however, is
subject to sufficiently protected
government interests.
Typical Commercial
Provisions
In the commercial
world, cargo insurance
companies provide
financial reimbursement
for financial losses if
exported goods are damaged or destroyed before
delivery to the importer.
Major exclusions are for
losses caused by improper packing or when
customs officials reject
the delivered goods. It is
important to make sure
that your negotiated contract defines if cargo insurance excludes claims
for abandoned property,
importers’ failure to pay,
spills or other damages
due to the product’s
nature, and/or damages
at port cities after cargo
is unloaded.
personal property in case of theft, as well as normal wear and
tear of the vehicle (e.g., tire or transmission damage).
It is also important to have an idea what exclusions are
present in your subcontractors’ policies prior to signing the
contract, even if they present a certificate of insurance with
proper coverage. Some organizations have corporate policies
that prohibit giving the other party copies of their insurance
policies, but if you do not ask, you will never be able to
estimate all possible risks that might come along.
Limitation of Liability
As we saw in the prior section of this article, indemnification
coincides with the insurance provision of the contract.
However, it is not the only provision that is closely tied with
the insurance clause. One major provision that you should
look out for is the “limitation of liability” provision, which is
sometimes italicized for its significance. Not all contracts
have a limitation of liability clause; however, if it is deemed
necessary, the limitation of liability clause plays a major role
in contract formation and negotiations.
The limitation of liability is a written statement that serves as
a disclaimer to limit conditions or instances under which the
Journal of Contract Management / Summer 2011
37
negotiating win -win insurance provisions: current corporate insurance
best practices
disclaiming party may be held liable for loss or damages.18 A
limitation of liability clause typically limits the liability of the
firm to some proportion of its fee/profit or a defined dollar
value. The first step in successful negotiation of the limitation
of liability clause with your client is to initiate a frank
discussion of risk allocation concepts.19 Your customer should
understand tasks that you will be performing in order to
complete your product/project. Since the product/project is
substantial compared to the risks you will be undertaking,
the limitation of liability must be applied appropriately. In
negotiations, a discussion regarding how the price could
change based on whether a limitation of liability clause is
included or excluded from the contract could help to reach an
understanding between the parties.
Your customer can offer joint sharing of risk and liabilities
among the parties. In some organizations, this is considered a
common practice, as long as it protects the organizations’
interests in particular circumstances. It is best to get together
with your proposal team to assess all risks prior to making
decisions regarding sharing of liabilities. On the safe side, risk
or liability should be assumed from the organization’s own
actions, and not actions of others, whoever they might
be—i.e., partners, customers, or third parties.
From the seller’s perspective, when there is more than one
liability provision—e.g., indemnification, limitation of
liability, and termination for default—the contract should
contain an overall cumulative monetary limitation of liability.
Even if you can add an endorsement to an insurance policy to
increase your limitations of liability to satisfy contract
requirements, on the safe side, it’s best to negotiate a lower
liability and to keep it at or under your organization’s
insurance policy requirements.
Waiver of Subrogation Rights
Have you ever seen a provision with the demand to waive
your organization’s rights of subrogation? If so, I hope you
consulted your organization’s legal counsel. The right of
subrogation is the right to pursue someone else’s claim as
though it were your own. In legal language, subrogation is
“the substitution of one person in the place of another with
reference to a lawful claim, demand, or right, so that he or
she who is substituted succeeds to the rights of the other in
relation to the debt or claim, and its rights, remedies, or
securities.”20 Usually, the waiver of subrogation clause is
placed in the contract in order to minimize claims or lawsuits
among the parties.21
38 Summer 2011 / Journal of Contract Management
If a claim arises, and you are the innocent party, the
insurance company will reimburse you and can sue the other
party for damages on your behalf. Thus, the risk of loss shifts
from organizations to the insurers. Even the waiver of
subrogation is an important tool for risk allocation, and can
be beneficial in some cases; leaving the insurer to pursue the
guilty party is not such a great idea. Consulting your
organization’s guidelines is always a must, but in most cases,
organizations recommend avoiding waivers of subrogation
on behalf of your company.
Precise Wording
In the legal/insurance world, precise word usage can add to or
completely change the meaning of the whole provision. As an
example, let’s look at negligence, which is the failure to exercise
the standard of care that a reasonably prudent party would
exercise in a similar situation.22 For example, as a part of your
indemnification provision, your contract could have the
following language:
The seller agrees to indemnify and hold harmless the buyer
against any and all liability, claims, suits, losses, costs, and
legal fees caused by, arising out of, or resulting from
negligence or misconduct during performance of this contract.
You might want to rethink this language, limiting “negligence” to “gross negligence” and “misconduct” to “willful
misconduct.” Gross negligence actually adds willful and
deliberate intent to the meaning of “negligence.” By adding a
word, you can save your company significant liability just by
limiting any negligent conduct to strictly willful and
deliberate conduct.
Another example would be negotiating unspecified “damages”
verses “direct damages.” Direct damages are foreseeable and
arise from direct breach of contract. Indirect damages, on the
other hand, are damages resulting from, or as a consequence
of, direct damages.23 When the contract has a broad definition
of “damages,” or does not specify what kind of damages you
can use in case of breach, claims can be recovered for
damages that result directly from the breach, such as the cost
to repair or complete the work in accordance with the
contract documents, the loss of value of lost or damaged work,
and also for damages that result from consequential damages
that include loss of product and loss of profit or revenue and
may be recovered if it is determined such damages were
reasonably foreseeable or within the contemplation of the
parties at the time of contract formation. This is a factual
determination that could lead to the contractor’s liability for
negotiating win -win insurance provisions: current corporate insurance
best practices
an enormous loss.24 For example, you can word a part of
your indemnification provision regarding damages as follows:
“Indemnification under this contract shall be limited to claims
by the buyer for direct damages, excluding third-party claims.”
com/pressroom-publications-TheChickenor
theEggInsuranceandIndemnifica.html.
9.
Ibid.
10.
Ibid.
11.
Howry LLP, “Your ‘Additional Insured’ Status: What Does
It Really Get You?” (May 24, 2004), available at
www.constructionweblinks.com/Resources/Industry_
Reports__Newsletters/May_24_2004/insured.html.
12.
Ibid.
13.
Definitions of business insurance exclusions by
www.investorwords.com.
14.
See Jim Cochran, “Understand the Exclusions of Your
General Liability Insurance Policy—Don’t Be Left
Uncovered” (July 7, 2010), available at http://ezinearticles.
com/?Understand-the-Exclusions-of-Your-General-LiabilityInsurance-Policy---Dont-Be-Left-Uncovered&id=4607957.
15.
Definition of errors and omissions insurance by
www.businessdictionary.com.
Conclusion
As contracts professionals, one of our main responsibilities is
to secure the most favorable terms and conditions in our
contracts in order to protect our organizations from unnecessary financial exposure. Each contract manager should review
all of the contract terms and conditions in order to determine
which clauses relate to the contract’s insurance provisions and
how to best approach the overall business deal. Negotiating
the most favorable insurance provisions in contracts can help
minimize risks and costs for businesses.
In this article, we reviewed the most relevant insurance
provisions that you can encounter in a commercial or federal
contract. However, consulting a legal or risk management
professional is a must prior to finalizing insurance provisions
in the contract in order to avoid placing your organization in
undue risk. JCM
16.Cochran, op. cit.
17.
Ibid.
18.
See definition of limitation of liability, available at
www.businessdictionary.com.
19.
“Drafting an Enforceable Limitation of Liability Clause”
(Camilleri and Clarke Associates), available at www.
camillericlarke.com/newsletters/customer-files/
29-drafting-liability-clause.htm.
20.
Definition of subrogation, available at www.
legal-dictionary.thefreedictionary.com.
21.
See Kenneth A. Slavens, “What is Subrogation…and why
is my Contract Waiving it?” (December 2000), available at
www.irmi.com/expert/articles/2000/slavens12.aspx.
22.
See definition of negligence, available
at www.merriam-webster.com.
23.
See discussion of direct and indirect damages,
available at www.uslegal.com.
24.
See Richard E. Neff, “Managing Risk in Technology
Licensing” (May 17, 2010) (reprinted and/or reposted
with the permission of Daily Journal Corp. (2010)),
available at http://nefflaw.com/2010/05/17/
managing-risk-in-technology-licensing.
Endnotes
1.
2.
Adhesion contract (a.k.a., “take-it-or-leave-it contract”):
“A contract in which one party has substantially more power
than the other in creating the contract. For a contract of
adhesion to exist, the offeror must supply a customer with
standard terms and conditions that are identical to those
offered to other customers. Those terms and conditions are
not negotiable.” Derived from www.investopedia.com.
Contractors subject to CAS 416, “Accounting for Insurance
Costs,” undergo through the joint Defense Contract Audit
Agency/Defense Contract Management Agency audit to
determine whether a contractor’s group insurance costs
claimed on government contracts meet the measurement,
assignment, and allocability requirements per FAR
Subpart 31.2.
3.
42 U.S. Code (U.S.C.) §§1651–1654.
4.
33 U.S.C. §§901–950.
5.
See “Defense Base Act definitions,” available at
www.dol.gov.
6.
Definition of indemnity, available at www.wisegeek.com/
what-is-indemnity.htm.
7.
Michael Pollick, “What is Indemnity?” available at
www.wisegeek.com/what-is-indemnity.htm.
8.
See James Stilwell, “The Chicken or the Egg—
Insurance and Indemnification Clauses in the Same
Contract” (2004), available at www.andrewskurth.
Journal of Contract Management / Summer 2011
39