By Michael J. Bemi
Most recently in our series on moving “beyond insurance,” we examined Claims Management.
Now, we undertake the next step in our journey: Contractual Risk Transfer.
First, we acknowledge that since this series of articles moves us “beyond insurance,” this mandates some level of Risk Retention — a self-assumed level of loss absorption that we must continually work to control if we are to derive maximal benefits from the Risk Retention process. We achieve that control via: occasional Risk Avoidance; loss prevention and mitigation through Risk Control; loss mitigation through Claims Management; and, for examination here …
Loss prevention and mitigation through Contractual Risk Transfer
Contractual Risk Transfer is used whenever our Church entity undertakes to employ some needed service provided by an outside entity (examples: cafeteria management, student transportation, grounds keeping and so on), or decides to build or lease some property to expand ministries.
The process begins by assessing which party to the undertaking is best positioned to prevent or mitigate loss, because that party has exclusive or primary control of the related process / undertaking, and also because it possesses experience, expertise and special equipment necessary to most safely provide the service or undertaking. Typically, using our examples, it will be the food service company, the bus transportation company, the landscaping company and the contractor that should assume primary responsibility via the contract of service — not the Church entity.
The process continues via use of a ‘hold harmless’ or indemnification clause in the contract.
Broad Form Indemnification clause: This clause requires the indemnitor (transferee of the risk) to assume all liability associated with the subject matter of the agreement regardless of which party was actually at fault, including, potentially, assumption of the indemnitee’s (transferor of the risk) sole negligence.
Intermediate Form Indemnification clause: This clause requires the indemnitor (transferee of the risk) to assume all liability associated with the subject matter of the agreement except for injury or damage caused by the indemnitee’s sole negligence. Note that this could result in a situation where the indemnitor is obligated for 100 percent of damages from a loss for which it actually was only 15 percent at fault, while the indemnitee was 85 percent at fault.
Limited Form Indemnification clause: Sometimes referred to as a ‘mutual and reciprocal’ or ‘comparative fault’ clause, this clause obligates the indemnitor only to the extent of its own fault. A Church entity should never allow itself to become the indemnitor / transferee where a Broad Form or Intermediate Form Indemnification clause is being required of it, by the contracting counter party.
We next need to recognize that every Hold Harmless / Indemnification agreement provided to a Church entity by a
contracting party is only as good and reliable as is the ability of the contracting party to fulfill any protective obligation to the Church entity, which it has assumed under the contract. This is why you should employ a ‘belt and suspenders’ strategy by requiring that your Church entity be named as an Additional Insured (AI).
However, the process doesn’t stop simply with the assurance that your entity will be named as an Additional Insured. Your attorney, risk manager and broker will all require contractual language stipulating the type, quality of (example: minimum Best’s rating of A8) and limits of insurance coverage, plus a valid certificate of insurance verifying currently in-force coverage that meets the aforementioned requirements. If the service or undertaking will continue beyond the term of the current coverage, the agreement should require renewal coverage “equivalent to” — or “at least as broad as” — the expiring coverage, as well as provision of a new certificate of insurance.
Finally, you should know that many states now have “anti-indemnity” statutes and / or related case precedents which could affect not only your desired contractual transference result, but also the efficacy of your Additional Insured status. Consequently, always use an attorney experienced in these contractual matters, who is also familiar with relevant state statutes and case law.
Michael J. Bemi is president & CEO of The National Catholic Risk Retention Group, Inc. (Lisle, IL) — a recognized leader in risk management. To learn more about available coverage — and to get valuable tools, facts and statistics — visit www.tncrrg.org.