Reduce Your Business Exposures During Company Parties
Businesses host parties for a variety of reasons, including the holidays and organizational accomplishments. While these events are fun, team-building opportunities, they can create a number of risks for the hosting company. In fact, in the event that an employee is injured at the party or causes property damage, the employer is usually the one held responsible. This can lead to costly litigation and reputational harm that can affect a company for years. Find out how to reduce your business exposures during company parties.
To avoid major losses, it’s not only important for employers to secure the right insurance coverage for every individual risk, but to also have a thorough understanding of common holiday party exposures.
When You Serve Alcohol At Your Holiday Party
Anytime you provide alcohol to individuals in a non-commercial manner, you are considered a social host. This is important to note, as a social host may be responsible for the acts of their guests should their conduct create harm. These risks are compounded when alcohol is served, and employers may be liable for damages following a drunken driving accident or similar incident.
While the best way to reduce alcohol liability risks is to avoid serving it altogether, this isn’t always feasible. To promote the safety of your employees and guests at company-sponsored events, consider the following:
Hold the event off-site at a restaurant or hotel.
Provide plenty of food and non-alcoholic beverages throughout the night.
Serve drinks to guests rather than offering a self-serve bar. Limit the amount of alcohol you will serve. Require servers to measure spirits.
Set up bar stations instead of having servers circulate the room. Place table tents at each bar that remind employees and guests to drink responsibly.
Don’t price alcohol too low, as it encourages over consumption. Offer a range of low-alcohol and alcohol-free drinks at no charge.
Close the bar an hour before the scheduled end of the party. Do not offer a “last call,” as this promotes rapid consumption.
Entice guests to take advantage of safe transportation options by subsidizing taxis or promoting a designated driver program.
What About Marijuana Consumption?
Similar to alcohol use, marijuana and other drug consumption can directly affect the safety of your party guests. In fact, according to the most recent federal data, 44 percent of vehicle crash deaths can be linked to drug-impaired driving, up from 28 percent a decade earlier.
Marijuana contains hundreds of chemicals, many of which act directly on the body and brain. Individual sensitivity to marijuana can vary, but the general effects include the following:
Dizziness, drowsiness, light-headedness, fatigue and headaches
Impaired memory, concentration and ability to make decisions
Disorientation and confusion
Suspiciousness, nervousness, anxiety, paranoia and hallucinations
Impaired motor skills and perception
Dry mouth, throat irritation and coughing
Increased heartbeat
These health effects can last long after an employee smoked, increasing the potential for accidents or major health concerns. In addition, federal, state and local laws may prohibit marijuana use in certain areas, making it all the more important to educate employees on behavior expectations.
To keep your party guests safe and avoid any liability concerns, consider making clear rules for marijuana use at your party. Remind employees that even though they are at a social event, they are still attending a work function and workplace policies on the use of marijuana still apply.
Be Aware of Workplace Harassment and Discrimination
Even when holding company-sponsored events off-site, employers are expected to enforce their workplace policies and safeguard their employees. In particular, employers must pay extra care to prevent issues of harassment and discrimination at their events, as they can lead to employment claims and costly litigation.
To help keep employees safe at company parties, employers should ensure all of their policies related to harassment, violence, discrimination and code of conduct are up to date and account for company-sponsored events. Policies should be specific as to what is and is not tolerated, and redistributed them as thoroughly as possible.
In addition, employers should:
Consider making the event a family party where employees can bring their spouse, significant other, children or a friend. This can help deter inappropriate behavior.
Keep event themes and decorations appropriate. Parties should be neutral and not make reference to specific religions or beliefs. In addition, plan your party on a day that does not conflict with religious holidays.
Consider having just one entrance to your party. This will allow you to control who enters the venue and ensure that uninvited guests do not attended.
Have supervisors and managers chaperone the event, looking closely for inappropriate behavior. Hire third-party security personnel as needed.
Avoid making attendance for company-sponsored events mandatory.
Food Exposures
Food is a staple of many company-sponsored events, and can actually be a useful way to keep party guest sober and limit alcohol-related liability (starchy foods can help reduce the absorption of alcohol). However, when serving food, there are a number of risks employers should consider.
For instance, employers need to be wary of potential food allergies. In the event that a guest gets sick from the food, they could sue the employer for negligence.
To help protect against this, employers should ask party guests to disclose any of their allergies, either in their RSVP or by contacting the event coordinator directly. In addition, you should specify what ingredients are in every food item, both on the menu and on display cards near the food itself.
For added protection against illnesses, it’s critical that employers promote safe food preparation and handling practices. Moreover, when working with a third-party provider, employers should do their due diligence to ensure they are securing reputable vendors. Reduce your business exposures during company parties with food safety.
Property Damage
Property damage can occur at just about any kind of party, even small, company-sponsored events. As the host, it’s your job to ensure your guests remain safe, behave appropriately and respect the venue and its contents.
To do so, employers should:
Set behavior expectations before the party.
Have supervisors and managers chaperone the event, looking closely for inappropriate behavior. Hire third-party security personnel as needed.
Remove valuable items from the party area wherever possible. Make sure any areas that you don’t want guests to enter are locked, roped off or secured in some way.
Ensure the venue is equipped to handle the number of individuals invited to the party.
Secure the Insurance Coverage You Need in Advance
Even if you take all the appropriate precautions, incidents can still occur. As such, it’s important for all organizations to secure adequate insurance.
Each business is different, and may require additional policies to account for all of their exposures. Contact GDI Insurance Agency, Inc.today at 209-634-2929 to learn about your coverage options when it comes to hosting a party. We hope this blog has helped you reduce your business exposures during company parties.
Contractors Doing Structural Work for HOA and Condo Associations
The key is to do all that can be done post project to assure nothing goes wrong. Taking a realistic view that “insurance” is not the solution as insurance only pays after something has gone wrong! Including rules for contractors doing structural work for HOA and Condo Associations in their CC&R’s can help with the risk management for such projects.
What HOA and Condo Associations Don’t Know Will Cost Them!
How do you then assure that you have done all that can be done to assure nothing goes wrong? Here are just a few brief pointers.
As a rule, all HOA and condo associations should have in their CC&R’s a stipulation as to what is required when any contractor is hired to do structural work.
An example I was recently asked about is when a unit owner buys the adjoining unit and hires a contractor to make two units into one. Basically, do any work at all beyond a simple remodel or upgrade in a unit.
Just a quick list of items to consider.
The past is the best indicator of the future! Yet for some odd reason no one seems to ask the simple question. “What is the 5-year loss history for the contractor and all subs on the project?”
These are the most missed items that matters the most!
Liability, premise operations as well as products completed operations.
How many and what type of liability claims do the contractors have? Particularly for products completed operations.
Workers compensation? Are they safe? What do the past 5 years tell us?
Keep in mind the unit owner and the association can be sued when a contractor’s employee is injured in the unit or common area!
The contract is typically between the unit owner and the general contractor. The General contractor will hire sub-contractors as well. When a signing party to the contract requires, they be named as an additional insured with a specific additional insured form they receive the benefit as it is “required by written contract”.
However, in this case we have an association that needs to also be named as an additional insured. The association typically not going to be a signor on the contract. In this case it creates a “privity” coverage issue unless the proper additional insured forms are used. Note: this is also true of the unit owner when a general contractor contracts with a subcontractor the same issue exists.
Indemnity and hold harmless agreements in place a properly done, as well as confirmation the contractors and subs insurance policies have action over and third-party action over coverage.
Consider a worker falling from a ladder. It is worker compensation between the worker and his employer. but the worker fell on who’s property? Both the unit owner and association can find themselves being sued directly by this worker whom may make a true or false allegation of contributory negligence.
Property coverage Builders risk and after work is done. Very important to specify whom is insuring what, also does the work add to the value the associations master policy must buy as it is structural? Or does the unit owner add it as improvements to their condo owner’s insurance?
How much liability insurance should the contractor and any subs they use be required to carry? Also is the coverage correct for the work, and risk…
These are just the top 5 things we see that create claims that go badly.
This is worth repeating.
The intent as you may notice with items 1-3 is to not have anything go wrong to begin with. Ie. Looking at the 5-year loss runs, understanding the likelihood of having a loss, (Loss runs), proper risk transfers, (hold harmless and indemnity, as well as additional insured status done properly) and in proper order if things do go badly.
Items 4 and 5 are the back stop, not the intended solution. very different then how most look at insurance and risk… “Let’s plan to not have a problem to begin with!
Lastly, check it out. Review the contractor’s policy to assure they have the proper coverage for the work they are doing. I know this sounds like a lot. Honestly it is about 30 minutes of work that we do for our clients. Which is a deal compared to the time, stress and frankly trauma a client goes through when something does go wrong.
California’s Leader in Insurance and Risk Management
As one of the fastest growing agencies in California, GDI Insurance Agency, Inc. is able to provide its clients with the latest and greatest of what the insurance industry has to offer and much, much more.
We are headquartered in Turlock, CA, with locations across the heart of California’s Central Valley, Northern California and beyond to provide a local feel to the solutions and services we provide our clients. We pride ourselves on exceeding our client’s expectations in every interaction to make sure that our client’s know how much we value and appreciate their business. Contact us today 1-209-634-2929 for your comprehensive condo association insurance quote!
Understanding the outside factors that impact your commercial property insurance can be complicated, particularly for those with little to no knowledge of what goes into the underwriting process. While the type of business you’re in, your location and the state of the insurance industry in general can all affect commercial property coverage pricing, there’s often more to it than that. Because commercial property insurance rating can be complex, it’s important to have an experienced insurance broker. GDI Insurance Agency, Inc. can help, call us today 209-634-2929.
In fact,
when it comes to underwriting and rating commercial property insurance,
insurers examine four key characteristics of a building: its construction,
occupancy, protection and exposure (COPE). Together, these factors can affect
commercial property policy pricing—pricing that can fluctuate drastically
following an Insurance Services Office (ISO) inspection. This is especially
true if there’s a discrepancy between what’s on an insurance application versus
what’s found during an ISO inspection.
This
Coverage Insights examines each aspect of COPE and how it can affect an
organization’s commercial property insurance rating and, subsequently, their
insurance rates.
The Types of Commercial Property Insurance Rating
Before
looking at the specific factors of COPE, it’s important to understand when it
is used and how underwriters rate property in general. When rating property
insurance, insurers will generally use one of two methods—class rating or
specific rating:
Class rating—For the class rating method, buildings with similar
characteristics are assigned to the same class. Insurance rates for class
rating buildings will often be an average of all those in a particular group,
with some rates fluctuating based on positive or negative features of a
specific structure. Typically, your building will be assigned a class rating if
it has all of the following characteristics:
It consists of
25,000 square feet or less
It doesn’t contain a
sprinkler system
It is not
fire-resistive
It is not used for manufacturing
Specific rating—In instances where a building doesn’t fall under
the class rating method, a specific rating will be calculated based on
individual characteristics of the structure itself. This is where COPE comes in.
Specific ratings are used for more complex buildings and take into account
unique features—features that are examined closely during an ISO inspection.
Following the inspection, ISO or the insurer will calculate a specific rate.
Construction of Property
With a
general understanding of the two rating systems, we can now examine how a
building’s characteristics under COPE can affect policy pricing.
The first
and most basic element of a commercial property insurance rating is a
building’s construction (i.e., the materials the building is made of). Based on
an ISO-developed system, insurers categorize buildings into one of six classes.
These classes not only take into account the building materials used in
construction (e.g., wood and concrete), but the combustibility of those
materials as well.
These
classes—numbered in order of combustibility, with Class 1 being the most likely
to burn—are as follows:
Class 1 (Frame)—Buildings
generally receive this classification if their exterior walls are made of wood
or some other combustible material.
Class 2 (Joisted Masonry)—Buildings
in this classification typically have noncombustible exterior walls consisting
of concrete block, stone, brick adobe or another masonry material. In addition,
Class 2 buildings usually have combustible floors and roofs.
Class 3 (Noncombustible)—Class
3 buildings will have exterior walls, floors and roofs made of and supported by
noncombustible or slow-burning materials. This can include materials like
metal, asbestos or gypsum. Often, Class 3 buildings are equipped with steel
frames.
Class 4 (Masonry
Noncombustible)—Class 4 buildings will often have exterior walls made of
brick, concrete block or another type of masonry. Unlike Class 2 buildings, the
floor and roof are constructed of metal or another noncombustible material.
Class 5 (Modified
Fire-resistive)—The walls, floor and roof of Class 5 buildings will have a
fire rating of at least two hours. Because these buildings are heavily fire
resistant, Class 5 buildings generally have walls, roofs and floors made of
solid masonry that are at least 4 inches thick.
Class 6 (Fire Resistive)—Similar
to Class 5 buildings, the walls, floor and roof of Class 6 buildings will have
a fire rating of at least two hours. In addition, the walls, floor and roof
will consist of reinforced concrete and will be 4 inches thick or more. What’s
more, structural steel used in Class 6 buildings will be load bearing and have
a fire rating of at least two hours.
Following
an ISO inspection, your building may be assigned a specific class, which could
substantially impact your rates.
Occupancy
The second
factor in COPE that insurers look at is occupancy. Specifically, underwriters
will examine how a particular building is used (e.g., for retailing, manufacturing
or renting).
In
addition, underwriters are interested in the contents of a building and how
those contents impact combustibility. For example, if a building is used as a
grain mill, it will likely contain dust that could ignite or explode. With this
in mind, your commercial property insurance rates will vary depending on the
type of work you perform in your building.
Protection
The third
factor of COPE relates to protection and the methods used to safeguard a
building from fire. When it comes to protection, insurers will take into
account both public and private protection:
Public protection—In general, public protection is provided by
local fire departments, and an ISO-developed system is used to rate the quality
of that protection. Under this system, fire departments are assigned what’s
called a Public Protection Class rating—numbered one to 10, with one being the
best. Essentially, buildings located in communities with low Public Protection
Class ratings will be charged a lower commercial property insurance rate. These
ratings take into account:
The caliber of the
fire department
The adequacy of the
water supply
The effectiveness of
the fire alarm and communication system
Private protection—Private protection refers to the policyholder’s
fire protection methods. This can include things like fire doors, fire alarms,
fire extinguishers and sprinkler systems. Essentially, the more of these
features your building has, the more likely your insurer will apply a credit to
your insurance rate.
Exposure
The fourth and
final factor of COPE refers to exposure. Exposure relates to external hazards
that exist primarily due to a building’s location. This can include natural
hazards (e.g., wind, hail and lightning) or man-made hazards from local
infrastructure (e.g., highways) or the general public (e.g., high-crime areas).
The closer your building is to a natural or
man-made hazard, the more likely you are to pay higher prices for commercial
property insurance.
What This Means for Your Commercial Property
Commercial property insurance rates are
anything but static, and a variety of outside factors can influence pricing.
Despite this, you aren’t alone when it comes to managing your risks and gaining
insight into your unique policies. We’re here to help.
Contact GDI Insurance Agency, Inc. today to learn more and speak to a qualified insurance broker.
California’s Leader in Insurance and Risk Management
As one of the fastest growing agencies in California, GDI Insurance Agency, Inc. is able to provide its clients with the latest and greatest of what the insurance industry has to offer and much, much more.
We are headquartered in Turlock, CA, with locations across the heart of California’s Central Valley, Northern California and beyond to provide a local feel to the solutions and services we provide our clients. We pride ourselves on exceeding our client’s expectations in every interaction to make sure that our client’s know how much we value and appreciate their business. Contact us today 1-209-634-2929 for your comprehensive commercial property insurancequote!
Hiring an
independent contractor offers employers many advantages. Unlike a traditional
employee, an employer does not pay an independent contractor a wage or salary,
federal and state payroll taxes on his or her earnings, social security tax,
federal unemployment insurance tax, state unemployment insurance, workers’
compensation premiums, benefits, or overtime. Employers do, however, pay for
office space, along with supplies and equipment for the independent contractor
to use. Employers can often save 30 to 40 percent by using an independent
contractor versus hiring an individual to do the same job. Beyond this, if an
employer is dissatisfied with the contractor’s performance, he or she can
simply seek out someone else to do the job which is far less stressful than
having performance discussions with an employee.
As a company grows and the demand for its products increases, California business owners are faced with the challenge of how to increase resources effectively. Though this may appear to be a rather innocuous dilemma, hiring is quite a complicated process, and wrongly classifying an employee as an independent contractor can have both financial and legal consequences. GDI Insurance Agency, Inc. can help with contracts and your business insurance. Contact us today 209-634-2929.
Year End Duties
At the end of the year, the company is required to issue the contractor a Form 1099 (if the contractor earned $600 or more during the year) and submit a Form 1096 to the Internal Revenue Service (IRS) explaining the payments made to the contractor. This entire process may seem pain-free and far more economical; however, there are hefty government-imposed penalties if an employer classifies an individual as an independent contractor when he or she is actually an employee. The IRS, the U.S. Department of Labor and various state agencies constantly monitor compliance with employee and independent contractor classification through somewhat ambiguous criteria. Using the Employment Tax Examination Program (ETE), special IRS teams investigate misclassified workers through audits. Those who file Form 1099 are subject to audits, as are industries that tend to abuse the privilege of hiring an independent contractor.
Who is an Independent Contractor?
According to the
IRS, the general rule requires an employer to have the right to control or
direct only the result of the work done by an independent contractor, and not
the means and methods of the accomplishing the result. Contractors are selected
and contracted to provide only specified services for a specific price or over
a given time frame. An employer would not supervise the task as it is
completed, nor provide supplies or tools accomplish the task. If the task is
not done to the employer’s specifications, he or she is free to hire someone
else and not compensate the independent contractor for the work. On the other
hand, the IRS classifies an employee as an individual in which the employer can
control how and when he or she performs tasks. Additionally, employees get paid
regardless of the quality of their work. Essentially, the facts that provide
evidence of the degree of control and independence determine whether someone is
an employee or independent contractor. There are a few exceptions to common law
rule though.
Statutory Employees
Some independent
contractors may be treated as employees by statute. Generally, if an
independent contractor falls within any of the following four categories, he or
she will be classified as an employee for certain employment tax purposes:
A
driver who distributes beverages (other than milk) or meat, vegetable, fruit,
or bakery products, or who picks up and delivers laundry or dry cleaning, if
the driver is your agent or is paid on commission.
A
full-time life insurance sales agent whose principal business activity is
selling life insurance or annuity contracts, or both, primarily for one life
insurance company.
An individual
who works at home on materials or goods that you supply and that must be
returned to you or to a person you name, if you also furnish specifications for
the work to be done.
A
full-time traveling or city salesperson who works on your behalf and turns in
orders to you from wholesalers, retailers, contractors, or operators of hotels,
restaurants, or other similar establishments. The goods sold must be
merchandise for resale or supplies for use in the buyer s business operation.
The work performed for you must be the salesperson’s principal business
activity.
Statutory Non-employees
There are two
categories of statutory non-employees: direct sellers and licensed real estate
agents. They are treated as self-employed for all Federal tax purposes, including
income and employment taxes, if the following two conditions apply:
Substantially all payments for their
services as direct sellers or real estate agents are directly related to sales
or other output, rather than to the number of hours worked.
Their services are performed under a
written contract providing that they will not be treated as employees for
Federal tax purposes.
Determining Classification-common Law
Control Test
When determining
whether the person a company hires (or contracts) is an employee or an
independent contractor, the IRS has devised a common law “control” test
consisting of a number of factors. If the majority of the answers to the
control test describe someone who is an employee, then the individual will
probably be seen as an employee or vice versa.
IRS Factors Used to Determine Control
These factors
are used by the IRS to determine control:
The individual can earn a profit or
suffer a loss from doing the task (indicative of independent contractor).
The individual is instructed where to
work.
The individual offers services to the
general public (indicative of independent contractor).
The individual can be fired by the hired
company.
The individual provides his or her own
tools, materials or supplies needed to complete the work (indicative of
independent contractor).
The individual is paid by the hour or
paid by the job completed (employees are generally paid by the hour whereas
independent contractors are paid by the job).
The individual does services for more
than one contracted company at a time (indicative of independent contractor).
The individual has a continuous long-term
relationship with the company (indicative of employee status).
The individual has an investment in
office space and equipment needed to complete tasks (indicative of independent
contractor).
The individual pays for travel and
business expenses (indicative of independent contractor).
The individual can quit without being
liable for breaking a contract (indicative of employee status).
The individual receives specific
instructions from the company (indicative of employee status).
The individual is told exactly how to
perform his or her job (indicative of employee status).
The individual receives training for the
job he/she is to perform (indicative of employee status).
The individual performs the services him-
or herself.
The individual hires his/her own
assistant and pays that person’s salary(indicative of independent contractor).
The individual sets his or her working
hours (indicative of independent contractor).
The individual gives the company reports
on his or her progress on work completed
The individual works full-time for the
company (indicative of employee status).
The individual’s work is considered part
of the core operations of the company’s daily operations (indicative of
employee status).
Other government
agencies such as the States’ Unemployment Compensation Board, Workers’
Compensation Insurance Agency, Tax Department and Department of Labor have ways
of determining an individual’s status within a company. Since each state is
different, it is imperative that employers contact these agencies directly for
more information.
Determining Classification-categories of
Evidence
Since common law
factors change, the courts and the IRS have placed some of the items within the
control test into three main categories, known as the “categories of evidence.”
Behavioral
Control: Facts that show whether the business has a right to direct and
control. These include:
Instructions: an employee is generally
told the following:
When, where, and how to work
What tools or equipment to use
What workers to hire or to assist with
the work
Where to purchase supplies and services
What work must be performed by a
specified individual
What order or sequence to follow
Training: an employee may be trained to
perform services in a particular manner.
Financial
Control: Facts that show whether the business has a right to control the
business aspects of the worker’s job include the following:
The extent to which the worker has returned
reimbursed expenses
The extent of the worker’s investment
The extent to which the worker makes
services available to the relevant market
How the business pays the worker
The extent to which the worker can
realize a profit or loss
Type
of Relationship: Facts that show the type of relationship include the following:
Written contracts describing the
relationship the parties intended to create
Whether the worker is provided with
employee-type benefits
The permanency of the relationship
How integral the services are to the
principal activity
Protection Against Misclassification
Companies
wishing to hire an independent contractor should proceed with caution in order
to avoid potential penalties. An independent contractor agreement is a good
first step. This document should contain a description of the services the
individual will perform, how long the task should take and how the person shall
be paid. This agreement serves as evidence of the person’s status with regard
to the company in case there is a discrepancy or if the individual claims that
he or she was actually an employee.
While hiring an independent contractor provides many advantages to companies, it is not as simple as it may seem. The pivotal detail to remember is that as the employer’s control increases, the likelihood that the individual will be classified as an employee increases as well. With that said, it pays to be highly scrupulous when deciding to hire someone as an independent contractor.
California’s Leader in Insurance and Risk Management
As one of the fastest growing agencies in California, GDI Insurance Agency, Inc. is able to provide its clients with the latest and greatest of what the insurance industry has to offer and much, much more.
We are headquartered in Turlock, CA, with locations across the heart of California’s Central Valley, Northern California and beyond to provide a local feel to the solutions and services we provide our clients. We pride ourselves on exceeding our client’s expectations in every interaction to make sure that our client’s know how much we value and appreciate their business. Contact us today 1-209-634-2929 for your comprehensive business insurance quote!
Examining and managing risk exposures is one of the keys to the long-term success for businesses of all sizes. However, when you work with partners and other parties such as contractors, renters, component suppliers and service providers, you may be held accountable for their actions or negligence. And because your regular risk management procedures and insurance policies generally don’t cover others, you could be found liable for huge losses. This is where contractual risk transfer can protect your business.
The best protection in these situations is to shift risk and
liability away from your business and onto other parties. Thankfully, you can
do this when you draft a formal business contract by including provisions,
clauses and other text that determines exactly who is liable for specific
scenarios and losses. This is generally referred to as contractual risk transfer and can include a wide range of provisions
on liability. For example, a business could agree to be responsible for losses
only when employees or customers are on the premises.
Protection and Risks
Because properly worded contracts are legally binding in court, they can help protect your business in the event of a loss or dispute. Additionally, contracts can contain insurance requirements, waivers and other types of risk transfer that give your business legal counsel or direct financial compensation. Although contractual risk transfer is an effective way to protect your bottom line when working with partners and other parties, the practice itself may expose your business to significant risks.
Many states have laws that require specific legal language
in order to make contractual risk transfer enforceable, and some states have
outlawed specific types of contractual risk transfer altogether.
This guide is meant to give a general overview of
contractual risk transfer, including summaries of how and when specific types
of risk transfer may be used. This guide should not be considered legal advice,
and you should contact legal counsel for advice before you agree to a contract
with other parties.
For more information on risk transfer and contracts, call GDI Insurance Agency, Inc. today 209-634-2929.
Legal Language Overview
Because contracts and all other legal documents may be read
by many different people, it’s essential for them to be written in a way that
ensures that they will be interpreted and enforced in a clear and consistent
way. For this reason, words and phrases inc1luded in contracts are often interpreted
literally, and their meaning can greatly differ from more informal, conversational
language.
For example, think about the definition of the word “should.” When a manager tells an employee that they “should” be in the office before a certain time every day, the employee has a general understanding that this is a job expectation. However, because the literal definition of “should” states that the action is only probable and not guaranteed, including “should” in a legal document could cause readers to interpret its meaning in a number of different ways. Instead, most legal documents use clearer language to outline expectations, such as “must”, “will” and “shall.”
Key Terms
Here’s an overview of key terms that are essential to
understanding contractual risk transfer.
Liability
The legal responsibility for a party’s acts or omissions. Legal proceedings involving liability focus on finding the party that was ultimately responsible for a loss, injury or other damage. Then, any relevant contracts are examined to see if any liability was transferred to another party, and if those risk transfer provisions are relevant to the situation.
It’s also important to note that courts often consider vicarious liability when investigating a case. Under this form of liability, a party can be responsible for a loss that they did not cause if they have a special legal relationship to the party who was ultimately at fault. For example, a person could sue an entire business if a single employee’s negligence leads to their injury.
Negligence
A failure to exercise the care toward an individual or situation that a normal, responsible person would take. Although negligence is accidental in nature, a negligent party can still be held responsible for a loss or damage. Most states have laws that prohibit or limit the transfer of liability that results from one party’s own negligence.
Because negligence can involve the relationships between
multiple parties’ actions and inactions, there are a few different types of
negligence with important distinctions:
Gross
negligence: An extreme form of negligence that is still accidental in
nature, but also shows a reckless disregard for the safety or lives of others.
Many contractual risk transfer provisions contain exclusions for gross
negligence.
Sole
negligence: Negligence that can be attributed entirely to a single person or party. Sole negligence is extremely
difficult to prove, because any involvement whatsoever by another party would
qualify as a separate type of negligence. Many states have outlawed contractual
provisions that contain sole negligence exclusions in order to protect parties
that don’t understand sole negligence and accept additional risk without their
knowledge.
Joint or contributory
negligence: A situation where multiple people or parties are simultaneously
negligent for a loss, injury or other damage. During a lawsuit, a court may
find that multiple parties were negligent and assign different amounts of
liability to each party. However, state laws concerning this form of negligence
vary greatly.
Diligence
The amount of reasonable care or attention that a normal, responsible person would take in any given situation. A party may attempt to avoid liability for a loss by proving that they were diligent and took reasonable steps to avoid damage or transfer responsibility for the situation to another reasonable person.
Idemnify
The act of one party agreeing to provide some form of
compensation for the loss, damage or liability of another party under one or
more specific circumstances. This is one of the most common and broadest forms
of contractual risk transfer, as the party that compensates for a loss takes on
some of the other party’s financial risk. Three additional terms are often used
when discussing this process:
Indemnity:
The actual compensation that’s exchanged when one party indemnifies
another. The form of compensation may vary depending on the specific wording
used in different indemnity clauses.
Indemnitor:
The party that promises compensation through an indemnity provision. This party
takes on additional risk by offering the reimbursement in a contract.
Indemnitee: The party that
will receive compensation through an indemnity provision. This party has
transferred part of their risk elsewhere by getting a promise of reimbursement
through the indemnity provision.
Hold Harmless
When used in a contract, the term hold harmless refers to
the act of one party protecting another party from losses and liability. Although
some experts believe that the terms indemnify and hold harmless can be used
interchangeably, not everyone agrees. Courts generally find that hold harmless
is a broader term that refers to protection against both liability and losses,
while indemnify only protects against losses by promising compensation after
damage has already occurred. However, both terms are often included in
indemnity provisions in order to offer more protection and avoid confusion.
Duty to Defend
The promise to provide for a legal defense or transfer funds to hire counsel. Many contracts include a duty to defend provision in which one party promises to accept responsibility for any costs or work related to lawsuits.
Insured Contract
A term that’s used to provide partial or full exceptions to the contractual liability exclusion in most commercial general liability (CGL) insurance policies. Most CGL policies don’t provide coverage for damage that comes from one party’s agreement to take on extra liability, since this extra risk wasn’t considered during the insurance underwriting process. However, if the extra liability was a part of a contract, an insurer may label the extra liability as part of an insured contract and provide coverage.
Subrogation
Subrogation is the legal ability of a person or group to use
the rights of another when resolving debt or an insurance claim. When talking
about contracts, subrogation usually refers to an insurance company that’s
trying to recover their losses from a loss that it paid out. For example, if an
insurance company pays for one of its policyholder’s losses, it can legally use
that person’s right to sue the at-fault party to try to recover the damages.
Waivers of subrogation are a common form of contractual risk transfer where the parties forming a contract deny this right to insurers. As a result, insurance premiums may go up.
The Common Types of Contractual Risk Transfer
Contracts are binding legal documents that outline the relationship between your business and another party, and the different sections included in a contract will detail how you operate together. In order to transfer liability from one party to another, contracts include dedicated sections—often called clauses or provisions— that describe the subject of risk and liability. Because contracts are a negotiated agreement, there are a number of ways to transfer liability during the drafting process. However, there are three main types of contractual risk transfer:
Indemnity provisions
Additional insured provisions
Waivers of subrogation
Each type of contractual risk transfer has unique advantages
and disadvantages, and you should examine each one to see what’s right for your
business. For example, many states have laws that limit some of the types of
contractual risk transfer, and some may be outlawed entirely.
When determining the type of risk transfer that’s best for
you, you should consider the following questions:
How can I establish the best working relationships
with others?
What types of risk transfer are most common in
my area and industry?
What type of risk transfer offers me the most
financial protection in this scenario?
Who will review my contract to ensure it’s both
legal and in my best interest?
In order to help you answer these questions, the following pages will detail the three main types of risk transfer and provide you with an overview of their advantages, disadvantages and more.
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