If your job includes reviewing, drafting or negotiating contracts, you’ve probably seen these provisions. Are they boilerplate that you spend little time on? Do you fully understand exactly what they do? Do you negotiate or revise them? Allocation of Risk Fundamentally, the purpose of insurance, indemnification, and limitation clauses is to allocate risks. In general, insurance transfers risk from the contracting parties to a third party—an insurance company. Indemnification usually transfers risk between the parties to the contract. Limitation of liability prevents or limits the transfer of risk between the parties. With those basic concepts in mind, think about the risks that arise out or relate to the contract. Take the time to imagine nightmare scenarios as well as other events that might be less devastating but more likely to occur. Then think about who should bear each of those risks. Do the insurance, indemnification, and limitation of liability provisions allocate the risks appropriately? If not, the parties should consider carefully negotiating to reach agreement on the risk allocation and then drafting or revising the provisions necessary to accomplish their mutual intentions. These issues can be as important as price and other material terms in the contract. Clear Drafting As with any contract provision, ambiguity can be bad for both parties. If you’re uncertain how the risk allocation provisions apply to one of the risk scenarios that concerns you, consider adding language that specifically addresses that situation. Make it as clear as you can, and consider not just who should bear the risk but how that should work. Should there be a deadline for one party to notify the other? Should the party bearing the risk be required or even permitted to control the defense of third-party litigation? If insurance covers only part of the problem, what happens to the rest? Whatever your answers to these questions, it may be important to address them specifically in the insurance, indemnification, or limitation of liability provisions of the contract. Obstacles to Enforcement The law governing the contract can make a big difference in whether a risk allocation provision will be enforceable. For example, many states have statutes limiting the extent to which a party can be indemnified for its own acts, especially in industries such as construction, transportation, oil and gas, and health care. Some courts also apply those anti-indemnity laws to limitation of liability provisions. States differ on the extent to which the contract between the parties may impact their common law rights and remedies. Insurance coverage may or may not hinge on the language of the insurance requirements in the contract or on the indemnity provision. All of these variables are worth considering. Understanding Insurance Contractual insurance requirements often describe the type of policies that one or both parties must carry, and they may even identify some terms and endorsements that must be included. The parties dutifully purchase the specified policies but unfortunately may misunderstand the coverage. For example, Owner hires Contractor to erect a second building on Owner’s site, and their contract requires Owner to be an additional insured under Contractor’s commercial general liability policy. In the course of the project, Owner’s existing first building is damaged. Owner may think that its additional insured status allows it to submit a claim to Contractor’s CGL insurer and get paid for the damage. Probably not. It’s a commercial general liability policy, covering the insured’s liability to third parties. Being an additional insured can allow Owner to be covered against a third party’s claim for injury or damage, such as an injury suffered by a subcontractor’s employee. There may still be an avenue for Owner to have Contractor’s CGL policy pay for the damage to Owner’s property. If the facts support an allegation that the damage was caused by an act or omission of Contractor, Owner can demand or sue Contractor, and then the CGL carrier may pay for Contractor’s liability for damaging Owner’s first building. But that has nothing to do with Owner’s status as an additional insured. If you’re not sure about something in the insurance provision of your contract, talk to coverage counsel or someone else who does. Regardless of which party(ies) must purchase insurance, make sure you understand the requirements and can verify compliance with them. This space is insufficient to address all the complexities or offer tips for drafting insurance, indemnification, and limitation of liability provisions in business contracts. If you take the time to think carefully about these issues, you’re already doing more for your business than someone who considers those provisions to be mere boilerplate not worth the effort.
Insurance, Indemnification, and Limitation of Liability Provisions in Business Contracts
Kenneth M. Gorenberg
PartnerRELATED ARTICLES
Should You Rely on Your Insurance Agent to Tell Insurance Company About a New Claim?
June 7, 2022 | Policyholder Protection, Insurance
When You Get Sued, Don’t Forget to Tell Your Insurance Company
June 1, 2022 | Policyholder Protection, Insurance
Can Insurance Cover False Claims Act Claims?
May 27, 2022 | Policyholder Protection, Insurance
D&O Policy ‘Related Claims’ Ruling Highlights Importance of How Your Policy is Written
March 23, 2022 | Policyholder Protection, do
Resolving Insurance Coverage Disputes – What Every Legal Department Should Know
March 11, 2022 | Policyholder Protection, Insurance
Should You Rely on Your Insurance Agent to Tell Insurance Company About a New Claim?
June 7, 2022 | Policyholder Protection, Insurance
When You Get Sued, Don’t Forget to Tell Your Insurance Company
June 1, 2022 | Policyholder Protection, Insurance
Can Insurance Cover False Claims Act Claims?
May 27, 2022 | Policyholder Protection, Insurance
D&O Policy ‘Related Claims’ Ruling Highlights Importance of How Your Policy is Written
March 23, 2022 | Policyholder Protection, do
Resolving Insurance Coverage Disputes – What Every Legal Department Should Know
March 11, 2022 | Policyholder Protection, Insurance
Mind the Gap: Coverage Gaps Created by Commercial General Liability Policies
October 15, 2021 | Policyholder Protection, Commercial General Liability
What’s Wrong With This Picture? Five Questions to Ask for Improving Contractual Indemnification Provisions
October 15, 2021 | Policyholder Protection, Policy
Interview With Greg Shantz, General Counsel of CertaPro Painters Ltd.
October 15, 2021 | Policyholder Protection
The Growing Science Behind Direct Physical Loss or Damage from COVID-19
August 2, 2021 | Policyholder Protection, Insurance, Property Insurance
This, That, and the Other: Different Insurance Policies Can Cover the Same Loss
June 21, 2021 | Policyholder Protection, Additional Insured, Insurance
State of the Law for Business Interruption Insurance Coverage for COVID-19 Claims
May 14, 2021 | Policyholder Protection, Insurance, Claims
Important Timing Considerations for COVID-19 Business Interruption Claims
April 27, 2021 | Policyholder Protection, Insurance, Policy
Parent Company Providing Workers Compensation Can’t Be Sued By Subsidiary’s Employee
March 3, 2021 | Construction Law, Policyholder Protection, Insurance Coverage, Contracts
The Growing Captive Insurance Market: Is It Right for Your Business Needs?
December 9, 2020 | Policyholder Protection, Insurance, Policy
The Right to Independent Counsel: What It Is and When You Should Demand It
December 7, 2020 | Policyholder Protection
COVID-19 and Business Interruption Insurance
December 7, 2020 | Policyholder Protection, Insurance, Policy
D&O Renewals in the Age of COVID-19
December 7, 2020 | Policyholder Protection, do, Insurance, Policy
Assessing the Value of Representations and Warranty insurance
December 4, 2020 | Policyholder Protection, Insurance
Case Summaries
December 10, 2019 | Policyholder Protection, Policy, Claims
An Appraisal Of The Appraisal Remedy In Property Insurance
November 26, 2019 | Policyholder Protection, Property Insurance
Coverage May Exist For Companies Facing Allegations Related To Sexual Abuse
November 19, 2019 | Policyholder Protection, Occurrence, Policy
Building An Insurance Bad Faith Case
November 14, 2019 | Policyholder Protection, Insurance
Interview With Laurence Midler
November 1, 2019 | Policyholder Protection, Insurance
The Negligent Breach of Contract Problem In Liability Insurance
September 30, 2019 | Policyholder Protection, Insurance
Privilege and Work Product in Insurance Coverage Disputes
September 3, 2019 | Policyholder Protection, Insurance
No Zebra or Leopard Prints: Insurance Company Must Repair Buildings to Match
August 26, 2019 | Construction Law, Policyholder Protection, Claims
Noise and the Decision to Settle Within Insurance Policy Limits
May 16, 2019 | Policyholder Protection, Insurance
Insurance Coverage for California Companies for Employee Sexual Misconduct Claims
May 3, 2019 | Policyholder Protection, Insurance
Is a Settlement of a Restitution Claim Covered If Your Policy’s Ill-Gotten Gains Exclusion Applies Only In the Event of a Final Adjudication?
June 11, 2018 | Indiana Insurance Coverage, Insurance, Policyholder Protection
New Year’s Resolutions for Policyholders
January 9, 2018 | Insurance, Policy, Policyholder Protection
Sold! Close Your M&A Deal Confidently by Funding Post-Closing Liabilities Through Insurance
January 2, 2018 | do, Insurance, Policyholder Protection
Payback: Can Settlements of False Claims Act Claims Be Covered Under D&O Policies?
December 26, 2017 | do, Insurance, Policyholder Protection
When Should an Accident be an Accident?
November 27, 2017 | Insurance, Policyholder Protection
Tenth Circuit Holds that Governmental Investigation of Potential Criminal Violations is Not a ‘Claim’ Under a D&O Policy
November 15, 2017 | do, Insurance, Policyholder Protection
Get Smart About Additional Insured Endorsements: Beware of the Proximate Cause Standard Recently Adopted in New York
June 26, 2017 | Additional Insured, Policyholder Protection
Why Indemnification Provisions are Important
June 2, 2017 | Insurance, Policyholder Protection
Check Your Policy When an Insurer Says a Self-Insured Retention Applies to Its Duty to Defend
May 30, 2017 | Duty To Defend, Policyholder Protection
Bad Faith Isn’t the Only Remedy
March 27, 2017 | Insurance, Policyholder Protection
Overcoming That Sinking Feeling
March 6, 2017 | Commercial General Liability, Policyholder Protection
Coverage for Commotion: Insurance for Businesses Affected By Rioting and Vandalism
February 8, 2017 | Insurance, Natural Disaster, Policyholder Protection
California Supreme Court Denies Insurance Industry’s Attempt to Deregulate Insurance in California
February 7, 2017 | Insurance, Policyholder Protection
Recent Trial Win Raises Interesting Issues on Relationship Between Insurance Agent and Policyholder
January 30, 2017 | Insurance, Policyholder Protection
Franchisors: Don’t Forget About Insurance for Joint Employer Liability Claims
January 27, 2017 | Insurance, Policyholder Protection
Exercise Your Bargaining Power at Renewal Time
November 28, 2016 | Insurance, Policyholder Protection
Upcoming Webinar on Aug. 23: What Keeps You Up At Night?
August 17, 2016 | Insurance, Policyholder Protection
Are You Prepared for a Natural Disaster?
March 25, 2016 | Insurance, Policyholder Protection
Capitalizing on Sites with Environmental Property Damage: Is there really a pot of gold at the end of that rainbow?
March 15, 2016 | Insurance, Policyholder Protection
Join us: Insurance Considerations in Mergers and Acquisitions
March 7, 2016 | Insurance, Miscellaneous, Policyholder Protection
Andy Detherage and Charlie Edwards present Lessons from a Recent $204 Million Jury Verdict Against 17 Insurers
December 16, 2015 | Insurance, Policyholder Protection
2.4 Million Reasons to Monitor Claim Costs: Five Lessons From a Barnes & Thornburg Victory
November 16, 2015 | Claims, Policyholder Protection
Now available for viewing - Insurance Law Webinar: You’re Covered, But...
September 8, 2015 | Insurance, Policyholder Protection
Join Us for an Insurance Law Webinar: You're Covered, But...
August 4, 2015 | Miscellaneous, Policyholder Protection
Best Practices in Managing Insurance Claims
April 17, 2015 | Claims, Policyholder Protection
Ken Gorenberg to speak at Chicago Bar Association seminar, “Insurance and Risk Management for Corporate Transactions”
April 15, 2015 | Insurance, Risk Management, Policyholder Protection
Thankful for Our Policyholder Clients and Insurance Professional Colleagues
November 26, 2014 | Miscellaneous, Policyholder Protection
Do We Have Coverage for This? Sometimes it's worth getting a second opinion
November 25, 2014 | Claims, Policyholder Protection
Scott Godes to Speak About Insurance Coverage for Asbestos Claims at ACI’s 18th National Advanced Forum on Asbestos Claims & Litigation
November 17, 2014 | Claims, Policyholder Protection
(E)stop, Hey, What’s That Sound? Insurers Get What’s Going Down
September 23, 2014 | Additional Insured, Policyholder Protection
Join us Sept. 25 for Barnes & Thornburg’s National Insurance Recovery Seminar
September 18, 2014 | Miscellaneous, Policyholder Protection
RELATED PRACTICE AREAS
Subscribe
Do you want to receive more valuable insights directly in your inbox? Visit our subscription center and let us know what you're interested in learning more about.
View Subscription Center