Reviewing Contracts 101
Introduction
Understanding contracts can be complicated. Full of legal jargon and insurance terminology, sometimes reading a vendor contract can feel impossible and overwhelming. This document is meant to help you break down the components of a contract and identify insurance related language that may be problematic for your organization. We hope that this article helps empower you to think critically about whether signing a contract is in the best interest of your organization.
Contracts and the Transfer of Liability
One of the most consequential insurance issues found in contracts is the transfer of liability from one party to another. Such a transfer can be explicit – “while in your use, you are responsible for any property damage to the rented facility,” or less explicit – “if you agree to this term and there is a bodily injury incident, then you have forfeited the opportunity to sue the venue for an unsafe physical condition in the property because you are holding them harmless.”
Often these less explicit transfers of liability aren’t caught before a contract is signed and a member has unknowingly bound an organization to more liability than is preferable or intended.
Look out for the following verbiage in a contract that can indicate a transfer of liability:
- Hold Harmless
- Indemnification
- Additional Insured
- Primary and Non-Contributory
While MJ does not review contracts for hold harmless or indemnification language, they are still cause for concern and you should consult your organization’s policies for guidance. Under an MJ contract review for insurance language, contracts that include only hold harmless and/or indemnification clauses will be considered satisfactory and there is no need to submit them to MJ for review.
If your contract contains other insurance related language such as additional insured or a third party is requesting a certificate of insurance, please fill out this form to have your contract reviewed for insurance requirements.
Addressing Additional Insured Language
An additional insured extends liability insurance coverage beyond the named insured or your organization and its members and staff to include other individuals or groups. Often, contracts require that the third-party vendor be listed as an additional insured. This extends them coverage under your policy, meaning that you forfeit the right to sue them if they were negligent in their responsibilities under the signed agreement. Potentially, your policy would have to pay for a claim and associated costs where an additional insured was grossly negligent, even if you had little to no responsibility.
This is clearly very unfavorable for your organization. If you see additional insured language in a contract, please first refer to your organization’s policies and procedures. Then, attempt to get the contract amended to exclude the additional insured language. If you have additional questions or are unable to amend the contract, please contact MJ Sorority to review the contract and, in consultation with your organization’s headquarters, provide recommendations.
Determining a Third Party’s Existing Insurance: Certificates of Insurance
When hiring a contractor, renting a venue, or working with other third-party vendors, it is essential to determine whether they have adequate insurance. Before signing a contract, be sure to ask for copies of the third party’s certificate of insurance, which will provide you with this important information.
MJ recommends that third parties hold the following minimum limits of liability insurance:
| General Liability ($1,000,000 per occurrence) | Liquor Liability ($1,000000 per occurrence) | Automobile Liability ($1,000,000 per occurrence) | Workers’ Compensation ($500,000 per accident) |
| Any third party contractor should hold this amount of general liability coverage | This is recommended if the third party vendor is serving alcohol at a chapter event | This is recommended for third parties providing transportation, such as a bus company | We recommend this coverage for any contractors you engage with |
If a third-party does not hold these minimum requirements, please contact your headquarters to determine whether you need to identify an alternative option.
Liquor Liability: Deep Dive
We often hear that a state does not require a venue or bar to carry liquor liability at all. This does not change our recommendation. If you are contracting for a service where alcohol will be served, the party administering the alcohol service should carry at least $1,000,000 of coverage per occurrence in liquor liability. The requirements or lack thereof in state law are immaterial.
Helpful Tips and Tricks
Always do your homework before signing a contract. If you’re considering a facility for rental, do a walk through and refer in the contract to any visible property defects or damage that was present before your function was held. This eliminates the possibility of the venue alleging that you damaged their property during your event.
Plan ahead! If organizing an event, be sure to give yourself plenty of time to find alternative venue or bartending service if necessary. It’s important whenever you enter into a contract to do your due diligence and be confident that you’ve selected the vendor that is the best fit. If a vendor can’t or won’t provide a certificate of insurance at your request, this is a red flag and often a sign of a poorly run business.
It’s always a good idea to have more than one set of eyes review a contract. Check with another chapter officer, advisor, or staff members to review a contract, especially if there is language you feel is unclear or don’t understand. Your organization’s policies are a huge help when determining whether a risk is tolerable! If there is insurance language such as additional insured or a certificate of your insurance is requested, MJ Sorority is here to help! Here is a handy link to our contract review forms.
Examples of Contract Language
Here are some examples of the more common transfers of liability:
- The hotel contract requires your organization to hold them harmless for any bodily injury of your attendees while on their property.
- If you agree to this term and there is a bodily injury incident, then you have forfeited the opportunity to sue the venue for an unsafe physical condition in the property because you are holding them harmless.
- Logically, the entity that has the greater “control” of the conditions of the physical property should be the one bearing the greatest liability, so holding them harmless is not preferable.
- Your agreement may be for exposures that are not covered by your insurance policy, though a remote possibility, it could occur.
- The sorority chapter is hosting an event at the local park where you have contracted with a caterer to provide the food and alcohol for the event. The caterer is requiring evidence of your insurance coverage and wants to be added to your insurance policy as an Additional Insured.
- The most alarming trend is the request for a non-insured to be added to your policy and given the full rights under the policy. In doing so, you forfeit the opportunity to sue this “Additional Insured” for their actions, which may have well been the only reason why a claim occurred. The classic example here would be the caterer not practicing good risk management and over-serving someone who becomes intoxicated and then assaults another attendee at the function. Your insurance policy would be obligated to defend this caterer and potentially pay for any judgment against them. We prefer to have each party to a contract rely on their own insurance coverage and then rely on the “courts” to determine where negligence lies and ultimately where the liability rests for paying for injury or damages.
Signed, Sealed, Delivered!
Our goal is always to help you manage risk and achieve the task at hand—whether that’s contracting with a service provider to mow your lawn or renting a venue for a spring formal. By asking questions up front, you can save yourself and your organization from regretful contracts and succeed in achieving your goals!