LO SS C O N T RO L A L ER T

Risk Transfer Techniques

Certificates of Insurance, Waivers of Subrogation, Hold Harmless Agreements

Imagine that you are the owner of a multi-tenanted retail building that just had a new roof installed. Shortly
after the construction is completed, the new roof collapses. You arrive at the scene of the collapse and see
your tenants’ customers injured, some still pinned beneath the collapsed debris. Who is responsible for
this accident? Who will pay for the injuries and medical bills of the injured shoppers? Who will compensate
your tenants while the building is being repaired requiring them to close their businesses during the repair
period? How will you afford the costs of defending yourself once the law suits are filed?

Questions of liability arise when a subcontractor installs a product or performs services on your behalf that
results in an injury or property damage, or when a contractor’s employee is injured in your workplace or on
your premises. Liability should ideally lie with the party that has the most control over the potential
sources, hazards and exposures of the potential liability. One way to prevent or avoid such confusion and
your assumption of unintended liability is to employ a strategy where your suppliers, contractors and sub-
contractors agree to assume the risk or indemnify you.

Transferring risk is a strategy that involves contractually shifting risk from one party to another. The most
common form of transferring risk is purchasing an insurance policy transferring risk from the entity pur-
chasing the policy to the insurer issuing the policy. Other methods of transferring risk to another party or
entity include contractual agreements or requirements and hold harmless agreements.

Performed effectively, transferring risk distributes or allocates risk in an equitable manner and places re-
sponsibility for assumption of risk on specific and designated entities in a manner consistent with their abil-
ity to control risk.

Adequate insurance coverage for the other parties, verified by Certificates of Insurance, along with Waivers
of Subrogation, Hold Harmless Agreements and Owner’s & Contractors Protective Policies are important
assurances. The guidelines listed below are intended to assist you or your company in applying each of
these risk transfer techniques. These guidelines are not an appropriate substitute for adequate insurance,
appropriate loss prevention activities or thorough legal review practices on your part.

Certificates of Insurance
To minimize the liability arising out of the work performed by contractors, subcontractors, vendors or a sup-
plier (of a product or a component part), begin by ensuring that the other party carries General Liability,
Product Liability, Completed Operations and Workers’ Compensation insurance. (If the service being pro-
vided requires transportation activities, the evidence of Commercial Automobile Insurance coverage should
also be requested). A Certificate of Insurance is a document that attests to the existence and limits
(amounts) of insurance coverage on the other party. When issued to you or your company by the other
party’s insurer, Certificates of Insurance also allow you to receive notification of lapse of coverage.
All Certificates of Insurance should contain the following information:
Date the certificate was issued;
Name of the insurance carrier for each line of coverage;
Policy numbers, effective date and expiration date for each line of coverage;
Limits of liability or coverage amounts for each line of coverage (the policy limits or amounts should
be equal to or greater than the amounts of insurance you or your company carries);
Include a requirement to notify you or your entity should the policy be cancelled prior to the
expiration date provided;
Name, address and telephone number of the agent issuing the certificate of insurance;

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The certificate should be signed by a representative of the insurance carrier or an authorized agent of the
insurance carrier (do not accept faxed copies of certificates of insurance); if you do accept a fax copy,
insist on the original being mailed to you;
Your name or your company’s name as the certificate holder;
You or your company should be listed on the certificate as an “Additional Insured”.

Being listed as an “Additional Insured” on a policy provides specific rights under the policy provisions as
compared to simply being a “certificate holder” which only provides information regarding the other party’s
insurance coverage.

An “additional insured” status requires the other party’s insurance policies to be endorsed to add you or
your company as the named insured. Once you or your company has been endorsed as an “additional
insured” you should receive a copy of the policy(s) endorsement indicating your status as an “additional
insured”. This status can provide protection under the other party’s insurance policy for liability that may
occur as a result of the named insured’s performance or involvement on a job.

When requesting status as an “additional insured” you should assure that the other party’s policy will provide
the same broad scope of coverage as afforded the named insured, as the coverage could differ significantly.
Your legal department or advisor should review the policies, endorsements and differences in coverage to
assure proper protection. Benefits of an “additional insured” endorsement:
Provides certain rights under the other party’s insurance policy, specifically defense coverage;
Discourages the insurance company providing the additional insured status from subrogating against you
when a loss is caused by your acts, errors or omissions;
Provides coverage in the event a court decides that your hold harmless agreement is invalid;
Offers more protection than being a certificate holder.

By requiring the contractor, subcontractor, vendor or supplier to name you or your company as an
“Additional Insured” you effectively make their insurance coverage the primary respondent in the event of any
claims resulting from their work, service or product. This requirement should also be applied to their Umbrella
and/or Excess Coverage policies. Most importantly, the other party’s primary responding policy should
provide the “additional insured” endorsement.

Certificates of Insurance should be updated every year or as the certificates expire based on the policy
expiration dates listed on each certificate. If the certificates expire while a contractor is still performing a job
for you, an updated certificate should be required.

Consideration should be given to use specific disciplinary measures to encourage enforcement and
compliance with your certificate of insurance requirements. These measures should include actions that can
be contracted for including:

Terminating the contract unless sufficient and satisfactory proof of compliance is provided within a
specified period of time;
Not permitting services, work or installation to begin until sufficient evidence/proof of compliance is
Received;
Withholding payments for services until sufficient or satisfactory evidence of compliance is received.
acts as a stop gap tool if the indemnity provisions turn out to be unenforceable;
Acts as a stop gap tool if the indemnity provisions turn out to be unenforceable.

Waivers of Subrogation

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Even if each of your vendors, contractors or subcontractors is adequately insured, their insurers have a right to
seek subrogation (recover some or all of their costs) from you if they believe or determine that you were at
fault or that you caused the event that led to the claim. This can obviously result in significant legal action
and blaming between the parties involved.

To avoid such actions, you or your company would need to have a waiver of subrogation from the other
party’s insurer prior to any loss. The waiver of subrogation is an endorsement to the insurance policy issued
to another party.

The following points should be remembered about waivers of subrogation:

A waiver should be general and encompass all hazards, locations or work performed. It should cover all
Operations for which the other party is responsible when performing their work for you or your company;
A waiver of subrogation should not contain limitations as to the specific entities, locations or work
performed. It should cover all operations conducted by the other party;
A waiver of subrogation should not contain clauses requiring the consent of the named insured (the other
party) for the waiver to be applicable;
A waiver of subrogation is necessary even if no specific clause in the policy of the other party expressly
permits subrogation.

Hold Harmless Agreements or Indemnity

To maximize your protection, you may wish to seek a Hold Harmless Agreement from your vendor, contractor
or subcontractor. This agreement is a legally binding contract in which the other party agrees to hold you
or your company harmless for any liability that may arise out of their work (or product) including liability for
claims that would normally not be covered by insurance (such as product recalls). In Particular, these
agreements even cover situations where you or your company is solely negligent. One caveat is that
many hold harmless agreements have been invalidated by courts finding them too binding on the other
party and passing too much of the liability or responsibility from you to the other party. Important points to
remember about hold harmless agreements include:
Hold Harmless agreements must be in writing and must clearly state the indemnifying party’s (the other
party’s) responsibility to indemnify you or your company against any liability, loss or damage.
If a corporation signs the agreement, the authority of the person signing the agreement should be
apparent (vice president, president, etc). Most corporate bylaws permit a vice president to contractually
bind the corporation. The same may not be true for corporation secretaries, treasurers or managers.
The preferred form of indemnity agreement is one that indemnifies against liability; since it does not
require that actual damages be shown before the agreement operates. For this reason, Indemnity
agreements that indemnify against “liability” are preferred and should go so far as to require the
indemnitor to “defend against suits/actions” and should also include legal fees and costs incurred by the
indemnitee (you or your company) in their own defense of the claim or suit.
The agreement should not have a term or be cancelable without sufficient notice in writing to you or your
company.
There should be no limitations on the amount of time in which to make a claim.
There should be no limitations on the amount of the indemnitor’s liability.
The agreement should specifically state that the indemnification is provided for your own or your
company’s own negligence.

In conclusion, risk transfer strategies are an important part of a risk management program because they
permit your entity to minimize its chances of taking on another entity’s liability unknowingly, or from being
exposed to additional liabilities due to the actions of others. They also permit the shifting of liability to others.

Prior to accepting any of these risk transfer strategies, documents and contracts (or prior to providing them
to others), you or your company should have them reviewed by your legal advisors or corporate attorney.

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Remember, Everest Loss Control offers services to help you in your loss prevention efforts. If you would like more infor-
mation about these services, visit our web site at www.everestnational.com.

Loss Control is a daily responsibility of your individual management. This publication is not a substitute for your own loss control
program. The information that is provided in this Alert should not be considered as all encompassing, or suitable for all situations,
conditions, or environments. Each organization is responsible for implementing their safety/injury/illness prevention program and
should consult with legal, medical, technical, or other advisors as to the suitability of using the information contained in this
Alert. The information contained in this publication is intended for general informational purposes only and is not intended to con-
stitute legal advice or opinions. You should contact an attorney if you need legal advice and/or you have any questions concerning
your obligations under any law, statute and/or code identified in this publication.

CONTACT US

Westgate Corporate Center

477 Martinsville Road
P.O. Box 830
Liberty Corner, NJ 07938-0830
Loss Control Department
Everest focuses on specialty property and casualty insurance Phone: 908-604-3000
business and is licensed to conduct business in all 50 states,
Fax: 908-604-3526
including the District of Columbia. Everest is rated A+ XV
E-mail: losscontrol@everestre.com
(Superior) by A.M. Best. To learn more about Everest, visit
our website at : www.everestnational.com

Risk Transfer Techniques November 2010