Avoid Unfavorable Indemnity Provisions in Institution Contracts

K-12 schools, colleges, and universities enter into contracts for myriad services and events. Contracts can be multi-page recitations of the many duties each party assumes or as simple as a one-page work order or a short email. No matter contracts’ length or form, their purpose is to document the intended relationships between parties.

In our claims, United Educators (UE) sees contracts cause problems when an institution enters into an agreement that requires it to assume liability for third-party claims it neither caused nor can control due to an unfavorable indemnification provision.

Indemnification or hold harmless provisions within contracts delineate how parties will share responsibility for injuries or damage arising from those agreements. Consider the following example:

A university enters into an ongoing contract to use a third-party food services provider on campus. The contract states the “university promises to defend and indemnify the food services provider for all claims or losses arising out of the university’s use of the food services provider’s product.” A student is served undercooked chicken at the cafeteria and gets a salmonella infection, causing an extended hospitalization. She sues the university and food services provider. The university promised to defend and indemnify the provider for all claims and losses arising out of the agreement. As a result of this language, the institution is obligated to defend the provider and resolve the claim, even though negligence from the provider’s employee caused the injury.

Here, an unfavorable indemnity provision required the institution to assume responsibility for losses stemming from the other party’s negligence and to incur legal fees defending suits that should have been the other party’s responsibility. By working with your institution’s legal counsel or Risk Manager and implementing a few key practices, your institution can mitigate risks arising from indemnity provisions.

Examples of Unfavorable Indemnity Provisions

• One-sided language. When possible, avoid contract language in which your institution assumes all responsibility for both its own negligent acts and the other party’s negligent acts. Example: “The institution agrees to defend and indemnify party X for all claims and losses arising out of the contract.”
• Ambiguous language. Avoid contract language that is so unclear you can’t tell what responsibility your institution has assumed. When the language is ambiguous, if a claim arises, your institution can’t rely on the indemnity provision to protect it. Rather, your institution will incur legal fees to determine the provision’s intent and fight for the other party to pay the appropriate share of the losses. Example: “Each party promises to indemnify each other for claims or losses.”

Employ These Strategies to Appropriately Allocate Risk

Involve legal counsel knowledgeable of state laws impacting indemnity provisions.

Contracts are a matter of state law. You need counsel well-versed in the relevant state laws that will apply to your contract, as laws differ dramatically between states. For example:

• In some states, one party can’t agree to contractually indemnify another for that party’s negligence. Here, indemnity provisions should contain language citing state law limitations. Example: “To the fullest extent as allowed by state law, [Contractor] agrees to indemnify [Institution] for all claims regardless of fault.”
• Many state constitutions prohibit public institutions from using state funds to indemnify other parties.
• Some jurisdictions won’t let a party transfer defense costs to another party unless an indemnification provision specifically states that it also applies to defense costs.
• State law can prohibit a contracting party from transferring risks to others in particular circumstances, such as in construction contracts.

Draft form agreements with model indemnity provisions and insurance requirements.

Consult with legal counsel and your institution’s Risk Manager to draft model language.

To streamline contract creation and review, some institutions use a step-by-step checklist to provide model language and help identify vague indemnity provisions. See Checklist: A Guide for Reviewing Contracts for sample review checklists.

Place the draft model language in your contract review checklist and form contracts for:

• Purchase orders
• Facility use
• Construction

If a contracting party wants to change the model language, use a clear process for considering and approving changes, including requiring a lawyer to review proposed changes.

Review indemnity provisions before finalizing contracts.

Be particularly careful when the contractor or vendor has its own contract. They often try to place the burden for injuries or damages on the institution.

Before signing, have legal counsel thoroughly review every contract to which your institution is a party. Too often, employees reviewing contracts are overburdened or unfamiliar with how indemnification works.

Require an additional insured endorsement.

To gain coverage under another party’s general liability policy, ask for your institution to be named as an additional insured. State in the contract’s indemnity provision that the contracting party agrees to name your institution as an additional insured.

Generally, your institution can become an additional insured by taking these actions:

• Add an endorsement to the other party’s policy that names your institution as an additional insured.
• Use language in the other party’s policy stating that an additional insured is “anyone to whom policyholder is contractually obligated to provide liability insurance.” Policies containing this type of language are known as “broad form” policies.

As an additional insured, an institution is likelier to get coverage under another party’s commercial general liability (CGL) policy for losses arising from the contract.

Require appropriate policy limits.

Set minimum policy limits for each line of insurance required and consider requiring excess insurance. These limits should reflect the potential risk of loss from the contract’s activities. Remember: The price of a contract isn’t a good measure of the liability exposures presented.

There was a time when $1 million was adequate protection and regularly served as the required minimum policy limit. But in today’s environment, coverage of $1 million primary and $5 million excess should be the minimum required in most contracts, especially construction contracts.

Require proof of insurance.

To confirm that a contracting party has the finances to pay for losses, request a certificate of insurance (COI) that includes:

• The agent’s and the insured’s name, address, and phone and fax numbers
• The insurance companies’ names (and their AM Best rating, an indicator of financial strength) along with the policy line, number, and limits
• Institution listed as a certificate holder
• A requirement that the insured provide a renewal certificate to the institution at least 15 days prior to expiration of any of the policies listed

The true value of a COI is its documentation of a party’s insurance coverage. It’s important to understand that the certificate doesn’t entitle the holder to coverage under the policies listed nor does it endorse, amend, extend, or alter in any way the insurance policy’s terms.

The only right a certificate holder may have is notification of a policy’s cancellation before expiration.

Get a new COI annually.

Schools that only require proof of insurance at the start of a contract may have outdated information. If a contracting party changes or discontinues its insurance coverage, your school may not know.

Example: An institution establishes a multi-year construction contract and receives the COI. Several years into the contract, a mishap occurs on the construction site. During litigation, the institution learns the construction firm dropped the relevant lines of insurance coverage several years prior.

Require a new COI annually to ensure ongoing coverage in the required amounts. Keep all the COIs for at least a few years after the contract expires. If a claim arises from the contracted period, you will have a record of the relevant COI at the time of the incident.

Review the other party’s insurance policies.

Your institution’s status as an additional insured is only as valuable as the coverage the underlying primary general liability policy provides. If the other party’s policy doesn’t cover the risks that are likeliest to occur under the contract, your institution receives little to no insurance protection.

It is especially important to review the other party’s insurance coverage for long-term contracts and those that present severe risks of loss.

Indicate which party’s insurance applies.

The contract should contain a provision stating that the contractor’s insurance will apply as primary and all your institution’s insurance exceeds the coverage the contract requires.

Keep track of certificates and endorsements.

The responsibility for keeping track of a COI and an additional insured endorsement falls on your institution or the party to which the certificate and endorsement were issued. A party’s insurance broker typically issues certificates of insurance in accordance with the policy terms and without notice to the insurance carrier.

This means carriers generally don’t track certificates or additional insured endorsements.

Publicize and educate about your process.

Ensure that staff or independent contractors who are authorized to negotiate, review, or sign contracts understand your institution’s contracting policy, model indemnity language, and the significance of indemnification provisions.

Train them on any changes you make. And be sure they understand when to consult your Risk Manager or attorney.

More From UE

Checklist: A Guide for Reviewing Contracts

Online Course: Contracting Fundamentals

Additional Resources

George Washington University: Contract Process Guide

Iowa State University: Alternate Indemnification Clauses

The University of Texas System: Indemnification Sample Clauses

University of Wisconsin System: Hold Harmless and Indemnity Agreements

Orange County School District: Contracts: A Practical Guide for District Administrators