Resource Library

3 Contract Issues to Watch

Manage Risks

Date: August 2020

Members commonly enter into agreements so they can work with other entities. Assumption of liability, sufficient liability limits and proper coverage should be three contract issues to watch when management reviews agreements.

When contracting, members should always be aware of which party to the contract assumes the liability in the event of a lawsuit by a third party. This is usually identified in the hold harmless agreement provision, which requires one contracting party to respond to certain legal liabilities of the other party.

Members need to understand which party is taking responsibility for what liability in the hold harmless and indemnification clause. If not properly worded, the member may unintentionally assume liability.

The following is sample language that places the liability with the vendor, independent contractor or other party to the contract. Wording should be modified or tailored to fit each individual situation.

The vendor agrees to defend, indemnify and hold (member name), its employees and officials harmless from any claims, demands, actions or causes of action, including reasonable attorney’s fees and expenses arising out of any act or omission on the part of the vendor, or its subcontractors, partners or independent contractors or any of their agents or employees in the performance of or with relation to any of the work or services to be performed or furnished by the vendor or the subcontractors, partners, or independent contractors or any of their agents or employees under the agreement.

No. 1: Assuming Liability for a Third Party’s Actions

Contracts might have a specific provision stating that the member assumes liability for a certain act or includes coverage for the contracted party. An example of assuming the liability of another party is an agricultural society contract that contains a provision that an entertainment show is protected by the agricultural society’s liability coverage.

With narrow exceptions, liability assumed in a contract is excluded by MCIT; therefore, liability arising out of the entertainment show would likely not be covered.

The provision could also state that personal liability for the entertainer is included. Likely this is not the intent of the agricultural society, and the member should ask the contractor for a revision.

Note that MCIT’s liability coverage does not extend to an independent contractor, so in this case, it would not cover the entertainer individually.

No. 2: Insufficient Liability Limits

Another area of concern is that members may agree in the contract to limit the contracting party’s liability to an arbitrary low dollar value, such as the contract amount. Limiting the amount of liability potentially could expose the entity to providing excess coverage if a claim is larger than the contract amount. Excess coverage may be necessary to pay for a loss once the primary limits of liability are exhausted.

An example is a software vendor that contracts with a member for a $100,000 project. Wording in the contract states that the vendor is only liable up to the amount of the contract, or $100,000. If a third party makes a claim against the software contractor over the $100,000 limit, the member could be held responsible for the damages beyond the $100,000 limit.

MCIT members should require the liability limits for vendors and contractors in their agreements, depending on the type of work being performed and the amount of exposure the agreement brings to the member. The MCIT resource Checklist of Coverage(s) and Liability Limits for Independent Contractors can help members identify minimum coverage and limits. MCIT recommends that members not agree to limitation language in third-party contracts.

No. 3: Coverage Exclusions

An agreement could ask that an MCIT member provide coverage that may be excluded from MCIT’s liability protection. Examples include but are not limited to:

  • pollution liability exclusion—bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.
  • asbestos and silica exclusion—liability, including all loss, cost or expense, directly or indirectly arising out of, resulting as a consequence of or related to asbestos and silica.
  • railroad protective liability—liability for work done within 50 feet of a railroad track is excluded by MCIT. Railroads require members  to provide railroad protective liability insurance before permitting work near their rights of way. MCIT does not provide this coverage, and  members need to be obtained it outside the Trust. MCIT recommends closely reviewing railroad contracts as most place al liability with the member.

Members should also be aware that MCIT coverage excludes contractual penalties and breach of contract. This means that any claim based upon penalties for failure to comply with a contractual obligation, breach of contract or cost overruns on any contract or project whether the contract or agreement is written or oral will not be covered.

Seek Contract Review

MCIT risk management consultants are available to review members’ contracts from a risk management perspective including the issues discussed above. Members can reach their consultant at 1.866.547.6516. MCIT also recommends that members seek a legal review of their agreements.

The information contained in this document is intended for general information purposes only and does not constitute legal or coverage advice on any specific matter.