Resource Library

3 Contract Issues to Watch

Manage Risks

Date: August 2017

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 certain liability in the hold harmless agreement. 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 the 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

Certain contracts might have a specific provision that states that the member assumes liability for a certain act or include 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.

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.

It should be noted that MCIT’s liability coverage does not extend to an independent contractor, so in this case, does not extend to the entertainer individually.

No. 2: Insufficient Liability Limits

Another area of concern is that members may be agreeing in the contract to limit the contracting party’s liability to the contract amount. Limiting the amount of liability potentially could expose the entity to providing excess limits if a claim is larger than the contract amount. Excess limits 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.

The liability limits for vendors and contractors that MCIT members should request in their agreements depends 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. The resource is available through the online Resource Library at MCIT.org/resource/.

No. 3: Coverage Exclusions

An agreement could ask that an MCIT member include a certain type of 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. Members that contract with the railroad are requested to provide railroad protective liability; coverage is not provided by MCIT and needs to be obtained elsewhere. MCIT recommends closely reviewing railroad contracts as most place liability with the member.

Members should also be aware that MCIT coverage excludes contractual penalties and breach of contract, which includes 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.

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.

Originally published in September 2017 MCIT Bulletin

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.