Resource Library

Contract Risk Management Basics for SWCDs

Date: August 2016

Soil and Water Conservation Districts (SWCDs) routinely enter into contracts. Typical contracts include equipment lease/rental agreements, construction contracts and grant agreements. SWCDs also enter into contracts with service providers, such as for computer services. Because of the variety and number of agreements, it is important for SWCDs to practice contract risk management basics.

Potential Contract Risks/Exposures

Contracts create legal duties between the parties to the agreement. Duties imposed by contracts may be broad and may include an agreement to perform in a certain manner, to complete a project in a specified period, or to deliver a quality product or service.

Generally, violations or breach of contract entitle the injured party to monetary damages suffered because of the breach. When entering into a contract, it is important that an SWCD is aware of its contractual obligations and the potential risks so as to take steps to control their exposures. Following are typical risks. 

1. The SWCD Agrees to Terms or Conditions It Is Unable to Fulfill

Hypothetical: An SWCD employee inadvertently leases a piece of equipment to two different patrons for the same period.

Potential Risks/Exposures: The SWCD may be liable for damages to the patron who is unable to use the equipment. Failure to comply with an agreement’s terms may result in penalties or a breach of contract allegation, neither of which are covered by MCIT. The SWCD would be required to defend against (including paying all attorney fees associated with the defense) any claim and pay the associated damages.

Risk Management Suggestion: It is important that the staff reviews the terms of the agreement to ensure compliance can be and is met. The SWCD may want to consider appointing a gatekeeper for all equipment lease agreements to help minimize the risk of double scheduling.

2. The SWCD Agrees to Accept Risks/Exposures that Are Outside of Its Control

Hypothetical: The SWCD leases a planter to a patron. The SWCD agrees to be responsible for any damage to the planter. The patron damages the planter while it is in his control.

Potential Risks/Exposures: The SWCD may be responsible for the damage, even though it was done outside of its possession and had no ability to control/manage the risk. Although MCIT would likely cover this loss (assuming the planter is properly scheduled), the SWCD would be obligated to pay its deductible. The loss also has the potential of adversely affecting the SWCD’s future contribution and dividends.

Risk Management Suggestion: Often contracts include provisions that identify who is responsible for certain risks and losses. When an SWCD retains a risk that is not within its control, it significantly limits the SWCD’s ability to manage the risk and mitigate against any potential loss. The SWCD should consider including provisions to the agreement that will transfer and protect against risks and losses. Following are examples of such clauses.

Hold Harmless and Indemnification Clause: A hold harmless and indemnification provision provides protection to an SWCD for actions arising out of the other party’s negligent or otherwise wrongful conduct. SWCDs should avoid entering into any contract that requires the SWCD to indemnify (compensate for damages) and hold harmless the other party from that party’s own negligence and/or otherwise wrongful acts. The SWCD has little ability to manage or control the other party’s actions and risk of loss. Hold harmless and indemnification clauses are appropriate for all types of contracts, including leases and contracts for services.

Following is sample language that should be modified to fit each individual situation.

Hold Harmless and Indemnification: [Patron] agrees to defend, indemnify, and hold harmless (Member SWCD), its board, officers and employees from any claims, demands, action or causes of action, including reasonable attorney’s fees and expenses arising out of any act or omission on the part of the [Patron], or its subcontractors, partners or independent contractors or any of their agents, including but not limited to family and friends, or employees in the performance of or with relation to any of [Patron’s] obligations under the Agreement.

Define which party bears the risk of loss: When the SWCD leases property or equipment, the contract should have a provision that articulates who will be responsible for damage to the property. The person who is in possession of the property should bear the risk. Consider determining and stating the value of the property in the lease to reduce disagreement regarding value after a loss occurs.

Following is sample language that should be modified to fit each individual situation.

Lessee shall be responsible for any and all physical loss or damage to the leased property, including the cost to repair or replace such property. The stipulated value of the leased property is                        .

3. The SWCD Does Not Require the Contracting Party to Obtain Insurance and/or Provide Verification of the Insurance

Hypothetical: A patron leases a piece of equipment. The patron does not have insurance. While operating the equipment, the patron injures himself or a third party.

Potential Risks/Exposures: When the outside party does not have adequate insurance, the person who has sustained damage or injury may look to the SWCD for compensation. Regardless of whether the SWCD is eventually found to be responsible, it will likely be involved in a costly and time-consuming claim.

Risk Management Suggestion: As noted in the previous section, an important part of the risk management process is placing the responsibility for negligent actions with the negligent party. A crucial part of this process is to require that a contractor have adequate insurance to cover any claims. To verify that the contractor does in fact have such an insurance policy, MCIT recommends that SWCDs require that contractors produce a Certificate of Insurance, verifying appropriate limits of liability coverage and to be added onto that policy as an additional insured.

Consider the following provisions:

  • For a lease agreement: Insurance. Lessee shall, at all times during the Term of each Lease and at Lessee’s own cost and expense, maintain insurance against all risks of physical loss or damage to Equipment for the greater of the full replacement value or the Stipulated Loss Value thereof and for personal and bodily injury and property damage per occurrence.
  • For a contract for services: Insurance. At all times during the terms of this Agreement, and beyond such term when so required, Contractor shall have and keep in force Commercial General Liability, Professional Liability, Worker’s Compensation and Employer’s Liability Coverage. The Commercial General Liability and Professional Liability Insurance Coverage shall have liability limits of at least $1,500,000 per claim. SWCD shall be named as an additional insured on all policies covering liability that may arise out of services provided pursuant to this Agreement.

4. The SWCD Does Not Consider the Appropriateness of Using a Waiver

Hypothetical: A patron leases a piece of equipment and injures herself while operating the equipment.

Potential Risks/Exposures: The patron may seek recovery from the SWCD for damages.

Risk Management Suggestions: Along with the risk management provisions discussed earlier in this article, waivers (also known as exculpatory clauses) may be helpful in limiting negligence claims brought against the SWCD. By signing a waiver, an individual typically gives up the right to sue the SWCD for an injury arising out the use of the equipment even if it is caused by the SWCD’s own negligence.

Waivers may not excuse willful, wanton or intentional conduct, but are limited to negligence claims. Waivers are not enforceable if they are contrary to public policy (i.e., a disparity in bargaining power exists between the parties or the types of services being offered are public or essential services.)

Waivers may also be helpful to show that the other party was aware of and assumes the risk related to the agreement. An individual can only waive his or her own rights. Someone cannot waive the rights of another individual. Therefore, the SWCD may want to consider having a policy that limits the operator of the equipment to the person who signs the waiver, or have all people who may use the equipment sign a waiver.

The clause must be conspicuous and not hidden deep in the lease agreement. In fact if the waiver is made part of the lease agreement, the SWCD may want to consider requiring the lessee to initial by the waiver provision.

Following is sample language that should be modified to fit each individual situation.

Lessee knows, understands, and acknowledges the risks and hazards of using (name of piece of equipment and the risks and hazards.) Lessee hereby waives any and all claims arising out of the SWCD, its elected officials, employees, agents and volunteers’ negligent acts or omissions arising out of or in association with the leasing, maintenance, ownership and operation of (name of piece of equipment.) This waiver does not waive liability for any injuries resulting from the willful, wanton or intentional misconduct by the SWCD, its elected officials, employees, agents or volunteers.

5. The SWCD Does Not Establish Objective Standards for the Leasing of Equipment

Hypothetical: The SWCD has two patrons who would like to lease equipment for the same period. One patron is an SWCD supervisor’s cousin.

Potential Risks/Exposures: In this situation, if the SWCD has not established leasing guidelines, a user may sue the SWCD based on disparate treatment. Even if the facts do not give rise to a legal claim, there may be a political issue if the SWCD supervisor’s cousin is given priority and there are no previously written guidelines to support the decision.

Risk Management Suggestions: An SWCD should set objective standards regarding the leasing of equipment. Considerations should include the following issues:

  • Will reservations be given on a first come first serve basis?
  • What special training or expertise is required by the individual leasing the equipment?
  • What is the age requirement for the leasing of equipment?
  • Will the person who leases the equipment be the only individual authorized to operate/tow the equipment?

By establishing objective criteria, the SWCD is able to establish minimum qualifications for individuals to operate the equipment.

6. The SWCD Agrees to Waive the Right of Subrogation

Hypothetical: The SWCD hires a contractor to construct a new shed. The contract includes an agreement that the SWCD waives its right of subrogation against the contractor. An SWCD employee walks by and is injured by a falling hammer owned and being used by a contractor’s employee. The SWCD pays workers’ compensation benefits to the employee. Because the contract included a waiver of subrogation, the SWCD and MCIT would be precluded from seeking reimbursement from the contractor.

Potential Risks/Exposures: When a contractor asks an SWCD to include a waiver of subrogation in its agreement, the SWCD gives up its right and MCIT’s right to seek reimbursement from the liable party for damages the SWCD and/or MCIT paid. The waiver essentially allows the actual liable party to be excused from its tortious conduct.

Risk Management Suggestions: MCIT asks SWCDs not to jeopardize the right of subrogation. Review contracts for provisions that request the SWCD to waive its right of subrogation. Caution: The MCIT Coverage Document prohibits an SWCD from waiving its subrogation rights after a loss occurs.

Contract Risk Management Suggestions

MCIT suggests the following contract risk management considerations.

  1. Develop a contract review procedure. Read all contractual agreements (new contracts and contracts at renewal time). Be certain that the obligations and expectations of each party are clearly identified in the agreement. A formal contract review procedure is a critical function in defining and understanding contractual obligations, including obligations related to securing appropriate insurance coverage.

MCIT is available to review SWCD contracts from a risk management perspective with an emphasis on insurance provisions, including Certificates of Insurance.

  1. Review all contracts with legal counsel. Ensure that you and your attorney are familiar with the MCIT Coverage Document so that the contract addresses the SWCD’s exposures. Apply good risk management practices by choosing to retain and manage the risk or transfer the risk.
  2. Require contracts with lessees to include a written agreement stating that the outside party accepts responsibility for its negligent acts by stating the lessee will hold the SWCD harmless for such acts.
  3. Require the lessee to keep in place adequate insurance coverage with appropriate liability limits. To verify that the contractor does in fact have such an insurance policy, MCIT recommends that the SWCD require the lessee/contractor to produce a Certificate of Insurance.
  4. Develop and implement written policies and procedures regarding maintenance, use, leasing, training and limitations regarding usage of equipment. Ensure that an orientation and instruction manual are provided to anyone leasing equipment.

MCIT Coverage

Generally, violations or breach of contract entitle the injured party to monetary damages. Accordingly, it is important that SWCDs understand how their MCIT coverage applies.

MCIT does not provide coverage for any claim based upon breach of contract or other obligation arising out of an agreement, whether written or oral that creates an obligation on behalf of an SWCD to another person or entity. This includes interference with contractual obligations between other persons or entities.

This clause specifically excludes any coverage for damages or claim expenses based upon, caused by or arising from:

  • breach of contract.
  • exchange of information.
  • negotiations in anticipation of an agreement, whether or not one is executed.
  • cost estimate overruns on any contract or project.
  • any penalties for failure to comply with a contractual obligation or other duties assumed as a result of an agreement, whether written or oral.

This includes, but is not limited to, actions based upon, caused by or arising from any claim based upon alleged negligence or misrepresentation by any covered party in the period leading up to or in the performance of a written or oral agreement.

These exclusions are found in the MCIT Coverage Document, Liability Coverage Section IV. General Exclusions, B, C and D.

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.