By Lars Olson, Vice President, Property & Casualty, USI Insurance Services LLC
Risks that may have been omitted, disguised or waived unintentionally in a contract can result in large financial losses that might not be covered by insurance.
As such, construction firms need to engage risk specialists who can provide comprehensive contract review. This process is critical to:
- Identify and evaluate indemnification and hold harmless provisions that do not coincide with current insurance contracts or exposures for which a company is contractually obligated
- Detect unreasonable insurance coverage requests that can have negative economic impact. (E.g. a waiver of subrogation on workers’ compensation)
- Evaluate the parameters of additional insured requirements. Do you really want to provide a defense for someone else’s sole negligence?
Lars Olson, vice president in the Construction Casualty Practice at USI Insurance Services in Bedford, NH, said USI frequently uncovers unreasonable terms and conditions during the contract review process.
“Most recently we reviewed a contract that required a tenant to hold the owner of a property harmless and indemnify this same owner for all costs related to a building fire,” said Olson, adding that tenant unknowingly accepted this financial obligation even though he had no control over the sprinkler system and maintenance at the property.
A USI contract review is designed to:
- Prevent underinsured and uninsured losses up to millions of dollars due to inadequate limits
- Promote and support contractual compliance
- Eliminate unreasonable contractual coverage requests.
The process begins with evaluating policy language adequacy based on contractual requirements, recommending changes if needed, and quantifying any potential financial impact. Program structure and coverage terms may be revised following the review.
“Most insurance agents focus on pricing, but short-cutting to the lowest price can hurt clients if they are not covered for an exposure agreed to under a contract. Unfortunately, many contractors, who only look for the best price, discover after a loss that they did not comply with the owner’s contract and also failed to appropriately transfer liability to subcontractors or vendors,” said Olson.
Recently, USI engaged a contractor who builds commercial and residential buildings. USI’s goal was to protect the company from unknown costs arising from its indemnity agreement. Following a thorough review of agreements between the building owner and the company, the team discovered that the contracts required certain insurance criteria as well as indemnification and hold harmless provisions.
Since the contractor was responsible for performing design/ build operations, it was required by contract to have a professional liability policy. As such, USI structured an insurance program that included a professional liability policy, helping the company avoid potentially uncovered defense costs of $400,000 and a potentially uncovered claim of $1,000,000.
This is just one example of how USI works to protect construction firms’ contractual obligations.
To learn more about USI’s Contract Review and how it can deliver a significant financial impact to your insurance program, contact Lars Olson, vice president, property and casualty, at 603.665.6118 or firstname.lastname@example.org.