Signing a Service Contract? Here Are the Risks and How to Avoid Them

By Reeja Varghese from

Whether hiring a gardener to tend to your office landscaping or a caterer for an event, the agreements you sign when you hire a contractor could potentially leave you on the hook if something goes wrong.

Take for example a recent incident involving a client who hired a contractor for some basic electric repairs in the office. The electrician was injured from a fall off of a ladder solely due to his negligence. Despite having all the insurance policies in place, payout from the contractor’s insurance was zero. Why? The signed contract between both parties stipulated that all the liability resulting from the work would be assumed by the client rather than the contractor even in the event of their negligence. The loss was significant - $2MM, and the client was left hoping that the resulting settlement paid by their insurer wouldn’t be a problem when it came time to renegotiate premiums.

Any contract you sign must be clear about where liability falls when another party’s employees or subcontractors get hurt, or when there’s damage to other people or property. Unfortunately, we see smart, careful people regularly sign contracts that offer inadequate protection because they don’t fully understand the consequences of doing so. This is an even more pressing concern for us today, since we’re seeing more and more contracts that explicitly transfer liability to the client.

Accordingly, every company should build in a contract review phase when hiring a third party for any function, whether it be event planning, information technology, facilities maintenance, etc. (This also applies to renting spaces, office or otherwise).

Here, then, is what you need from every contract for third party services:

Assumption of all liability for relevant actions. If the contract doesn’t explicitly mention liability, it’s a problem. Even if liability is mentioned, make sure the contractor hasn’t put a limit on its own responsibility. The contract needs to state that the contractor is responsible for all liabilities, including those related to negligence with respect to the work being done.

Adequate insurance. Assumption of liability alone isn’t enough if the contractor doesn’t have money to cover damages. It’s important to know both the contractor’s insured coverages and the minimum liability limits attached to it. Be certain the coverage will remain in place for the duration of the contract.

Certificates of insurance. Secure a certificate of insurance that covers all the insurance conditions stipulated in the contract and is valid for the contract’s duration. The company should also be included as an additional insured, which will allow you to collect damages directly from the insurer.

Workman’s Compensation coverage. So many contractual liability problems occur when the contractor’s own workers are injured. Make sure the contractor provides evidence of this coverage and it is compliant with the state laws.

Responsibility for subcontractors. The contractor hired should assume responsibility for any liabilities created by subcontractors they hire. (Of course, the contractor should compel its subcontractors to have their own insurance, but that cannot be controlled.)

One final suggestion: Don’t try to figure all this out alone. The best way to know you have the right coverage with the right limits is to check with your insurance broker who is regularly exposed to issues that come up with Contractual liability and is familiar with the size of settlements typical to a particular market.

Reeja Varghese is a director in Crystal & Company’s New York office who specializes in property and casualty insurance.

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