Your organization enters into contracts every day. It’s a necessary to your mission. But do you know how these contract affect your Nonprofit Insurance?
Most contracts require your organization to have General Liability insurance at a minimum and most require you to name the third party (and perhaps others) as an Additional Insured. There are usually other insurance and indemnity requirements as well.
Note that when we refer to a “third party” we mean a venue, a government agency, a funding source, etc. Anyone that you enter into a contract with.
Unfortunately, we find that many of our clients enter into these contracts without being clear about what they are agreeing to. Here at SteelBridge we believe that you should give serious consideration to adding third parties to your insurance policy as and Additional Insured.
What is and Additional Insured?
When you grant a person or entity “additional insured” status on your insurance policy you are giving them much of the same coverage that you have purchased for your organization. Essentially you grant them full coverage under your policy for certain activities, operations and circumstances. This means that the additional insured party can make a claims on your insurance policy. That’s right! And they don’t need your permission or knowledge to do it either…
Do you really want to share your liability insurance with just anyone?
Consider This: Your organization rents a meeting space at a local hotel for a seminar. Your contract with the hotel requires that you name the hotel as an additional insured for your meeting. The seminar includes a continental breakfast which is set up in the hallway just outside your meeting room.
During the setup of the continental breakfast the hotel catering department leaves a cart in the middle of the hallway. A random hotel guest that is not attending your seminar trips over the cart, falls and breaks his hip. He files a claim against your organization and the hotel for medical expenses, disability and lost income.
The hotel immediately sends the claim to your insurance company for payment. Although the claim is clearly the fault of the hotel employee the hotel can say that because at the time of the incident they were working to fulfil the contract they have with your organization. Therefore as an additional insured they have coverage under your insurance policy, not their own.
What happens when the Additional Insured makes a claim on your nonprofit insurance policy?
- The amount of the claim decreases your coverage leaving less (or potentially nothing) available for you if your organization has a claim.
- Your policy may provide more coverage than you actually intended to provide them under the terms of the contract.
- A claim against your coverage and the resulting defense costs can adversely affect your future insurability.
Other tricky issues:
1) Sometimes contracts specify that your nonprofit insurance has to be “Primary & Noncontributory”. This means that in the event of a claim, the coverage under your policy must be used 100% before the insurance of the third party is accessed.
2) Sometimes contracts include a “Waiver of Subrogation”. This means that if your insurance company pays a claim for something that is actually the fault of the third party then they cannot go back to the third party for re-payment.
What to do?
First, try to negotiate out of the Additional Insured requirement (and any other requirements). It doesn’t always work but it doesn’t hurt to ask.
Second, always have your attorney review your contract language to ensure that you aren’t agreeing to too much. And while you’re at it, have your insurance broker review the insurance and indemnity clauses.
Third, review your liability coverage limits to verify that they are adequate giving the agreements you are entering into. Remember the more parties you agree to additionally insure the more coverage you potentially need.
Fourth, see if the third party will also name your organization as Additional Insured. Cross indemnification often ensures that both parties are responsible for their own actions or inactions.