Risk Transfer Protects Institutions From Liability

The high volume of contracts at an institution can create arduous and time-consuming contract reviews. However, ironing out these important details before signing a contract will greatly reduce an institution’s risk of liability should an injury or loss occur. Consider the following cases:

• A contracted bus driver taking a university baseball team to a tournament mistakenly takes an exit at a high speed, resulting in a crash that causes five team member deaths and multiple student injuries. Because the bus driver was named an “insured” under the institution’s auto liability policies, the institution is required to cover his negligent driving, resulting in millions of dollars in lawsuits and litigation by surviving family members and students.
• During a performance by a chart-topping rock band at a college in the Midwest, a student suffers a neck injury when the lead singer does a stage dive. Although the institution is named as an additional insured, the band’s insurance policy specifically excludes stage dives, leaving the institution responsible for all expenses incurred.
• A large university contracts with an elevator repair company to provide services on campus. When exiting an elevator at his residence hall, a student trips and breaks his ankle because the elevator lines up a couple inches off the floor. Though the institution has documented its request to be named an additional insured under the company’s insurance policy, specific terms were not finalized prior to signing the contract, which has expired. The university assumes liability for the injury and must cover medical expenses.

Institutions can avoid responsibility for a contracting partner’s negligence in such situations by ensuring that each contract includes a risk allocation provision—commonly referred to as an indemnification, hold harmless, waiver, release of liability, or exculpatory provision—that clearly defines how the parties agree to retain, transfer, or share responsibility for third-party claims.

Beware the following common problem areas in risk allocation provisions:

• Ambiguous language that fails to clarify or shift responsibility
• One-sided provisions assigning responsibility for injuries resulting from activities outside of the contractor’s control
• Language that limits the contracting party’s risk to a capped dollar amount, which is often inadequate to cover claims and litigation

In addition to inserting an effective risk allocation provision in the contract, institutions should require and carefully review a proof of insurance to ensure that the other entity is capable of paying for losses it causes. When reviewing an outside entity’s insurance policy, be sure to:

• Require that the institution be named as an additional insured on the contracted vendor’s commercial general liability (CGL) policy.
• Keep track of and review certificates and endorsements.
• Use the contract to reinforce insurance requirements while confirming that the policies are consistent with the risk allocation provision.

Make time to review your institution’s contracting policies to ensure appropriate provisions for risk allocation.

Best Practices in Contract Risk Allocation

• Address risk allocation in the campus contracting policy.
• Update form agreements.
• Inform potential contracting parties of insurance requirements.
• Receive and review insurance documents prior to signing the contract.
• For ongoing contractual relationships, confirm insurance requirements.
• Establish a process for monitoring and storing insurance documents.
• Publicize and educate relevant people about the policy.