Improving Contracting on Campus: Allocating Risks Between Parties

Read hypothetical scenarios and details from actual United Educators (UE) claims that make clear how through proper contract language, insurance requirements, and a sound policy, your institution can better protect itself in its contractual relationships. It’s crucial to prevent your institution from unknowingly assuming responsibility for a contracting party’s negligence.

Consider this scenario:

ABC College and Snowtown Inc., a small business with minimal assets, enter a written contract for snow removal services over the next year. After a heavy snowfall, Snowtown neglects to clear snow from a campus parking lot. A student falls and suffers a traumatic brain injury. He sues the college, which incurs more than $2 million in expenses to defend and resolve the claim. Given Snowtown’s financial situation, ABC must pay the entire cost of the claim because ABC failed to require Snowtown to get adequate insurance and use “risk allocation” language in the contract to clarify both parties’ responsibility for third-party claims.

Every written contract your institution signs should contain a risk allocation provision or language addressing the responsibility of contracting parties for injuries and losses arising from the contract. 

Risk allocation language may be called an indemnification, hold harmless, release, waiver, or exculpatory provision. However, the contract doesn’t need a special title or name to allocate risk. It only requires language demonstrating the parties agree to retain, transfer, or share responsibility for third-party claims.

The most common ways contracting parties allocate responsibility for third-party injuries are:

• One-sided or broad contractual provision. A contractor agrees to assume all responsibility for its negligent acts and another party’s negligent acts, even when the other party is solely responsible for a loss. Example: “Party X agrees to defend and indemnify the institution for all claims and losses arising from the contract.”
• Intermediate contractual provision: A contractor agrees to assume responsibility for losses caused solely by its negligence but not for losses caused by joint negligence or the other party’s negligence. Example: “Party X agrees to defend and indemnify the institution for all claims and losses arising out of its sole negligence.”
• Mutual contractual provision: Each party to the agreement remains responsible for losses caused by its own negligence. Neither party transfers risk to the other. Each remains responsible for its own actions or omissions in the same way that each would if the agreement didn’t exist. Example:“Party X agrees to defend and indemnify the institution for all claims and losses arising from its negligent actions or omissions in performing work under the agreement. The institution agrees to defend and indemnify Party X for all claims and losses arising from its negligent actions or omissions in performing work under the agreement.” 

The appropriate risk allocation provision for an institution’s contract is often a matter of negotiation.

Several factors influence whether institutions can negotiate one-sided, intermediate, or mutual allocations, including:

• State law: Individual state laws are relevant to the type of risks institutions can allocate in their contracts. Many state constitutions prohibit public institutions from using state funds to indemnify other parties. Some state laws prohibit parties from transferring liability losses that arise from their negligence, such as in a one-sided or broad risk allocation provision. Some jurisdictions won’t let one party transfer defense costs to another unless an indemnification provision specifically states that it also applies to defense costs. Also, state law can prohibit a contracting party from transferring risks to others in particular circumstances, such as in construction contracts.
• Bargaining power: The strength of an institution’s bargaining position is influenced by the pool of competing contractors, a potential contractor’s desire to do business with the institution, and the institution’s need for the contractor’s goods and services. The larger the pool of competing contractors or the more intense their interest in doing business with the institution, the likelier it is that the institution can negotiate a favorable indemnification arrangement. 
• Risk of financial or reputational loss: An institution’s tolerance for risk can impact the indemnification arrangements it will accept. Key considerations include the institution’s insurance coverages; the institution’s ability to pay for third-party claims another’s negligence cause, including the effect that paying for such claims may have on the availability and affordability of the institution’s insurance; the riskiness of activities performed under the contract; and the potential for serious personal or reputational injury. Before your institution negotiates a contract, consult with your institution’s legal counsel, Risk Manager, and Insurance Broker. Use these conversations to assess the contract’s importance to your institution’s overall academic mission and your willingness to assume liability for actions that your institution has little to no ability to control.

Common Problems Related to Risk Allocation Provisions 

United Educators’ (UE’s) claims indicate certain problem areas related to risk allocation provisions, such as contracts that:

• Don’t include the provision, leaving the institution vulnerable as the perceived “deep pocket,” responsible party, or premises owner
• Include an ambiguous indemnification provision that fails to clarify or shift responsibility
• Include a one-sided indemnification provision assigning responsibility to the institution for injuries resulting from activities outside its control
• Limit the amount of risk a contracting party will assume by capping funds available to pay claims — often to the amount of the contract — commonly referred to as a “limitation of liability” provision

For summaries of actual claims that demonstrate the impact of poor indemnification provisions for UE members, see Mistakes When Using Contracts to Allocate Risk.

Consider these issues:

No Risk Allocation Provision 

Good Neighbor University lets a local high school baseball team practice on one of its fields. One day the team’s assistant coach takes players to a tract of land adjacent to the field to work on catching pop flies. During this drill, a player steps in a pothole and breaks his leg. The player sues the university. Even though the university has a contract with the high school, the contract is silent on the issue of risk allocation.

The player wasn’t on the field that Good Neighbor University had agreed the high school could use, but complications remain for the university. Because the contract between the high school and university lacked a risk allocation provision, the university must defend the player’s claim and then sue the local high school to get any contribution from the high school for the player’s losses.

Ambiguous Risk Allocation Provision 

A college enters a written contract with Super Funk for the local rock band to perform a concert as part of the college’s Emerging Artists Series. Before signing the agreement, the college’s representative skims the contract to confirm it includes an indemnity provision. The representative doesn’t scrutinize the provision’s wording. During the concert, a band member flings a bottle into the audience, injuring a student, who sues the college and Super Funk. When the college’s general counsel examines the contract, she discovers it says, “Each party promises to indemnify each other for claims or losses.”

This ambiguous wording probably renders the provision worthless. There’s no clear guidance about whether Super Funk will defend and compensate the college for claims or losses arising from the band’s actions or omissions. Rather, the college likely will have to expend its resources to defend this claim and perhaps ultimately contribute to a settlement or jury verdict.

One-Sided Risk Allocation Provision 

To host a graduation ceremony for the Anthropology department, a university enters a one-day rental contract with a local historical theater. After receiving the theater’s draft contract, the university representative expresses concern about the proposed hold harmless provision because it doesn’t use the language campus policy requires. But theater management won’t rent the theater without the provision in the contract. Believing no alternative exists, the university representative agrees. At the ceremony, a student’s grandparent trips on a toolbox that a maintenance worker left in one of the rows. She shatters her hip and will require full-time care for the rest of her life. She sues the university and the theater. While preparing to defend the university, the attorney discovers the contract’s hold harmless provision says, “The university promises to defend, indemnify, and hold harmless the theater from any claims and losses arising from this contract.”

This language attempts to transfer all risk of loss that may arise under the theater’s rental contract. While circumstances causing the woman’s accident were beyond the university’s control, the institution may be held fully liable for her injuries because of this risk allocation provision — unless state law prohibits the one-sided provision as against public policy.

Language Limiting the Amount of Risk the Contracting Party Will Assume 

A college enters a contract with Fun Fun Fun Company for the company to provide a Velcro wall — in exchange for $1,200 — at a college-sponsored festival. When part of the wall collapses, a student breaks his neck and is paralyzed. The student sues the college and company. Under the contract, Fun Fun Fun agreed to indemnify the college for all claims of negligence. But the contract limited the company’s obligation to the amount of the contract.

The university thought Fun Fun Fun accepted responsibility for third-party claims, but the risk allocation arrangement was effectively negated by the $1,200 limit of the company’s responsibility. Given the student’s injury, the university is responsible for a significant amount. With an indemnification provision like this, the contractor limits its risk to a known amount without regard for the serious nature of injuries that can occur during the contract.

The amount of a contract isn’t a good indicator of the liability risks the contract presents. Be wary of monetary limits or caps on a contracting party’s responsibility.

When an indemnification provision in the parties’ contract shifts some or all liability for third-party claims to a contracting party, your institution must confirm that the party is able and willing to pay for liability it has assumed. To do so, require the other party to show proof of adequate insurance and give your institution coverage under some of its policies, particularly the commercial general liability (CGL) policy. A CGL provides coverage against third-party claims of bodily injury and property damage.

Adhere to these recommendations to ensure your institution benefits from a contracting party’s insurance:

Require Proof of Insurance 

To confirm that a contracting party has finances to pay for losses, request a certificate of insurance. The certificate should include:

• Name, address, and phone and fax numbers for the agent and insured
• The insurance companies’ names and AM Best rating policy line, number, and limits
• The institution listed as a certificate holder
• A requirement that the insured provide a renewal certificate to the institution at least 15 days prior to expiration of any policies listed

A certificate of insurance’s true value is its documentation of a party’s insurance coverage. But this doesn’t entitle the certificate holder to coverage under the policies listed — nor does it endorse, amend, extend, or alter in any way the insurance policy’s terms. The only right a certificate holder may have is notification of a policy’s cancellation before expiration.

Require an Additional Insured Endorsement 

To gain coverage under another party’s CGL policy, ask to be named as an additional insured. Generally, institutions can become an additional insured:

• By adding an endorsement to the other party’s policy that names the institution as an additional insured
• Through language in the other party’s policy stating an additional insured is “anyone to whom policyholder is contractually obligated to provide liability insurance” — policies with this type of language are known as “broad form” policies

As an additional insured, an institution is likelier to be covered under another party’s CGL policy for losses arising from the contract.

Keep Track of Certificates and Endorsements 

Responsibility for keeping track of a certificate of insurance and an additional insured endorsement falls on the institution or party to which the certificate and endorsement was issued. A party’s insurance broker typically issues the certificate in accordance with policy terms and without notifying the insurance carrier. This means carriers generally don’t track certificates or additional insured endorsements.

Review the Other Party’s Insurance Policies 

An institution’s status as an additional insured is only as valuable as the coverage the underlying CGL policy provides. If the other party’s policy doesn’t cover the risks likeliest to occur under the contract, the institution receives little to no insurance protection. 

Consider this scenario:

The written contract a college enters with 007 Security Services lets the college receive on-campus security. Legal counsel reviews the contract’s risk allocation provision and determines it lawfully transfers to 007 Security Services the risk of claims and losses arising from the agreement. To ensure 007 Security Services can pay for any claims that arise and that the college is adequately protected, the college gets a certificate of insurance with an additional insured endorsement naming the college. During the contract’s performance, a female student alleges that a 007 guard sexually assaulted her. She sues the college. When the college seeks coverage under the security company’s insurance, the college learns the policy excludes sexual assault coverage.

It’s especially important to review the other party’s insurance coverage for long-term contracts and those that present severe risks of loss.

Use the Contract to Reinforce Insurance Requirements 

A contracting party’s insurer is likelier to assume coverage for a claim brought against your institution if:

• The contracting party has assumed responsibility for the claim under an enforceable contract.
• The policy hasn’t expired. While it’s not always feasible, your institution should try to get the actual policies to which it is named an additional insured.
• The claim is covered by the policy.

Even when all these requirements are met, the contracting party’s insurance carrier can challenge its obligation to extend coverage to your institution. But the underlying contract can fortify your claim to other insurance coverage if you:

Require That the Other Party’s Insurance is Primary and Noncontributory to Your Institution’s Insurance 

Consider this scenario:

A college contracts with construction company Rock Solid for the company to construct a campus building. The contract contains a one-sided indemnity provision transferring responsibility for third-party losses to Rock Solid. The college is named an additional insured on Rock Solid’s CGL. During construction, a Rock Solid employee suffers a significant electric shock. He sues the college, which spends $1.2 million to defend and settle. Rock Solid has an insurance policy that provides $1 million in coverage, and the institution’s policy provides $2 million in coverage.

Despite the favorable indemnity provision and additional insured endorsement, Rock Solid’s insurance carrier may not pay the bulk of the claim’s costs. If the contract between the college and Rock Solid states that Rock Solid’s insurance is “primary and noncontributory,” Rock Solid’s insurer is obligated to first pay all costs up to the policy limit. Rock Solid’s insurer will pay the first $1 million, and the institution’s policy will provide excess coverage.

Without the contract’s “primary” language, a court may find that the institution’s policy provides primary coverage before the other party’s policy applies. In that situation, the institution’s policy would pay the $1.2 million.

Without the contract’s “noncontributory” language, a court could require the institution’s policy and Rock Solid’s policy to pay dollar for dollar on a pro rata basis (in this case, $600,000 each).

List Required Lines of Insurance in the Contract 

Lines of insurance typically required include:

• CGL
• Auto
• Workers’ compensation
• Employers’ legal liability
• Professional liability
• Property

Appropriate lines of insurance depend on the contract’s subject matter and the risks involved.

Require Quality and Well-Capitalized Insurers 

If the other party’s insurers are financially stable, they’re likelier to be solvent to cover third-party claims. Consider requiring the other party’s insurers to have a particular financial strength rating by a nationally recognized financial rating organization such as AM Best.

Require Appropriate Limits 

Set minimum policy limits for each line of insurance required. Also consider requiring excess insurance. These limits should reflect the potential risk of loss from the contract’s activities. Remember the contract’s price isn’t a good measure of liability exposures presented.

Require Advance Notice of a Policy’s Cancellation or a Material Coverage Change 

As an additional insured under the contracting party’s insurance policy, an institution will want sufficient notice of a cancellation so it can require the other party to secure substitute insurance coverage in accordance with the contract.

For a description of actual claims involving other insurance missteps, see Mistakes When Using Other Insurance to Allocate Risk.

Do this to establish consistent campus policy and procedures for allocating responsibility between your institution and its contractors for third-party claims:

Address Risk Allocation in the Campus Contracting Policy 

Your institution’s contracting policy should include your approach, based on risk tolerance, to allocating responsibility for third-party injuries from activities you may not control. Some institutions transfer as much risk as possible to the other party, while others may change the way risk is allocated depending on the subject matter or amount of the underlying agreement, or the nature of activities performed under the agreement. For example, an institution may transfer any risk in its facilities use agreements but decide about contracts with guest lecturers on a case-by-case basis.

To decide on a policy, consider state law, bargaining power relative to the other party, and the potential for financial or reputational loss if your institution is responsible for injuries a contracting party’s negligence causes.

Through this process, strive to establish:

• Model indemnity language.Consult with legal counsel and the Risk Manager to draft model indemnity language to include in written contracts.
• A process for considering and approving deviations to your institution’s model indemnity language.Your institution needs a clearly articulated process for considering and approving deviations to language contracting parties seek. This process should include legal counsel review of suggested changes. If state law prohibits your institution from indemnifying contractors for third-party injuries, the contracting policy should clearly state that deviations from the model language aren’t allowed.

During this process, seek expertise from your institution’s Risk Manager and legal counsel and get input from relevant administrators.

Update Form Agreements 

Update any form contracts your institution uses (such as facilities use, service, and construction contracts and purchase orders) to include the model indemnity language. If your institution uses a checklist to review agreements, include the model indemnity provision in the checklist and require contract reviewers to look for that provision in any contract under consideration.

Inform Potential Contracting Parties About Insurance Requirements 

Before a contractor bids on a contract or an entity considers using your institution’s facilities, establish and clearly state the insurance requirements for the other contracting party. Advance notice of insurance requirements will help attract contracting parties that can meet your institution’s requirements and prevent later disqualification.

Receive and Review Insurance Documents Prior to Signing the Contract 

If your institution plans to handle third-party claims by getting coverage under the contracting party’s insurance, before signing the contract you should try to get and review all documentation about that party’s insurance coverage. To ensure compliance with your institution’s requirements, spend ample time evaluating the:

• Certificate of insurance
• Additional insured endorsement
• Other party’s CGL policy

For Ongoing or Multiyear Contractual Relationships, Confirm Insurance Requirements 

The contracting party’s insurance coverage may change over time or even expire while your institution continues conducting business with that party. Therefore, new documents may be necessary. Periodically review a contracting party’s insurance documents.

Establish a Process for Monitoring and Storing Insurance Documents 

If a claim is brought, prove it is covered by the contracting party’s insurance policy. Because the contracting party and its insurance carrier may not keep track of issued certificates of insurance or additional insured endorsements, your institution must maintain and monitor:

• Certificates of insurance
• Additional insured endorsements
• Copies of relevant policies it gets in connection with a contractual relationship

Publicize and Educate Relevant People About the Policy 

Educate any staff or independent contractors who are authorized to negotiate, review, or sign contracts about your institution’s indemnification or risk allocation practice as set out in the campus contracting policy. 

• Post explanations of the policy on your institution’s website.
• Conduct training seminars.
• Publish articles in campus communications.

Careful attention to contract indemnification provisions and other insurance requirements can help institutions avoid liability for injuries they don’t cause. But if a misstep occurs while allocating the risk of loss to the other contracting party, repercussions can be unexpected and serious.

This summary of claims from UE member institutions – reviewed in 2015 – shows the type of problems that can arise.

No Written Contract 

Example: A college entered a joint venture with a local resort to provide ski instruction to its students. While a student was participating in a skiing course, the student struck a snowmobile and was severely injured. The student sued the college for more than $2 million. Because there was no written contract between the college and ski resort, a court will determine each party’s responsibility.

Example: A school let a local football league scrimmage on one of its fields. A minor participant was severely injured and sued the school, which didn’t require a written contract with the league that would clarify each party’s responsibility for players’ injuries. The school is the lone defendant in a lawsuit that will determine whether the school is responsible.

Unenforceable or Unfavorable Indemnification Provision 

Example: A food service company employee slipped and fell while working at a university event. The employee sued the university. Since the contract between the university and the company had expired two years earlier, language addressing risk allocation wasn’t enforceable. The university spent tens of thousands of dollars to settle the claim.

Example: A college let local high school girls’ basketball team to use its gymnasium. A player fell during a practice and suffered a traumatic brain injury. The player sued the college. While the college’s contract with the high school contained a provision allocating responsibility for third-party claims, the provision was ambiguous. The college spent more than $1 million defending against and resolving the claim.

Example: An institution hired a company to provide security services on campus. A security guard the company employed molested a female student, and the student’s parents sued the institution. The contract between the institution and company was a form agreement that required the institution to indemnify the company from claims and losses arising from the agreement. Because the contract clearly placed responsibility on the institution, the institution incurred expenses of more than $150,000 to defend and settle the lawsuit.

This summary of claims from UE member institutions – reviewed in 2015 – shows the type of problems that can arise when using other insurance to allocate risks.

Defective Certificate of Insurance

Example: A college let a local league host a basketball tournament at its gym. One player slipped on the court, severely injured his leg, and sued the college. The college had required and obtained from the league a certificate of insurance that named the college as an additional insured under the league’s insurance policy. Unfortunately, the certificate failed to identify an actual insurance policy, stating only that the policy was “to be determined.” Because of the certificate’s shortcomings, the college must continue to defend against the player’s claim.

Defective Additional Insured Status 

Example:A university hired three contractors to renovate a campus building. After one of the contractors’ employees fell from scaffolding at the project site and suffered severe injuries, he sued the university in its capacity as the premises owner, as well as the three contractors. The institution didn’t use consistent approaches with each contractor in getting additional insured status to protect itself against the risk of third-party injuries. In one contract, the university required the contractor to indemnify for third-party injuries and also obtained an appropriate certificate of insurance and additional insured endorsement. In another arrangement, the university and the contractor agreed to a mutual indemnification provision, and the contractor provided a certificate of insurance but named the university as an additional insured only on its excess policy. In the third arrangement, the institution didn’t have a written contract or any proof of insurance or additional insured status. Because of the confusion about each defendant’s responsibility for the employee’s injuries, the case was tried and resulted in a jury verdict exceeding $6 million. The court determined the university was responsible for nearly a third of the verdict.

Deficient Other Insurance Coverage 

Example: An employee of an electrical contractor suffered second- and third-degree burns over half of his body when he suffered a significant electric shock while working under a contract with the college. The institution and the contractor had a written contract that contained an indemnification provision transferring liability for third-party claims to the contractor. The institution had a certificate of insurance and an additional insured endorsement. But the limit of the contractor’s insurance policy, $1 million, wasn’t sufficient to cover the contractor’s extensive injuries. The college had to contribute more than $1 million more.

Example: A local group used a school’s swimming pool for an event at which a participant drowned. The school’s contract required the group to indemnify the institution from all claims or losses arising from its use of the pool. The school also had a certificate of insurance and an additional insured endorsement. But the policy listed in the certificate excluded coverage for bodily injury claims; it didn’t give the school any insurance coverage for the loss.

Example: An educational institution contracted with a management company to maintain the apartment buildings it owned. While the company was cleaning common areas, an elderly tenant fell on a wet walkway and later sued the institution. The contract between the institution and company had an indemnification provision, and the institution required a certificate of insurance. Yet policies listed on the certificate had expired in the middle of the contract’s term. The institution expects to spend six figures to defend or resolve the claim.

With about 1,600 members ranging from large university systems to small, independent K-12 schools, UE is committed to providing the coverage and tools needed to confidently operate your campus while managing education-specific risks. We strive to provide you with peace of mind so you can focus on what’s important – delivering a high-quality academic experience.

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