Understanding Contractual Risks

Organizations frequently enter into agreements with independent contractors or vendors, but sometimes the inherent risks of such agreements are not well understood. Service providers, such as carpenters and electricians, often present organizations with important terms of agreement in the form of estimates, work orders and maintenance contracts.

While a contractor may be providing a valuable service to your organization, if the contract is not properly reviewed, your organization could be exposed to considerable risk and financial loss. The following information will help you to limit risks associated with entering into such agreements.

Liability Coverage: Who is responsible if something goes wrong?

If you hire a contractor to do a job and a person is injured as a result of negligence on the contractor’s part, your organization should not expect to assume liability on the contractor’s behalf. For this reason, you need to make certain that the contract provisions do not in any way exclude the contractor from liability.

In order to ensure that funds are available in the event something does go wrong, it is important to verify that the contractor has an appropriate level of liability insurance. A $1 million commercial liability “umbrella” policy may be sufficient. However, for larger or particularly hazardous projects, you may want to be sure the contractor has a multi-million dollar liability policy.

Another distinguishing feature of this type of liability insurance is that the umbrella can cover a “single” incident or “multiple” incidents. For a small and discrete project, a single incident may be sufficient, but if the agreement relates to a larger project or work that will extend over a longer period, it may be important to have coverage for multiple incidents.

To confirm that your contractor has sufficient liability insurance and that his company’s premiums have been paid, request that the contractor provide a certificate of insurance from the underwriter, which lists your organization and the Roman Catholic Archbishop of Boston, a corporation sole, and its affiliates as an “additional insured.”

What if something happens to the contractor’s employees while on our premises?

State law typically requires employers to maintain workers’ compensation insurance. However, just because state law requires it, do not assume that the contractor has appropriately acquired and maintained this type of insurance. If the contractor’s employees will be working on your premises, demand evidence of the contractor’s workers’ compensation insurance and keep a record in your files.

Hold harmless and indemnification – common provisions

Be cautious of Hold Harmless and Indemnity clauses, which appear in many standard contracts. These clauses are also known as Waivers or Releases. In these clauses, one party promises not to hold the other party legally responsible for certain actions, conditions or omissions. When reviewing these provisions, please consider what liability your organization is accepting and what type of liability you are excusing from the contracting party. The promises of the other party should be as inclusive as the promises of your organization in the contract. Please be sure to have legal counsel review any contracts that contain these provisions.

Seeking legal guidance

Monitoring the risks assumed by your organization through these types of contractual terms is an important part of controlling exposures and ensuring the good stewardship of your organization’s resources. Before signing, if you are ever in doubt about any contract you are considering, or if you have questions on any of the information above, please consult with the General Counsel’s office at 617-746-5683.