From municipalities to schools to emergency services, public entities tirelessly serve their communities—often with limited resources. One tried-and-true strategy for using resources strategically involves partnering with outside vendors. While efficient, this arrangement may bring additional risk to the project. Who is financially responsible if a construction project falls behind schedule? Can a vendor’s employee sue a public entity if they’re injured while acting on its behalf?
Savvy organizations know that risk cannot be avoided completely—but it can be shifted away from their organization with the use of a well-constructed contract. Contractual risk transfer uses a contract to clearly establish accountability and liability between two parties. As with any contract, you should utilize any legal resources available to draft and negotiate these agreements. However, everyone involved in coordinating projects and vendors should feel comfortable advocating for their organization’s risk management needs. The good news? Contractual risk transfer is not as complex as it sounds; all it requires is a working knowledge of a few key elements.
Indemnify & Hold Harmless
Indemnity clauses provide protection against loss. Your organization is the indemnitee (the one being protected), and the other party is the indemnitor (the one responsible for protecting the organization). Essentially, an indemnity clause requires the indemnitor to compensate any losses incurred by the indemnitee. Some contracts are broader, assigning liability regardless of who is at fault, while others specify that the indemnitor is only responsible for losses to which they’ve directly contributed.
A hold harmless agreement (sometimes called a waiver of liability) is what it sounds like. It operates very similarly to an indemnity clause, but the focus of a hold harmless agreement is on losses experienced by the contracted party, not your organization. By signing this agreement, the vendor or partner waives any rights to seek compensation from your organization for any losses sustained during the partnership.
Indemnity and hold harmless are often used together due to their similarities. The end result will look something like this:
“The Service Provider shall indemnify and hold the City and its agents, employees, and officers, harmless from and shall process and defend at its own expense any and all claims, demands, suits, at law or equity, actions, penalties, losses, damages, or costs, of whatsoever kind or nature, brought against the City arising out of, in connection with, or incident to the execution of this Agreement …”
Insurance
The contract should specify some basic insurance requirements. The type and amount of insurance will depend on the specific circumstances, but it should address additional insureds and a waiver of subrogation, as well as require a certificate of insurance.
- Additional insured endorsement: When the vendor names your organization as an additional insured on their policies (most commonly, general liability and auto), their insurance protections extend to your organization.
- Waiver of subrogation endorsement: This is put in place to prevent the vendor’s insurer from attempting to collect payment from your organization—even if your organization was responsible for the loss in some way.
- Certificate of insurance: Before aligning with a vendor or other partner, request a certificate of insurance. This provides a snapshot of the insurance in place, giving you evidence that your public entity is adequately protected.
Determining the appropriate insurance requirements may seem simple at first: determine the level of risk involved and adjust the insurance requirements accordingly. In practice, the nuanced details can cloud the issue. Ask your insurance consultant or legal resources for tips and tools to simplify your contractual risk transfer.
