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experienceinnovation
trust
APRIL 12, 2016
CONTRACT LAW AND
CONTRACTUAL RISK TRANSFER:
THE PITFALL OF NOT KNOWING
THE RESTRICTIONS
RIMS Annual Conference & ExhibitionSan Diego, California
April 12, 2016
11:30 AM- 12:30 PM
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Prepared and Presented by:
Daniel W. Houston
Senior Vice President,
Enterprise Risk Management
Principal
EPIC Insurance Brokers and Consultants-Atlanta
2405 Satellite Boulevard, Suite 200
Duluth, GA 30096
678-542-2652
Keri Rhodes
Director,
Risk & Claims Management
Arby’s
1155 Perimeter Center West
Atlanta, GA 30338
678-514-4425
-and-
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Disclaimer
The following presentation is a basic interpretation and
summary of the many aspects of contract law and does not
purport to be complete in any way.
This information is current as of the date presented.
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A Contract is the
Legal Framework
Within Which
Parties May
Create Their Own
Rights and Duties
by Agreement
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Types of Contracts
• Standard Form Agreements
• Modified Standard Agreement Forms
• Letter Agreements
• Purchase Orders
• Custom Agreements
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Other Types of Business Contracts
Commonly Used in Business
Arbitration Agreement
Asset Purchase Agreement
Assignment Agreement
Bonus Agreement
Collaboration Agreement
Consulting Agreement
Credit Agreement
Deferred Compensation Plan
Development Agreement
Distribution Agreement
Employee Stock Plan
Employment Agreement
Equipment Lease
Export Sales Agreement
Franchise Agreement
Guaranty Agreement
Indemnification Agreement
Joint Venture Agreement
Lease
License Agreement
Loan Agreement
Manufacturing Contract
Merger Agreement
Non-Disclosure Agreement
Operating Agreement
Promissory Note
Repurchase Agreements
Sales Contract
Services Agreement
Shareholder Agreement
Stock Option Agreement
Stock Purchase Agreement
Supply Agreement
Trademark License Agreement
Underwriting Agreement
Voting Agreements
Waiver Agreement
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Export Sales Agreement-Terms of Payment
• Cash in Advance
• Letter of Credit
• Open Account
• Consignment Sales
Applicability Recommended for use (a) in low-risk trading relationships or markets and (b) in competitive
markets to win customers with the use of one or more appropriate trade finance techniques
Risk Substantial risk to the exporter because the buyer could default on payment obligation after
shipment of the goods
Pros Boost competitiveness in the global market
Help establish and maintain a successful trade relationship
Cons Significant exposure to the risk of non-payment
Additional costs associated with risk mitigation measures
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Legal Framework of a Contract
• Affords Significant Freedom to
the Contracting Parties to
Determine the Terms of Their
Agreement
• Provides the Parties with Legal
Remedies for Breach of Their
Agreement
• This Enhances the Commercial
Efficiency of Contracting
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A Contract
• Agreement Between Two or More
Parties
• Creates Obligations
• Obligations are then Enforceable or
Otherwise Recognized by Law
• Records Expectation and Constitutes
the Ground Rules for their
Relationship until Each Party’s
Contractual Undertaking is
Discharged
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The Intention to Create a Legal Relationship• The concept of a contract as a bargain or agreement struck by (at least) two parties is based
upon the premise that the end results will be a meeting of the parties’ minds on the terms and conditions that will form their agreement with each other. Each will normally agree to do, or perhaps not do, certain things in return for the promise of the other to do certain things of a particular nature. In the process of reaching this meeting of the minds, the parties must establish certain elements of the contract itself.
• One of the essential elements of an agreement is a promise. Obviously, not all promises can be taken as binding on the party making them. Some may be made by persons with no intention of becoming legally obligated to fulfill them, for example, promises made between family members. This type of promise cannot be taken as the basis for a contract. The first requirement, then, for a valid contract must be the intention on the part of the person making a promise (the promisor) to be bound by the promise made. This intention to create a legal relationship is an essential element of a valid contract. It is generally presumed to exist at law in any commercial transaction where the parties are dealing with one another at arm’s length.
• The intention to create a legal relationship is a presumption at law because the creation of the intention would otherwise be difficult to prove. If the intention is denied, the courts will usually use the conduct of the party at the time that the statements were made as a test and examine the conduct and statements from the point of view of the “reasonable person.”
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Categories of Contracts
• Express Contracts
• Express contracts arise when the
parties speak the elements to
which they have mutually
assented. Oral Contracts are
Express Contracts that are
generally legally enforceable –
however, difficult to prove.
• Implied Contracts
• Implied contracts are when the
promise can be inferred from the
parties rather from their Expressed
words.
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Elements of a Contract
• An intention to create a legal relationship
• Offer
• Acceptance
• Consideration
• Capacity to contract
• Legality
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Elements of a Contract
Element Description Example
An Offer
One party must promise to do or
refrain from doing some specified
thing in the future, conditioned on
an act, forbearance, or return
promise given in exchange
“I will build a house for you, if
you pay me $1,000”
Acceptance
The agreement by one who
receives an offer, by express act or
implied conduct, to the terms of the
offer
“I accept your offer to build my
house” or “Here is $1,000”
Consideration
Something (such as an act, a
forbearance or a return promise)
that was bargained for and received
by each party to a contract
The built house and the $1,000
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Elements of a Contract: Consideration• “Consideration” means something of value given by both
parties to a contract that induces them to enter into the
agreement to exchange mutual performances. For example, a
promise to make a gift is not enforceable because it is one-
sided.
“Consideration” is an essential element for the formation of a
contract. It may consist of a promise to perform a desired act
or a promise to refrain from doing an act that one is legally
entitled to do.
“Consideration” must have a value that can be objectively
determined. For example, a promise of love or affection is not
enforceable because of the subjective nature of the promise.
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Tiers or Hierarchies of Contracts• Prime Contracts (e.g., Project
Owner to the Contractor).
• Prime Contracts contain “flow down”
provisions to lower tier contracts.
• Subcontracts- the “Achilles
Heel” of the process.
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Why is Dan So Persnickety?Case Law: An Expensive Comma
With one year’s notice, Aliant terminated a contract it had withRogers Communications. Rogers felt it should get the benefit of afull five-year locked-in term, before anything could be terminated.The agreement stated it “shall continue in force for a period offive years from the date it is made, and thereafter forsuccessive five year terms, unless and until terminated by oneyear prior notice in writing by either party.” Rogers felt the dealhad to last at least five years; Aliant thought it could get out within ayear.
Answer: English professors have given round 1 to Aliant, saying thesecond comma allows the notice period to modify the wholesentence. Note: Extra fees of over $2 million will apply in order torevive the deal.
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Basic Elements ofa Contract
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Basic Elements of a Contract• Introductory Provisions
• The Body
• Language of Representation
• Language of Performance
• Language of Obligation
• Language of Discretion
• Language of Condition
• Language of Prohibition
• Concluding Clause and
Attachments
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Review “Sample Contract”
This sample contract will help you understand the general
structure of a contract. The sample contract begins with notes
about sections that typically appear in contracts. A brief
overview of basic contract law principles that we have
discussed is applied.
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Preamble
The sample contract’s Preamble (i) identifies the agreement
through a title, (ii) identifies the parties to the agreement, and
(iii) identifies the date on which the agreement was entered
into.
THIS SALES AGREEMENT made and entered into this [__] day of [month] [year] (the “Effective Date”), by and between, [First Party], a __________ corporation having its principal office located at [street address], [Country] (“First Party”), and [Second Party], a _____________ corporation (“Second Party”).
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Recital / Introduction
The sample contract then continues with Recitals that (i)
provide an introduction to the agreement and why it is being
entered into, and (ii) identify important terms and possibly third
parties. Instead of the traditional recitals, some contracts have
an introduction that serves a similar purpose.
WITNESSETH
WHEREAS, First Party is engaged in the manufacture of products described on
Schedule A (the “Products”);
WHEREAS Second Party is engaged in the business of marketing, selling and
distributing products within [Country] (the “TERRITORY”); and
WHEREAS First Party desires that Second Party market, sell and distribute the
Products in the Territory;
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Body
The body of the sample contract contains the heart of the agreement – the reason why the contract was entered into. Topics such as the key terms of the agreement, the type and amount of “consideration”, and the parties’ ongoing rights, duties and responsibilities are discussed in the body of the contract.
NOW THEREFORE in consideration of the mutual covenants herein contained, and other good and valuable consideration, the parties hereto mutually agree as follows:
1.1 First Party hereby appoints Second Party as First Party’s exclusive partner in the Territory, and grants Second Party the exclusive right to promote, market, sell and distribute the Products in the Territory under First Party's Brand name(s) and Trademark(s).
1.2 Second Party accepts such appointment and agrees to use its commercially reasonable efforts to promote, develop and increase sales of the Products within the Territory.
1.3 Second Party shall not actively sell the Products in territories that (i) First Party allocated exclusively to a third party or (ii) First Party reserves for itself or an affiliate.
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Boilerplate
“Boilerplate” is ready-made, all-purpose language that is
inserted in many kinds of contracts. Despite being
commonplace, boilerplate terms play key administrative
roles. If something goes wrong and the parties to a contract
end up in arbitration or court, a boilerplate term may be at
the center of the dispute.
2.1 Neither party shall be in default hereunder by reason of any failure
or delay in the performance of any obligation under this Agreement
where such failure or delay arises out of any cause beyond the
reasonable control and without the fault or negligence of such party.
2.2 The provisions of this Agreement shall be construed and the
performance thereof governed in accordance with the laws of the State
of ___________, USA.
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Ending and Signatures
The sample contract concludes with a statement of the
parties’ intention to create a legally binding agreement
and signature blocks for the parties to the agreement.
IN WITNESS THEREOF, the parties, intending to be legally bound, have executed this Agreement as of the date first above written.
FIRST PARTY SECOND PARTY
By: ____________ By:____________
Name and Title Name and Title
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Evaluate the Risk
Before determining the types of insurance, limits, wording to be
required, you must have a very good idea of the types of harms
that could arise from the activities contemplated under the
Contract. You should determine issues such as …
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Questions to Ask to Assist
You In Evaluating the Risk1. What type of activities will take place during the term of the
Contract?
2. Who could be harmed by these activities?
3. What property could be damaged and how severely?
4. What is the likely maximum loss for each activity?
5. Is there a possible pollution exposure?
6. Are crowds likely to be involved?
7. Will inherently dangerous activities, such as blasting, be part of the
project?
8. Will there be any “military base” exposure?
9. How likely is it that my organization would be a defendant in the
event of a loss?
10. Is the risk “low” enough to allow changes in limits, etc.?Tip: Always ask for/demand a copy of the complete Contract, Addendums Exhibits and All Other Attachments.
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Contractor Insurance Requirements: An EXAMPLE (Check Your State Laws)
• Contractor’s Insurance: The Contractor shall procure and
maintain for the duration of this Contract, and for three (3)
years thereafter, at its sole cost and expense such insurance
as will fully protect it and ____________________and
____________________’s boards, officials, directors, officers,
employees, agents and volunteers from incidents, accidents
and claims for personal injury, bodily injury, and property
damage which may arise from or in connection with the
performance of the work and for the Contractor’s
professional liability (errors and omissions) under this
Contract, whether such services and work are performed by
the Contractor, its agents, representatives, employees, or by
any subcontractor or any tier directly employed or retained
by either.
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Consider New CGL Form and Think Umbrella• The following is the minimum insurance and limits that the
Contractor must maintain. If the Contractor maintains higher
limits than the minimums shown below,
____________________ requires and shall be entitled to
coverage for the higher limits maintained by the Contractor.
Any available insurance proceeds in excess of the specified
minimum limits of insurance and coverage shall be available
to ____________________.
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Insurance Policies… Approval• All insurance policies, endorsements, certificates, and/or
binders shall be subject to approval by _________________as
to form and content. These requirements are subject to
amendment or waiver only if so approved in writing by
____________________.
• A lapse in any required insurance coverage during this
Agreement shall be a breach of this Agreement.*
*Review the nature of the Contract first.
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Liability Insurance
1. Workers’ Compensation & Employer’s Liability Insurance.
Workers’ Compensation Insurance in compliance with the
applicable Workers’ Compensation Act(s) of the state(s)
wherein the work is to be performed or where jurisdiction could
apply in amounts required by statutes. Employer’s Liability
Insurance, with limits of liability of not less than $1,000,000 per
accident for bodily injury or disease.
2. Commercial General Liability Insurance, including contractual
liability insurance, product and completed operations, personal
and advertising injury, and any other type of liability for which
this Contract applies with limits of liability of not less than
$1,000,000 each occurrence / $2,000,000 policy aggregate for
personal injury, bodily injury, and property damage.
Commercial General Liability Insurance shall be written on an
“occurrence” form.
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Liability Insurance (Continued)
3. Automobile Liability Insurance with limits of liability of not
less than $1,000,000 per accident for bodily injury and
property damage if automobiles are to be used in the
delivery of or in the completion of services and work or
driven onto ____________________’s property. Insurance
shall include all owned, non-owned and hired vehicle
liability.
4. Umbrella Insurance with limits of liability excess of
Employer’s Liability Insurance, Commercial General Liability
Insurance and Automobile Liability Insurance in the amount
of not less than $3,000,000.
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Liability Insurance (Continued)
5. Cyber Liability insurance with limits of not less than
$3,000,000 for each occurrence/policy aggregate of
$3,000,000 covering incidents Such policy shall also include
coverage for losses arising from the breach of information
security or cyber liability including Errors & Omissions,
Security and Privacy Liability and Media Liability, involving
privacy violations, information theft, damage to or
destruction of electronic information, intentional and/or
unintentional release of private information, alteration of
electronic information, extortion and network security (...) .
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Possible Cyber...
Module 1: Loss of Data
Module 2: Denial of Service
Module 3: Privacy Liability
Module 4: Cyber Extortion
Module 5: Transmission of Virus
Module 6: Unauthorized Access
Module 7: Unauthorized Use
Module 8: Physical Theft of Hardware,
Laptops, Servers, Etc.
Module 9: Errors and Omissions
Module 10: Failure to Deliver
Module 11: Copyright
Module 12: Breach, Theft or Use of your
Copyright or Software Code
Module 13: Defamation, Invasion or other
violation of a right of Publicity,
Libel, Invasion or other violation
by you of a right to Privacy,
Product Disparagement, Slander,
Trade Libel
Module 14: Business Interruption Loss
Module 15: Period of Restoration
Module 16: Administrative/Regulatory
Proceedings
Module 17: Legal Proceedings Against You
Module 18: Crisis Management Fund
Module 19: Social Engineering
Module 20: IoT
Module 21: Trolling
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Liability Insurance (Continued)
6. Contractors’ Pollution Legal Liability (To Be Discussed)
and/or Asbestos Legal Liability and/or Errors and Omissions
(if project involves environmental hazards) with limits not
less than $1,000,000 per occurrence or claim, and $2,000,000
policy aggregate.
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Liability Insurance (Continued)
7. Professional (Errors and Omissions) Insurance- For Professional Services
and for all Design/Build Projects with limits of liability of not less than
$3,000,000 per occurrence or claim / $3,000,000 policy aggregate. Such
coverage shall insure damage, injury and loss caused by error, omission or
negligent acts, including all prior acts without limitation, related to the
professional services to be provided under this Contract. The policy shall
be amended to include independent contractors providing professional
services on behalf of or at the direction of the Contractor. The definition of
Contractual Liability shall be amended to state that liability under a contract
of professional services is covered. Further, coverage shall be afforded for
fraudulent acts, misappropriation of trade secrets, internet professional
services, computer attacks, personal injury, regulatory actions, wrongful
acts, contractual liability, privacy policy, and insured versus insured. The
Contractor shall ensure that coverage under this policy continues for a
period of thirty-six (36) months after completion of services.
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Other Insurance
Fidelity Bond
Fidelity Bond (Employee Dishonesty) in the sum of not less than $___________.
Property Insurance
The Contractor assumes sole responsibility for loss or damage to its property and hereby releases ____________________ and ____________________’s boards, officials, directors, officers, employees, agents and volunteers from loss or damage to Contractor, its agents, representatives, employees, or by any subcontractor for property including tools, equipment, goods, machinery, materials and supplies.
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Other Insurance Provisions
The aforementioned insurance policies shall contain or be endorsed to contain,
the following provisions:
• A provision that coverage afforded under such policies shall not expire, be
canceled or altered without at least sixty (60) days prior written notice to
____________________.
• Workers’ Compensation and Employer’s Liability and Property insurance policies
shall contain a waiver of subrogation in favor of ____________________ and
____________________’s boards, officials, directors, officers, employees, agents
and volunteers.
• Commercial General Liability, Automobile Liability (To Be Discussed) and Umbrella
Liability insurance policies shall include an endorsement making
_____________________ and ____________________’s boards, officials,
directors, officers, employees, agents and volunteers Additional Insureds under
such policies.
• Contractors’ Pollution Legal Liability (To Be Discussed).
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Certificates of Insurance
Certificates of Insurance showing that such coverage is in
force shall be filed under this Contract by the Contractor to
____________________.
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Non-Limitation on the Contractor’s Liability and Best’s Ratings
• The obligations for the Contractor to procure and maintain
insurance shall not be construed to waive or restrict other
obligations and it is understood that insurance in no way
limits liability of the Contractor whether or not same is
covered by insurance.
• All of the insurance herein specified shall be written on a
form acceptable to ____________________ and shall be A.M.
Best Company rated A (Excellent) X $500 Million to $750
Million or greater.
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Confidential Information: EXAMPLE United States• The Contractor may be provided, have access to or become aware of
____________________’s Confidential Information including ____________________’s strategic plans, products, employee data, customer data and other technical and business information of ____________________ (collectively referred to as the “Confidential Information”). The term Confidential Information includes the deliverables as well as all information generated by the Contractor that contains, references or is derived from the Confidential Information and the Services including, without limitation, the Contractor’s summaries, analysis, extracts, working papers and notes relating to the Services and the Deliverables (referred to as the “Working Papers”). The Contractor agrees not to disclose the Confidential Information to third-parties without the prior written approval of ____________________ and not to make use of the Confidential Information other than as needed to perform the Services. The Contractor further agrees that it will only disclose the Confidential Information to its personnel on a need-to-know basis solely for the performance of the Services and will protect the Confidential Information with the same degree of care that …
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Confidential Information (Continued)
… the Contractor uses to protect its own confidential information, but no less than reasonable care or as the various laws may require or impose.
• All Confidential Information as well as other documents, data and information provided to the Contractor by ____________________is and will remain the property of ____________________ to the extent that it was the property of ____________________ at the time it was provided to the Contractor.
• All Confidential Information shall be returned to ____________________ by the Contractor within five (5) business days of the completion of the Services under this Contract. The Contractor will keep no copies of the Confidential Information except that the Contractor may retain one copy of the Working Papers as required by law, regulation, professional standards or reasonable business practice. If requested by ____________________, an officer of the Contractor will certify in writing that, to the best of his/her knowledge, information and belief, all Confidential Information and all copies thereof (except for one copy of the Working Papers) have been delivered to ____________________ or destroyed.
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Use of Premises
• The Contractor shall confine its apparatus, material and the
operations of its workers to limits/requirements indicated by
law, ordinances, permits, codes and any restrictions of
______________________, and shall not unreasonably
encumber the premises with its materials or supplies.
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Protection of Work, Property and Persons• The Contractor shall adequately protect its own property from
damage, will protect the ____________________’s property from
damage or loss, and will take all necessary precautions during the
progress of the work to protect all persons and the property of
others from injury or damage. The Contractor shall take all
precautions for the safety of employees, and shall comply with all
applicable provisions of Federal, State and local safety laws,
building codes and any restrictions of ____________________ to
prevent accidents or injury to persons on, about, or adjacent to the
premises where work is being performed.
• The Contractor shall erect and properly maintain at all times as
required by the conditions, service and work, all necessary
safeguards for the protection of its employees, the Contractor’s
employees, and the public, and shall post signs warning against
potential hazards.
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Indemnity: EXAMPLE
The Contractor agrees to protect, defend at its own expense, indemnify, save
and hold harmless ____________________, ____________________’s boards,
officials, directors, officers, employees, agents and volunteers from and
against all losses, damages, costs and expenses-including reasonable
attorney’s fees, and from and against all liability, awards, judgments and
decrees, of whatever nature for any and all damage to property of others and of
the parties hereto, their boards, officials, directors, officers, employees, agents
and volunteers, and of whatever nature for any and all injury or injuries
(including death) to any person or persons including the boards, officials,
directors, officers, employees, agents and volunteers of the party hereto,
arising or in any way growing out of any of the acts or omissions or negligence
whether of the Contractor, the Contractor’s boards, officials, directors, officers,
employees, agents and volunteers or of any tier of the Subcontractor, the tier’s
boards, officials, directors, officers, employees, agents and volunteers in
connection with the performance of the services and work under this Contract.
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Evidence of Insurance [1 of 3]Certificate(s) of Insurance:
• Evidence provided for each type of insurance required in the contract (e.g., Commercial General Liability, Automobile Liability, Workers’ Compensation ...with Statutory Limits, Umbrella, Professional Liability or E&O, etc. per the contract specifications)
• General Liability is on an “occurrence” basis, not “claims-made.”
• Automobile Liability covers “any auto” (or non-owned & hired if contractor has no autos).
• Limits are at least as high as the minimum required in the contract.
• Workers’ Compensation provides Statutory Limits & Employers’ Liability of $1 million.
• Policies are current and will be suspended (tickler filed) for renewal follow-up if the contract period runs beyond the policy expiration date.
• Ideally, Excess Liability policies have coverage periods concurrent with primary policies.
• Insured name is the same as Contractor named in the contract.
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Evidence of Insurance [2 of 3]• The insurer’s A.M. Best and Standard & Poor’s ratings meet or exceed the
Entity’s minimum requirements.
• The insurer is admitted in ___________, or non-admitted is acceptable
___ yes ___ no.
• No self-insured retention (SIR) on liability policies. Any must be disclosed
and approved.
• Descriptions of operations, locations, etc. are correct.
• Certificate Holder (your entity) is correct, with attention to correct person.
• Certificate provides for 60-day notification (10 days for non-payment) to
Entity of changes or cancellation.
• Certificate includes signature of authorized representative.
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Evidence of Insurance [3 of 3]• Endorsement(s)
• Additional Insured Status (appropriate endorsement)
• Primary Coverage (for discussion).
• Waiver of Subrogation
• Notice of Cancellation
• Entity-supplied endorsement provided and signed (for
discussion).
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Additional Insured Endorsements-A Brief History
• Broad Form Coverage - (1985) “Any Liability” / “Arising Out Of”
CG 20 10 11 85 – Ongoing Operations and Completed Operations
• Broad Form Coverage – (1993)“Any Liability” / “Arising Out Of” (Narrowed to Ongoing Operations)
CG 20 10 10 93 – Removal of Completed Operations
• Broad Form Coverage – (2001)“Any Liability” / “Arising Out Of”
CG 20 10 10 01 – Ongoing Operations
CG 20 37 10 01 – Reinstatement of Completed Operations through Creation of New Form
• Intermediate Form Coverage – (2004)“Personal Injury and Property Damage” / “Caused In Whole or In Part”
CG 20 10 07 04 – Ongoing Operations
CG 20 37 07 04 – Completed Operations
• Limited Form Coverage – (2013)“Personal Injury and Property Damage” / “Caused In Whole or In Part” (And Additional Limitations)
CG 20 10 04 13 – Ongoing Operations
CG 20 37 04 13 – Completed Operations
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Routes of Recovery – Risk Control
Owner
Owner’s
CGL Insurance
Contractor’s CGL
Insurance
Blanket
Contractual
Liability
Contractor
Contractual
Indemnity Clause
#1 - Control
#2 - Control#3 - Finance
Liability Claim
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WRAP UPQ & A